Risk Levels Down, Opportunities Up

After decades of inconsistent development, the economies of Latin America as a whole are progressing steadily in an environment marked by dynamic change. On an almost daily basis one can see the results of important structural changes taking place, from the impact of technology, to privatization, to market deregulation, to increased integration among countries within the region and across the globe. Latin America remains one of the most challenging and promising areas of the world in which to do business.

Following solid economic performance in 2000, Latin America now confronts a complex external environment in which demand for the region’s exports has slowed, non-fuel commodity prices are weak and global credit conditions for emerging market countries remain tight. Triggered by the US slowdown, growth of the world economy has decelerated from 12% in 2000 to a projected 6% this year. Most countries in Latin America, however, are well positioned to withstand these external shocks, although some will need to reinforce policy commitments.

Countries with relatively open economies such as Mexico, Chile, Venezuela and Colombia, which have the strongest trade links with the US and whose exports are particularly sensitive to changes in growth abroad, will experience the greatest decline in export earnings.

While lower interest rates in the US will reduce interest earnings on the international reserves of Latin American countries, they will also result in lower interest payments on the region’s existing floating-rate external debt. For the benefits of lower interest rates to extend to new borrowing, markets will have to perceive no increase in Latin America’s country risk.

Investors may be able to adopt a more optimistic view towards the region and its short-term prospects. For example Brazil thus far has successfully rolled out its energy rationing plans and the political landscape has stabilized. Although the Mexican economy was adversely affected by the slowdown in the US, a major inflow of foreign direct investment has boosted domestic and global confidence in the country’s prospects.

Latin America’s short-term prospects may receive another boost from any signs that the US economy is moving beyond a period of sluggish growth. Tax rebates in the third quarter are expected to boost US GDP growth by as much as one percentage point. With this additional stimulus, the US economy should resume robust growth by the fourth quarter. Countries less vulnerable to the US slowdown with relatively strong or improving fundamentals are expected to lead regional growth. Such countries have been able to cut interest rates without adversely affecting their currency and fueling inflationary expectations.

Despite the risks felt throughout the region, Latin America is better prepared to deal with a downturn than it was in 1994-95 and in 1998-99 when the region was hit hard by external shocks.

The economic momentum being experienced in the emerging markets and its highly attractive demographic profile translate into tremendous revenue opportunities in banking, insurance, investments and securities – Citibank’s core businesses. As the first US financial institution to enter the Latin American market, Citibank opened its first branch in Buenos Aires in 1914 and since then, has expanded across the region to 24 countries. Citibank is a major player in these markets and is poised to bring its business to the next level in a manner that only a company the size and depth of Citigroup can attain.

General banking risk levels in the region have improved in most cases over the past few quarters reflecting economic recovery, more flexible exchange rate regimes in several countries and an easing of international liquidity. Governments throughout Latin America are also continuing efforts to strengthen regulation and supervision, while liberalization is fostering consolidation. Banking sector reforms are currently taking place in Mexico, Colombia, Venezuela and Peru.

Beginning in the mid-1990s, the region has witnessed a surge in cross-border purchases of Latin American banks. Over the past five years, over $30 billion has been invested by foreign financial institutions in Latin American banks. The rate of purchases is expected to slow over the next five years however, as privatization programs for financial institutions have been largely completed and the majority of willing private sellers has already exited.

The changes now taking hold in the region’s financial systems resulting from the increased presence of foreign banks will make Latin America’s economies more resilient to crises. During the past two decades, systemic bank crises have adversely affected several countries in the region, invariably exacting a high cost. With a larger foreign presence, system wide bail-outs are expected to become less likely and less costly when they do occur as foreign institutions investing in the region are likely to provide fresh capital to their subsidiaries in the event of turmoil. In addition, the generally tighter lending and provisioning standards of these banks encourages regulators to apply the same standards to domestically owned banks.

An Impressive Evolution
Latin America’s banking industry has undergone an impressive evolution. With intense competition in-country, there is a trend toward the emergence of strong regional players. Consolidation has resulted in a number of foreign banks either closing their operations or scaling back on products and services they offer. A number of foreign banks in the region have reassessed their international presence and have opted to focus on only those markets with critical mass. These changes are often part of a broader retreat from emerging markets as a deteriorating credit environment and a slowing US economy cut into profits. Citibank, however, views its presence in the emerging markets (and in Latin America in particular) as part of its core, long-term strategy to be a local bank in every country where we do business, with roots as deep and broad as any local institution.

As only 1% of GDP is spent on insurance in the emerging markets – versus 9% in the OECD – opportunities to expand the insurance business are substantial. The trend toward pension privatization in emerging markets offers exceptional opportunities to expand the asset management business.

Even during recessionary periods and economic downturns, the Latin American insurance industry has grown at unprecedented rates in recent years. The largest percentage gains have been witnessed in the life insurance industry, particularly in those countries where pension fund reform has been implemented. Given the structure of pension fund reform, an increase in the demand for annuity products is expected. The economies of Brazil and Venezuela have yet to privatize their pension systems, resulting in significant future revenue opportunities.

The role of e-business has expanded rapidly within the Latin American region with growing domestic and international competition. IDC expects the Latin American B2B market to soar to $8.3 billion in 2003, up from $437 million in 1999. Banks have moved toward a greater customer focus and seek to develop competitive advantages through innovations in product development, delivery and customer knowledge. Although a great deal of work remains, infrastructure and communications systems are improving and the outlook is promising.

Although Latin America is still contending with the volatility that hit the region in early 2001, near-term prospects appear favorable with increased stability and potential signs of a US economic recovery. As the marketplace becomes increasingly interconnected, financial institutions with the global, regional and local business expertise and reach to develop innovative value-added solutions to customers will remain the key players within Latin America.

With a century-old international presence, Citigroup is well positioned with a powerful brand name, extensive on-the-ground presence and strong balance sheet that provide a competitive advantage in building its business and delivering the most diverse array of products and services to the broadest range of clients. Citigroup has more capital than any firm in the industry allowing for growth even during times of economic uncertainty. Its extensive network of relationships with local companies and governments provides solid grounding for conducting business and managing risk. Citigroup will continue to maintain its deep-rooted commitment to the Latin American region and attract those corporate and consumer clients looking for security, stability, trust and a global firm that also understands local markets.

Michael Contreras is executive vice president, Citigroup Corporate and Investment Bank, Latin America and the Caribbean.