The Challenge of Financing Business in Latin America and the Caribbean The Future of the Financial Services Industry after the Crisis 14th Caribbean Business Executive Seminar Port-of of-spain, Trinidad and Tobago 3 th April 21 Esteban Pérez Caldentey Development Studies Section Economic Commission for Latin America and the Caribbean (ECLAC)
The global crisis caused one of the most severe declines in GDP in over three decades and the sharpest growth deceleration of any past episode since the 198 s 8. 6. 4. 2.. Latin America and the Caribbean: GDP Growth Rate (Annual growth rates) South America -.34% Central America -2.% Mexico -6.% Caribbean -2.% -2. -4. 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Growth Rate Source: Development Study Section, ECLAC on the basis of official figures.. Trend 2
The transmission channels resembled those of other crises episodes The effects on trade flows have been significant. The availability of external finance was severely curtailed Partly as a result the supply of domestic funding was significantly reduced. 3
Trade flows contracted by nearly 4%... 6% 5% 4% 3% 2% LAC-7: Annualized rate of growth of exports and imports January 27-December 29 Note: Simple average including Argentina, Brazil, Chile, Colombia, Mexico,Peru. Source: Development Studies Section on the basis of official information. Jan-7 Feb-7 Mar-7 Apr-7 May-7 Jun-7 Jul-7 Aug-7 Sep-7 Oct-7 Nov-7 Dec-7 Jan-8 Feb-8 Mar-8 Apr-8 May-8 Jun-8 Jul-8 Aug-8 Sep-8 Oct-8 Nov-8 Dec-8 Jan-9 Feb-9 Mar-9 Apr-9 May-9 Jun-9 Jul-9 Aug-9 Sep-9 Oct-9 Nov-9 Dec-9 1% % -1% -2% -3% -4% -5% 29 Latin America -22% Caribbean -44% Exportaciones Importaciones 4
25Q1 25Q2 25Q3 25Q4 26Q1 26Q2 26Q3 26Q4 27Q1 27Q2 27Q3 27Q4 28Q1 28Q2 28Q3 28Q4 29Q1 29Q2 29Q3 29Q4 Financial flows The region witnessed restricted access to all external sources of finance due mainly to higher international risk aversion and global deleveraging Caribbean: FDI and Remittances (US$ billion) LAC-7: FDI (US$ billion) 4.5 4. 3.5 3. 2.5 2. 1.5 1..5. 26 27 28 29 12 1 8 6 4 5 45 4 35. 4 2-2 -4-6 -8 Financial flows (exc. FDI) EMBI 25Q1 25Q2 25Q3 25Q4 26Q1 26Q2 26Q3 26Q4 27Q1 27Q2 27Q3 27Q4 28Q1 28Q2 28Q3 28Q4 29Q1 29Q2 29Q3 29Q4 Remittances Foreign Direct Investment LAC-7: Remittances (US$ billion) LAC-7: Non-financial flows (US$ billion) and EMBI Source: Development Studies Section on the basis of official information. 25Q1 25Q2 25Q3 25Q4 26Q1 26Q2 26Q3 26Q4 27Q1 27Q2 27Q3 27Q4 28Q1 28Q2 28Q3 28Q4 29Q1 29Q2 29Q3 29Q4 8 7 6 5 4 3 2 1 5 EMBI Global L. America
At the same time, there was a marked reduction in the rate of expansion of the flow of domestic credit LAC-7, Central America and the Caribbean Annualized rate of growth of credit in real terms to the private sector 3 25 2 15 1 5-5 24- Jun 24- Sep 24- Dec 25- Mar 25- Jun 25- Sep 25- Dec 26- Mar 26- Jun 26- Sep 26- Dec 27- Mar 27- Jun 27- Sep 27- Dec 28- Mar 28- Jun 28- Sep 28- Dec 29- Mar 29- Jun Source: Development Studies Section on the basis of official information. LAC-7 Central America Caribbean 6
The countries of the region implemented a range of different policies to mitigate the effects of the crisis on real and financial activity Countries stabilized their external financial position during the crisis. Countries confronted the effects of the liquidity crunch on domestic markets through a range of countercyclical policies: Fiscal stimulus packages (.5%-6% of GDP). Lean against the wind monetary policies. Active public credit interventions. 7
25Q1 25Q2 25Q3 25Q4 26Q1 26Q2 26Q3 26Q4 27Q1 27Q2 27Q3 27Q4 28Q1 28Q2 28Q3 28Q4 29Q1 29Q2 29Q3 29Q4 US$ Billion During the crisis the decline of gross outflows acted as buffer stock partly offsetting that of gross inflows 15 LAC-7: Gross non-fdi inflows and ouflows (US$ billion) First quarter 25-Fourth quarter 29 12 9 6 3-3 Non-FDI inflows Non-FDI outflows 8
Public sector credit played a fundamental role in offsetting the decline in private sector credit LAC-7: Total credit growth in real terms (27-29) Rates of change 3 25 2 15 1 5 26% 28% 7% 19% 17% 16% 4% -4% 22% -5 27 28 29 Total Credit Private Credit Public Credit 9 Source: IDB (21)
Countries capacity to confront and mitigate the negative effects of the crisis was determined by stock (balance sheet) positions Balance sheet positions were with some exceptions stronger than in the past. Countries increased their reserve coverage. Countries (with exceptions notably in the Caribbean) reduced their debt levels. Nevertheless, regional comparisons show that balance sheet positions were stronger in South America than in Central America or the Caribbean. Due to an exceptionally favorable macroeconomic performance in 22-27 that served to consolidate their stock positions. 1
International Reserves in months of imports and external debt as percentage of GNI (1985-27) International Reserves in Months of imports By Country Groupings (1985-27) 7 6 5 4 3 2 1 1985-199 1991-21 22-27 LAC-7 Central America OECS MDC1 MDC2 4 35 3 25 2 15 1 5 External debt as percentage of GNI By Country Groupings (1985-27) 1985-199 1991-21 22-27 LAC-7 Central America OECS MDC1 MDC2 Source: Development Studies Section on the basis of WDI (21) 11
International Reserves in Months of Imports For LAC-7 the dynamics of reserve accumulation and debt stocks behaved differently in relation to past crisis episodes 15 1 8 7 6 External Debt as percentage of GDP LAC-7: Months of imports covered with international reserves and external debt as percentage of GDP (198-29) 5 External Debt Asia Argentina Years Source: Development Studies Section on the basis of Official Information 12 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 5 4 3 2 IR/Imports External Debt/GDP
The combination of policy activism and more favourable conditions in external markets point to a rebound in economic activity in 21 The rebound is generalized throughout the region. All countries are expected to show positive growth rates in 21. However it is not homogenous throughout the region. South American countries and Mexico are expected to show the more pronounced recoveries partly as a result of favorable commodity prices. This has strengthened the capacity of commodity exporting countries to expand domestic demand through higher consumption and investment. The rebound is expected to be very modest for Central America and Caribbean countries. 13
Rate of change (%) Latin America and the Caribbean Rate of change of GDP in real terms 29-21 8 6 4 2-2 -4-6 -8 Source: ECLAC 29 21 MEX PAR HON ELS VEN CHI NIC CRI GUA ECU BRA COL ARG PER URU RDO PAN BOL CARIBBEAN 14
The rebound is much stronger in the larger Latin American economies Rebound LA South America Central America Mexico Caribbean World 5.9 4.4 2.7 1.2 3.-3.9 4.4 Rates of change (%) 6 4 2-2 -4-6 4.5 4.1 3.5 3. 2.5 1.8.1.3-1.8-2.1-2.2-6.7-8 Latin America South America Central America Mexico Caribbean World Source: ECLAC 29 21 15
The short-term rebound will face significant obstacles to become a sustained recovery The effects of the current crisis are not limited to short-run factors associated with the economic cycle The magnitude and systemic character of the current crisis indicate that the world will experience structural changes. There is a growing perception that world conditions will move towards a New Normality comprised of three characteristics: Lower actual and potential growth rates in the developed world. Jobless recovery. Global aggregate demand will be sustained more by the emerging economies. Limited expansion of international financial markets. Massive destruction of financial wealth, tighter regulation and increased financial protectionism. Reduced volume of commercial flows. Growth in world trade will be more sluggish, trade protectionism will increase, and the competition for markets will be more fierce. 16
In addition to the challenges imposed by the New Normality, the financing of business will also face domestic challenges SOURCES OF FIRM BY REGION FINANCE BY REGION (In percent of the total) 6 5 4 3 2 1 Internal Sources Local Banks Supplier credit Stock market Informal Not specified Government East Asia and the Pacific South Asia NICS Latin America and the Caribbean CIS Europe Source: Development Studies Section on the basis of World Bank 17
The financial system should be an instrument for productive development On the one hand financial systems: Have low levels of development Low levels of access Short term oriented Are highly Concentrated In terms of the ownership of assets In terms of the distribution of loans Are short-term oriented Are highly segmented and exhibit high costs 18
Latin America has lower levels of financial access than other regions 1 COMPOSITE INDEX OF FINANCIAL ACCESS BY REGION 9 8 7 6 5 4 3 2 1 Source: Honovan (27) Europe East Asia Europe and Central Asia Caribbean Latin America South Asia 19
And the access to financial services is unequal within the Latin American and Caribbean region and between poor and nonpoor households PERCENTAGE OF HOUSEHOLDS WITH LOANS AND SAVINGS IN FINANCIAL INSTITUTIONS Country Year Total Poverty Microfirm activity Poor households Non-poor households Households with microfirm Households without microfirm Credit Saving Credit Saving Credit Saving Credit Saving Credit Saving Bolivia 2 7. 9.9 5.3 4.5 9.7 18. 6. 6. 7.2 15.3 Dominican Republic 21 1.9 25.1 5.8 9.8 13.1 31.7 12.3 24.3 9.2 25.9 Ecuador 1998 9.8 22.7 4.9 7.9 12.2 29.9 13.9 2.2 4.2 25.5 El Salvador 22 1.3 n.a..5 n.a. 1.7 n.a. 1.1 n.a. 1.4 n.a. Guatemala 2 6.4 16.8 4.2 2.5 8.3 28.9 7.2 14.7 5.6 19.2 Haití 21 n.a. 11.7 n.a. 3.7 n.a. 23.9 n.a. 9.9 n.a. 19.2 Jamaica 1997 3.8 59.4 1. 4.2 4.5 61.5 4.3 6.2 3.6 56.9 Mexico 22 6.2 2.6 5.3 14.8 8.2 32.9 8.2 2.9 5.5 2.5 Nicaragua 1998 1.4 5.6 5..9 13.8 8.6 15.7 5.4 5.8 5.8 Panama 23 17.5 35.2 8.4 9.9 2.7 44. 13.7 27.2 19.7 39.7 Paraguay 21 3.4 3.7 1.7.7 3.1 4.8 2.1 2.7 3.6 6.2 Peru 21 3.5 4.5 1.5.9 5.1 7.6 3.4 3.4 3.6 6.4 Weighted average 6.3 18. 4.5 1. 8.3 28.3 7.2 14.5 5.6 2.3 n.a. not available. Source: Tejerina y Westley (27)
Commercial bank credit is mainly chanelled to big firms Share of credit by firm size in the case of Mexico (27) BANK SHARE OF CREDIT TO FIRMS IN THE BANK S PORTFOLIO SHARE OF THE 1 BIGGEST CLIENTS IN THE BANKS LENDING PORTFOLIO SHARE OF SMALL CLIENTS IN THE BANKS LENDING PORTFOLIO BBVA 31.9% 56.2% 14.% BANAMEX 4.3% 73.5% 1.7% SANTANDER 46.9% 68.6% 14.7% HSBC 36.6% 63.3% 13.4% BANORTE 44.8% 56.5% 19.5% REST 48.3% 78.% 1.6% TOTAL 41.6% 68.% 13:3% Fuente: Development Studies Section (21) 21
In Latin America the interest rate differential for different size firms can reach up to 1 percentage points Differential between preferential and ordinary interest rates in Latin America (In percentage points) 28-29 (Averages) 12 1 Percentages 8 6 4 2 Brazil Colombia Uruguay Venezuela Source: Development Studies Section (21) 22
And the operating costs are high relative to other regions Non-interest expenses/average assets (%) of commercial banks by region Average 26-28 9 8 7 Percentages 6 5 4 3 2 1 East Asia and the Pacific Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Source: On the basis of World Bank Data (21) 23
Sep-95 Mar-96 Sep-96 Mar-97 Sep-97 Mar-98 Sep-98 Mar-99 Sep-99 Mar- Sep- Mar-1 Sep-1 Mar-2 Sep-2 Mar-3 Sep-3 Mar-4 Sep-4 Mar-5 Sep-5 Mar-6 Sep-6 Mar-7 Sep-7 Mar-8 Sep-8 Mar-9 On the other hand financial systems focus on ROA finance rather than leverage 35 Leverage in the developed world and Latin America (September 1995-April 29) 3 25 2 Developed Countries 15 Latin American 1 5 Source: Sobre la base de Bloomberg (29) 24
And profit margins are high compared to other regions Profit margin (before tax and non-operational items (%) of commercial banks by region (Average 26-28) 1.8 1.6 1.4 Percentages 1.2 1.8.6.4.2 East Asia and the Pacific Latin America and the Caribbean Middle East and North Africa South Asia High Income Source: On the basis of World Bank Data (21) 25
The challenge is to move towards the creation of inclusive financial markets that can improve upon their function of resource channeling and allocation To this end commercial banking and financial system activities must be complemented with public policies that promote the role of development banking, and their respective instruments Development banking must focus on market failures. Complementarity with commercial banking. Allocation of resources through financial criteria (maximization of utility). Development of new financial instruments Guarantee schemes Venture capital Securitization Factoring 26
Commercial and development banking Public bank Private bank Second tier banking First tier banking 27
Also public policies must promote the role of microfinance and its respective instruments Microfinancing institutions provide financial services to low income households and microenterprises, that do not possess the conditions (collaterals or guarantees) to secure loans. Multiproduct Financing of working capital. Credit lines: education, family. Health and life insurance. Means of payment: current accounts, cards. In order to promote the development of microfinance in the region, it is necessary to design public policies to improve the capacity of the relevant institutions to obtain the required resources to operate. This implies addressing challenges related to administrative and regulatory issues in order to facilitate the monitoring of risk ventures. And requires the application of low cost technologies that are accessible to this type of institution. 28
Conclusion The context within which the financing of business takes place will change. The New Normality Implications and effects (regulation, access to finance). What is the role and function of the financial sector Who finances is as important as how activity is financed. Intermediation role. How to complement private finance with public banking. 29