Juan Pablo Cuevas is managing director and head of Global Transaction Services, Latin America and the Caribbean, at Bank of America Merrill Lynch. Based in Miami, he is responsible for developing and executing the integrated strategy for the full end-to-end regional treasury and custody businesses in Latin America and the Caribbean, including Treasury and Trade Sales, Treasury Product Solutions, Trade and Supply Chain Finance, Fulfillment & Service, Technology & Operations and Product Innovation, Development and Management. He also plays a leading role in delivering an integrated global corporate banking plan in conjunction with all his debt, FX and other partners, for building market share in the region.
Why have many Latin American economies outperformed developed countries since the financial crisis?
The transformation of the economic and political landscape in Latin America has been a long process. In the past, it sometimes took the region two or three times as long as the rest of the world to recover from global economic downturns. Today, the model of the autonomous central bank that leads a country’s monetary policy has become widespread in Latin America – and as a result, the majority of the region’s economies have been able to cope much better with the recent crisis.
Countries in Latin America have also been bolder in using the global capital markets to seek finance – for example, Chile, Colombia and Peru have all recently issued sovereign bonds which attracted a great deal of interest from international investors. These issuances have not only created a steady stream of dollars into these nations’ economies, but they have also garnered interest from the private sector abroad, encouraging inward investment.
As the flow of dollars into these economies has increased over the last decade, the institutions there have become steadier, which stimulates growth further. When you combine this with the separation of fiscal and monetary policy in many Latin American countries, and the fact that most of the economies in the region are increasingly market-driven, you have the basis for a level of stability that was not there 25 or 30 years ago.
What impact has the level of household savings in Latin America had on financial stability in the region?
In most of the economies in the region, households have been doing a lot of saving. When the financial crisis hit, these economies were able to pump some liquidity into the market to stabilise the situation. And with many Latin American countries exporting more than they import, they have positive current accounts, which has allowed them to reinvest a great deal of that surplus back into the economy.
Additionally, countries like Chile, Peru, Colombia and Brazil, have a healthy flow of dollars moving in and out of their economies. In some Latin American markets, extensive inward dollar flows are a slight concern – as they can place downward pressure on the value of the domestic currency – but with most economies in the region being net exporters, this could be viewed as a positive.
How significant a factor is foreign trade to Latin America’s emergence as an economic force?
Foreign trade is key to the region, and it is being driven by several powerful trade blocs.
One such bloc is Mercosur (also known as Mercosul), which comprises Argentina, Brazil, Paraguay, Uruguay, and Venezuela. This group negotiates with multiple regions around the world in order to promote its exports and receive imports.
On the other side of the continent there is a new alliance called the Alianza del Pacífico (or Pacific Alliance), comprising Chile, Colombia, Mexico, and Peru. These countries had historically negotiated individual trade agreements with other nations, often with great success. Now they have the opportunity to expand the reach of their products and services by arranging agreements as a unit, which gives them greater leverage and range.
Alianza del Pacífico is particularly important because it has opened up a corridor (the size of Brazil) along the continent’s Pacific coast, which looks across the ocean to Asia and beyond. Although it was only established in 2012, it is already generating a lot of interest from countries looking to make foreign direct investments in the bloc. More than 30 countries have ‘observer’ status in the alliance, including Canada, China, France, Germany, India, Japan, the UK and the US.
Obviously, there is political motivation behind the formation of these trade blocs. However, from an economic perspective, it is transforming the infrastructure for trade activity on both the Atlantic and Pacific sides of the continent.
What challenges still need to be overcome for Latin America to realise its full potential?
One challenge is that Latin America has been slow to invest in science and new technology to catalyse its economic growth. With increasing foreign direct investment flowing into the region as the result of growing trade links, technological innovation is starting to arrive, but there is still scope for further improvement.
Politically there is room for improvement as well. From a political (and also economic) perspective, there is now an opportunity to banish some of the longstanding issues that have, historically, cast a shadow over the region. More investment needs to go into education, and Latin American countries need to start investing in people so they can fulfil their potential. Furthermore, this should take place in the context of free market-driven economies. Now is not the time to focus on the past, but rather to embrace the opportunities available today and in the future to progress.