Latin America may be many things; predictable is not one of them. We ask a regional corporate banking expert to uncover the mysteries of this vast market and shine a light on its future.
“There’s never a dull day in Latin America,” says Fernando Iraola, Head of Latin America Corporate Banking at Bank of America Merrill Lynch (BofAML). When days are good, they can be very good. But when they are bad – well, the stories that circulate the world’s press tend to sensationalise the issues.
“LatAm is still very much an emerging market. It is used to operating with volatility. It is a region that demonstrates a high degree of creativity when challenges are thrown at it. And there are many challenges,” says Iraola.
The troubles faced in certain LatAm countries cannot be underplayed. But neither can the opportunities that the wider region offers. Knowing what is happening and understanding why is perhaps more important here than almost anywhere.
The political transitions witnessed in a number of LatAm countries has been on the top of the agenda for a number of clients, says Iraola. The three biggest – Brazil, Mexico and Colombia – all elected new presidents in 2018, all signalling great change.
The connection of Mexico to the US and Canada as part of NAFTA – which eliminated most tariffs on more than US$1.2trn worth of trade between the three partners – will reshape in 2020 as the United States-Mexico-Canada Agreement, or USMCA. It reinvents some rules that favour US production of cars, or US imports of Canadian dairy, for example, but keeps the Chapter 19 rules on trade practice disputes between each party. There are many more ‘reforms’ agreed and it will certainly help shape the Mexican economy going forward, notes Iraola.
Brazil’s election saw two candidates at opposite ends of the political spectrum fight it out in spectacular style, with Jair Bolsonar becoming the country’s new far-right president. With some drawing parallels between the outspoken Bolsonar and President Trump, there remains a lot of uncertainty in this major regional economy.
In a similarly polarised election, the market-friendly economic policies of conservative, Iván Duque, won the election to become Colombia’s new president in June. This promptly raised questions about the country’s fragile 2016 peace deal with the leftist Revolutionary Armed Forces of Colombia (Farc). The country has effectively been subject to civil war for over 50 years which has impacted its trading status enormously. Colombia’s neighbour, oil-rich Venezuela (it is the sixth largest member of OPEC), remains in economic and political turmoil. The IMF expects inflation in Venezuela to be 1,000,000% for 2018.
Argentina has also gone through a political transition and, says countryman Iraola, was starting to move in the right direction but is now “heading somewhere else” at the hands of a macroeconomic crisis, as it goes into presidential elections in 2019. The government of business-friendly President Macri has been unable to get a grip on inflation (c.40%), which is the highest amongst G20 nations.
Transitions will always bring about uncertainty, says Iraola. In LatAm, he notes that the impact on exchange rates, for example, tends to manifest in extreme volatility. In the case of Argentina, it has pushed interest rates from 40% to 60% as Macri tries to control devaluation of the peso (it has lost more than 40% of its value against the US dollar so far in 2018).
Mexican rates are up to 7.75%, the highest in more than nine years, a response to rising inflation. However, Brazil is moving in the opposite direction, rates sliding from 14% to 6.5%, the lowest in 30 years, despite market volatility.
“The variety of challenges for treasurers in the region is high,” notes Iraola. “If you add on top what is happening in the US with its rising interest rate cycle, there needs to be a strong focus on risk management, exchange rate volatility, and liquidity optimisation both in terms of excess liquidity and working capital management.” Furthermore, he notes that the intense pressure on cashflow visibility and control, and the ability to effectively forecast, is not letting up.
“It is assumed that there are more similarities than differences across geographies,” says Iraola. “The reality is proving to be something else.” Indeed, each market has different regulations, some economies are more open than others – the Mexican peso is one of the most traded currencies in the world whereas the Brazilian real is very much central bank regulated.
All of these differences create new needs in terms of information flows. At a practical level for treasurers, it means an everyday process such as reconciliation becomes a major data management and analytics challenge.
Chile’s central bank reportedly lost US$10m in a cyberattack this year, the latest victim in a targeting of vulnerable payment transfer systems. Other major cyber events this year in Mexico (it was foiled but not before major damage was caused) and Peru (subject to widescale phishing attacks) led one expert to comment that “compromising global financial networks via small to medium-sized banks in Central and South America whose cyber defences may be less sophisticated poses a higher probability of success”.
Help is at hand for those who seek it. “We have been playing a very active role in terms of educating clients around the challenges of cyber-security, helping to drive the right culture internally,” states Iraola. However, he adds that corporates tend to be less aware or responsive to the threat than financial institutions. It may be that budgets are less focused on this issue, but this only serves to reinforce the need for cultural change around cyber.
Call for help
“The general challenges we see are more directly connected to the indigenous LatAm businesses,” says Iraola. “But we are seeing a plea for help across the region for the sharing of information and global best practices on managing risk and volatility, and interest rate cycles.”
In terms of funding alone, working out how to meet mid- to long-term capital needs remains a “rollercoaster ride” for LatAm operations. It is therefore essential for treasurers to understand the political landscape and how elections impact the cost of capital, for example, and be aware of what instruments are available and where (Chile, for example, has well-developed capital markets, Argentina less so).
With the technology discussion gathering momentum for treasurers just about everywhere, “the reality of LatAm is that there is a lot going on in the fintech space”, says Iraola. This creativity is across all geographies; there is no centralised South American hub per se, he explains. “It is an amazing time for the region in this respect; there is a lot going on and many large indigenous corporates are already engaged in the digital journey, right across the business.”
Indeed, whilst some highly developed modern organisations have for some time been using big data analytics to sharpen their product mix and distribution, the tech-imperative is true even for some of the traditional industrial players, many having already developed an operational end-to-end digital customer experience.
“We’re seeing a lot of innovation, particularly around the treasury challenges,” comments Iraola, adding that LatAm “is well-advanced”. This is mostly out of a commercial need to reach logistically challenging territories, a need for improving process efficiency in a diverse regulatory and taxation environment, and a need to satisfy an increasingly tech-savvy and demanding population.
And here is a beacon of light. Growing investment in LatAm by global investors runs in parallel with its emergence as a key strategic market for global tech companies. The list of entrants includes Amazon, Google, Facebook, Netflix, Spotify, Airbnb and Uber.
VC tech investment in the region reached an all-time high of US$1.1bn in 2017, doubling the amount committed to start-ups in 2016. In Q1 2018, three tech start-ups exceeded US$1bn valuations. “I see a lot more of this happening in the next three to five years,” states Iraola. “Asia may be ahead by a few steps now, but LatAm is catching very quickly.” Treasurers should start preparing now.