Transcript Presentation for the CSBS International Banking Conference

Presentation for the CSBS International
Banking Conference
Rob Schenck
Federal Reserve Bank of Atlanta
February 3, 2004
GDP Growth Across the
Globe
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The Latin American
Economy



After three years of turbulence, most countries
achieved stronger domestic performance.
For the first time since 1997, there are no
projected contractions for any Latin American
economy in 2004.
2004 brings few presidential elections.
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Latin America enjoyed
improved prices for many
of its most important
commodity exports.



Rebuilding of reserves in the US and increased global
consumption helped the price of oil remain high.
Demand from China and supply disruption concerns
lifted copper prices.
Gold is viewed as continuing safe haven.
4
Improved conditions translated
into increased capital flows for
the region


During 2003 investors displayed a greater
appetite for risk as interest rates remained low
in the US, Europe, and Japan.
However, the size of the investments remained
much smaller than the amounts risked by
foreign investors during the 1990s.
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Improved conditions translated
into increased capital flows for
the region




On average, the cost of external financing has
declined across the region.
Some countries have taken advantage of the lower
financing costs and accelerated their bond issuance
schedules.
While FDI flows differed from country to country, they
have not yet recovered on a regional basis.
Remittances remain very important, particularly in
Central America.
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Other Developments

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Brazil’s social security system, which appeared to be
fiscally unsustainable, remained in need of reform.
Venezuela remained a divided nation as the
presidential recall referendum loomed.
Colombian President Uribe’s 15 point reform
referendum failed to gain voter approval.
Ecuador’s ability to service its external public debt
remained in question.
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Update: 2004 Summit
of the Americas

In the end, very little progress was made at the summit.

All agreed on the need to battle poverty and corruption, but how
to achieve these goals was not clarified.

The FTAA proposal continued to face vehement opposition.

Yet, there were some encouraging signs for the US:
Chile praised its free trade pact with the US.
 Mexico’s Fox praised Bush’s immigration initiative.

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Update on the FTAA



Miami Declaration and America’s Summit
communiqué both reaffirmed 2005 deadline.
The “flexible approach”, also known as
“FTAA Lite”
Resistance from Argentina, Brazil, and
Venezuela persists.
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NAFTA
MERCOSUR
CACM
CARICOM
ANDEAN
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Exchange Rates



Regional trend towards flexible
exchange rates.
The real exchange rate in Latin America
and the Caribbean is 18% higher than
the average for the past five years.
Will the weak dollar hurt trade in 2004?
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Reform Fatigue is a
concern in 2004.


Some Latin Americans are disappointed that freemarket reforms failed to enhance living standards
throughout the entire region.
Reform fatigue in Mexico?
 Tax
proposals defeated.
 Are electric and labor reforms in jeopardy in ’04?

Reform fatigue in Brazil?
 Fiscal
and social security reforms are still pending.
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Banking in Latin America
The Year in Review


Several foreign-owned banks have either scaled back
operations in or withdrawn from Latin America.
Financial systems are recovering from years of recession.
Argentina’s banks made progress, but still have a ways to go.
 Brazilian banks benefited from growing investor confidence.
 Venezuelan banks improved operating efficiency.
 Colombian banks benefited from an improving economy.
 Chilean banks not significantly affected by Inverlink scandal.


Further privatizations were postponed in Brazil and
Colombia until 2004.
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Banking in Latin America
Prospects for 2004

“It seems to me that no fortune-teller
should be able to look at another
fortune-teller without laughing.”
- Cicero addressing the Roman
Senate, 81 B.C.E.
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Banking in Latin America
Prospects for 2004

While the past two years have been difficult
for Latin American banks, the future is
looking brighter.
Brazil - improved market confidence, less volatile economic
conditions worldwide, and an improving domestic economy.
 Argentina - outlook improving, but still limited by legal
uncertainties.
 Chile – stable operating environment.
 Colombia – outlook good, but still constrained by weak credit
demand and the country’s persistent security concerns.

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Banking in Latin America
External Factors

Global macro-economic conditions.

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The question is “how strong will the recovery in the
US and Europe be?”

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Upturn in US economy likely to stimulate trade in region.
A strong recovery should lead to increased demand for
commodities.
Continued stability in the big three (Brazil,
Argentina, and Mexico) affects the whole region.

Stability in the major countries could lead to an increase in FDI
throughout the region.
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Banking in Latin America
Internal Factors

Banks are actively seeking ways to improve
operating efficiency.
 Adoption
of new technologies
 Significant room for improvement in many countries.

Banks are pursuing growth strategies that include
building financial ties with non-traditional trading
partners.
 China,
Russia, and India.
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Countries Subject to the
FBO Supervision Program
System: 193 FBOs from 55 countries
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FBO Growth Rates
Growth Rates Since 2000:
Number Assets
System Wide
FBO Bank
-8%
-9%
FBO Nonbank
14%
-2%
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FBO Trends

Consolidation
 In
many countries, challenging economic times
have led to a consolidation in the banking industry.

Restructurings and Retrenching
 Volatility
in Latin America inspired some banks to
partially or completely exit the region.

Regulatory Realignments
 Strategic
reasons.
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Supervisory Challenges

Emerging risks associated with outsourcing
Internet site outsourcing.
 The “Offshoring” challenge.

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Coordination/Collaboration with domestic and foreign
supervisors
Information agreements sometimes viewed by Latin
American supervisors as being too restrictive.
 CCS is still a challenge.

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USA PATRIOT Act
Majority of FBOs are doing a great job of complying with
this complex set of requirements .
 Consistent application going forward.

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Ten things to watch closely in ’04 …
1.
Brazil’s social security reform.
2.
Argentina’s external debt renegotiation.
3.
The progress of the FTAA negotiations.
4.
The weak dollar and the region’s competitiveness
5.
The resurgence of populism in the region.
6.
The rate of progress of structural reform in the region.
7.
Venezuela’s probable recall referendum.
8.
Capital flows into the region.
9.
Uribe’s “Plan B”.
10.
Ecuador’s fiscal performance.
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QUESTIONS ?
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