Forever Young

Latin America, like the rest of the world, has turned 21.  In years this usually signifies adulthood and one would imagine that in centuries it would confer the wisdom of Solomon.  Unfortunately, as we all know, history has shown that the assumption would be false.  The countries of Latin America, for example, have displayed a mix of level- headedness, impetuosity and immaturity at times; one trait, however, which they all share is unpredictability.  Nowhere is this more palpable than in its politics.  In Argentina, Fernando de la Rúa, a sober 62-year-old lawyer, has become president.  His personality and style is in stark contrast to that of his predecessor, Carlos Menem, a colourful personality who has seen his party, the Peronists, ousted after 10 years of uninterrupted governance.  The Peronists’ defeat is the biggest political upheaval since Argentina returned to a democracy in 1983.  One political analyst explains that Argentina will now be exposed to a new style of government which will be notable for its policy of negotiation and consensus-building rather than the previous image of the caudillo, or political strongman.  The Peronists still have influence, however, as they retain control of the Senate until at least 2001 and two-thirds of local government in the provinces is under Peronist control.  But De la Rúa and Menem have enjoyed a good personal relationship for the past three years during which time De la Rúa was mayor of Buenos Aires.  Whether or not the relations will hold now that the king has been dethroned remains to be seen. 

Political uncertainty is not slowing down foreign direct investment in Argentina or elsewhere in Latin America for that matter.  Foreign direct investment, unlike stock market activity, is not fickle and its contribution is vital to the growth and confidence of a country.  Figures for 1998 (latest year available) produced by the United Nations Conference on Trade and Development reveal that inflows of foreign direct investment capital into Latin America and the Caribbean exceeded US$71 billion, which is 5% over the record level that was recorded in 1997.  The United States remains the largest source of such investment capital, but Europe is catching up fast.  Spain, Germany and France are the prime investors and the European Union, as a whole, nearly matched the inflows from the United States in 1997-8, having only contributed a comparative half of such amounts back in 1995.  There remains a firm belief that a strong recovery will take place this year in the region and foreign direct investment reflects that sentiment.  It is no coincidence that Latin American debt prices have been recovering along with bond prices.

Visiting the Dentist

Brazil, especially, has received huge amounts of long-term investment money.  In 1998 it was, for a third straight year, Latin America’s largest recipient of foreign direct investment capital, receiving US$28.7 billion:  44% of the region’s total inflows and over 50% more than it received in 1997.

Surprisingly, despite these encouraging figures, banking in Brazil remains dull.  One chief executive of an international bank describes Brazilian banking as “boring”, equating a visit to a bank with one to a dentist. For many years the banks earned most of their profits by taking positions in stormy financial markets in which interest rates, financial derivatives, equities and the U.S. dollar were juggled.  But relative stability in Brazil and the decline in interest rates has forced bankers to return to conventional methods of making money by lending more to people and companies rather than to the Brazilian Treasury.  Foreign bankers say that Brazil is not service-oriented and that the country’s banks do not give its population a very good deal.  Nonetheless, Brazil’s big banks are well capitalised and well-managed which makes them the exception rather than the rule in Latin America.  The government spent over US$50 billion in the 1990s in restructuring the private and state-owned banks. 

Although some foreign analysts say that Brazilian banks have a lot to learn about managing credit, Brazilian bankers are not feeling any pressure from foreign competitors setting up shop in the country.  They say that Brazil is a special market and that scale is vital in order to provide a national service in a country that is so large and diversified.  Without adequate scale, the foreign banks will have a struggle on their hands.  It is a struggle, however, which is very tempting to put up with when the opportunities are put into perspective.  Only one quarter of the population (just over 160 million) has a bank account.  It’s enough to make any banker salivate.