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Previous issues can be selected by viewing our Letter from Panama index page
In conjunction with our newsletter, Offshore
Pilot Quarterly,
this regional roundup of economic developments appears regularly in SA Banker,
the official journal of the Institute of Bankers in South Africa,
under the title “Panama Passport”
Brazil’s
Besieged Banks
The shares of Brazil's largest banks have had a bad time of it. Increasing worries among investors that big profits will no longer be earned by the banking sector have caused bank share values to fall sharply. It has been a quirk of the Brazilian economy that its banks have made most of their money during periods of crisis in the country. When inflation was at its peak almost 10 years ago, banks made profits estimated to be around US$12 billion. When the country's currency was devalued and the economy went into intensive care back in 1999, banks again prospered. Banco Ita, the second largest private bank, became the first Brazilian bank to earn over $1 billion in a year. The banks have shown consummate skill in benefiting from financial volatility and high base rates meant that banks had an easy source of profit. But rates are likely to fall sometime next year because of politics. The central bank has kept rates high in order to counter inflation but all the candidates in this October's presidential elections have said that they will slash rates. Brazilian banks have produced a return on equity of around 16 per cent a year, which compares favourably with banks in the developed countries. Those returns, however, unlike in the developed world, have been traditionally earned on high spreads from low volumes. If the banks, brought about by political pressures, are forced to lend to a broader segment of the public it would undoubtedly be good for the economy.
Not just politics, however, are casting a shadow over banking. Government debt has risen from approximately 40 per cent of gross domestic product in 1998 to about 55 per cent currently. Government paper has offered an attractive source of medium-term liquidity and so the banks now find themselves very exposed. Banco do Brasil held two and a half times its book value in government paper at the end of this year's first quarter. There are real concerns that the increase in public debt cannot be sustained and this has been compounded by Moody's Investors Services, a rating agency, which has changed its outlook on 22 Brazilian banks from neutral to negative.
Although bank shares have always been considered a safe haven there is a growing realisation on the part of investors that the Brazilian banks are very vulnerable to both the current economic and political conditions. A spokesman for J. P. Morgan in New York, however, insists that there has been an over-reaction to the situation. He acknowledges that the political and economic tempo of Brazil is mercurial by nature, but that its future prospects, nonetheless, are good. Brazil’s potential has been recognised ever since a Portuguese mariner, Pedro Alvares Cabral, who had been looking for India, accidentally discovered Brazil in 1500. Brazil has become known as the “land of the future” but many Brazilians are wondering when the interminable present will become the past and the good times will start to roll.
Looming Debts,
Lingering Doubts
The spectre of default has returned to Latin America. Besides real concerns that Brazil is moving closer to default on its foreign debt (internal and external debt levels are approaching, it is said, the point at which repayment will become impossible) other countries on the continent are beginning to look vulnerable as well. Defaults in Latin America first occurred in the 1820s and then again in the 1880s. Looming problems once more appeared in the early 1900s and were followed by actual defaults in the 1930s. It wasn't until the 1980s, however, that nearly all Latin American countries defaulted, prompting many writers and commentators to characterise the countries of Latin America as serial defaulters. Not surprisingly, the fragility of the continents fiscal record, combined with the current economic climate in Latin America, weighs heavy on the minds of investors, especially at present as Argentina sinks further into a financial fiasco. Lingering fears have been a major factor in foreign direct investment (FDI) falling dramatically in the region after a decade of unprecedented growth. FDI (including the Caribbean) has shrunk from US$105 billion in 1999 to US$80 billion in 2001 and the decline continues, according to preliminary data on hand for 2002. In fairness, international conditions have exacerbated the situation, such as the recession which hit the United States and the fact that the European and Japanese economies are in the doldrums. And there is increased competition for FDI: over the last few years, for example, FDI in China has been such that today it is the largest developing-country recipient, having received US$41 billion in 2000 and US$47 billion last year. But due to economic conditions worldwide, FDI has more than halved from US$1,492 billion in 2000 to US$735 billion in 2001 with a further decline expected in 2002.
In 2001 the main beneficiaries of FDI in Latin America were Mexico (35 per cent) and Brazil (32 per cent). Chile’s share was just 6 per cent, which was the same as the combined FDI in Central America and the Caribbean. Argentina only managed to attract 4 per cent after having been a major beneficiary in the 1990s when transnational firms re-shaped the country’s economy. The country has seen FDI fall from a high of US$11.665 billion to US$3.181 billion in 2001.
Now, in this kaleidoscope of changing regional economic fortunes, where uncertainty is as close as positive gets, anxious investors and governments alike are finding few encouraging signs that the malaise will end soon.
Letter from Panama is published by
Trust Services, S. A. which is a British- managed trust company licensed under the banking
laws of Panama. It is written by our Managing
Director who is a former member of the Latin America and Caribbean Banking Commission as
well as a former offshore banking and insurance regulator.
He has over 35 years private and public sector experience in the financial
services industry. Our website provides a
broad range of related essays.
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