Although still showing “signs of stress”, Latin America is handling the credit crisis better than other emerging markets, argues Carl Adams, head of origination and structured finance for the Americas at Espirito Santo Investment in New York.
Compared with Eastern Europe for example, he suggests that: “The negative effect has been less drastic, partly because Latin America as a region has taken advantage of the previous years’ liquidity and access to credit to put its house in order.”
That said, even top-tier Latin companies are finding it hard to access cross-border financing, and although the credit market has recently shown signs of improvement, money continues to flow from the region into locations viewed by investors as “safer risk”, he notes.
Most of Latin America’s economies are commodities driven, meaning they suffered a double whammy as the banking crisis froze lending and raw materials prices plunged.
Although the prices of some commodities have held up well – for example corn and coffee – they are the exception, and oil-dependent economies like Venezuela have taken a big GDP hit, observes Francisco Miralles, country manager for the Andean region, Central and North America at Falcon Trade Corp in Miami.
“People across the world are consuming less. They are buying less, they are going out less, they are not eating in restaurants every day, they are not changing their cars every year,” says Antonio Alves, head of trade finance, Latin America and Caribbean region at the IFC in Washington.
As a result, the volume of goods traded inevitably falls, making it tougher for local banks to find the right trade asset and to finance the right trade client.
Since last September, when a spate of institutions such as Lehman Brothers and AIG started to collapse, the demand for IFC guarantees has ballooned, Alves reports.
Local issuing banks have looked to the IFC to facilitate funding amid desperately tight liquidity, while confirming banks have sought to mitigate their risk via the corporation’s AAA credit risk guarantees. On top of this, Basel II has increased capital requirements for lending banks, meaning the IFC’s ability to strip away credit risk has become far more sought after.
Different countries in Latin America are weathering the downturn in varying degrees.
As a major commodities exporter, Brazil was hit hard by the global liquidity crisis and the resultant downturn in world trade, says Daniel Issa, Falcon’s Brazil country manager in Sao Paolo.
During Q4 2008, only US$2.5bn of trade finance was available there, marking its lowest point since 2002, Issa notes. Following a government injection however of around US$66bn to exporters, “people now believe that the worst has passed”. Commodities prices have started to recover and credit lines are beginning to come back, albeit for very specific transactions.
Latin America’s smaller countries, for example Caribbean islands and those in Central America, are also becoming a bigger focus for the IFC as banks there need help building relationships with international lenders.
“In these countries, remittances – an important source of liquidity – have considerably decreased,” IFC’s Alves notes.
In April, the IFC signed up its first bank in Guatemala, followed in June by its first in Panama, approving US$25mn lines for each. In both cases, deals were booked within days of the banks being approved. “The response is very fast,”Alves remarks.
Popularity boost for trade finance
For all countries however, overall trade deal flow has decreased, and for those transactions that are getting done, banks are demanding greater security over goods and structures continue to go back to basics.
Trade finance tools once considered almost obsolete are suddenly back in fashion, says Falcon’s Miralles. In recent years, letters of credit (LCs) had become the industry’s “dying elephant” as the world merged into a single market. Now however, with risk soaring, LCs and structured deals that give lenders title to goods are coming back into their own.
“We are seeing a greater demand for ECA financing and, in general, banks are looking to mitigate risks through these programmes or alternatively looking to implement tighter structures in areas such as commodity trade finance,” says Nicholas Shaw, head of structured trade finance at BBVA.
Governments and multilaterals are indeed driving what recovery Latin America has enjoyed so far, injecting billions of dollars in trade stimulus packages and risk guarantees.
Commodity safety net
During the past half decade of commodities boom, Brazil did exactly what economists always advise – save during good times to help you through bad times. And this has left the country far better placed than some of its peers, says Falcon’s Issa.
“I do feel that Brazil compared to other countries in Latin America is in a better position,” he says. “For the first time in our history, we have accumulated a good amount of reserves, now more than US$200bn.”
The central bank has cut interest rates to aid market recovery, but has still kept inflation under much tighter control than neighbours like Argentina, Issa notes.
The fact that Brazil is now building a trade surplus – of US$3.7bn in April compared to a deficit just three months earlier – has given overseas investors confidence that “we are not just burning our reserves”, he adds. And with this, the local stock market has enjoyed a “huge rebound”, much of this due to an influx of foreign money.
Although the initial impact of the financial crisis was severe in countries like Brazil, where at its height, banks didn’t even have any benchmark for pricing, a number of Latin American countries have been helped through the downturn with generous stimulus from their central banks.
Since its LatAm launch in 2006 the IFC’s global trade finance programme has expanded fast. It has already issued around US$1.65bn of guarantees to cover local banks’ risk in the region, representing more than 35% of the programme’s global volume in full year 2009.
In response to the financial crisis, the programme’s global ceiling has also been raised, increasing the total amount of guarantees that the IFC can have outstanding at any time from US$500mn at launch to US$3bn today. Given that the average trade transaction currently has a tenor of four months, this equates to US$9bn of IFC trade finance support in one year.
The IFC is also rolling the programme out to an ever wider range of banks. As of June 30, it takes risk from 50 local or “issuing” banks across 19 countries in Latin America as well as offering guarantees on trade-related transactions to 177 “confirming” banks across 76 countries globally. So far, none have defaulted.
The commercial sector, however, also has a vital role to play in the region’s recovery.
“There are several things local banks can do to improve their chance of attracting what liquidity is left in the system, and many in Latin America are working fast to take such measures,” explains IFC’s Alves.
For example, a rating from an agency such as Moody’s improves transparency and can help an international bank in its decision to provide financing to a local borrower. Similarly, improving anti-money laundering and KYC controls and corporate governance practices “gives more comfort” to international banks.
For their part, international banks can help improve liquidity by greater take-up of programmes like the IFC’s.
The IFC guarantee is AAA-equivalent and can mitigate a big chunk of risk, Alves notes.
“A lot of banks are already seeing this, using our guarantee as an entry-door product to explore and get to know local banks.” After this, they can start cross-selling other products and start approving direct local lines to the new customer base.
The pullback of many international banks from trade finance in the region has left a big funding gap, creating additional room for players like Falcon, says Issa. Industry consolidation, for example through the merger of Santander and Banco Real, will also create opportunity in Brazil for new entrants, he adds.
Falcon opened a new office in Miami in May, focusing on the Andean region, the Caribbean and Central and North America, and aims to gain greater market presence as bigger banks tighten their lending.
“What we do is complementary to what other financial institutions do. Where banks stop, we continue,” Falcon’s Miralles says.
Iberian and Chinese interest
Spanish and Portuguese firms meanwhile continue doing relatively brisk business in Latin America and lenders from the two countries have retained a stronger presence than many of their peers.
Spanish firms are doing better in Latin America than at home, says Espirito Santo’s Adams.
“This has a lot to do with the limited size of the Spanish market, which has incentivised many Spanish firms to become truly international players by investing outside their home market into growth markets around the world,” he says. “As international firms, these companies have a broad funding network among international banks and institutional investors.”
Latin America’s biggest draw card however, comes through its blossoming relationship with China, the one country that markets the world over still hope will help drag them out of recession.
Latin America is already the world’s biggest supplier of agricultural products, minerals and metals to China, and this relationship has more room to grow, says Shaw. Since 2000, Latin American exports to China have surged 163%, almost matched by a growth of 136% in the other direction, he notes.
The relationship is being pushed at government level, with Costa Rica and Colombia in the process of signing trade agreements with China, on top of similar accords it has with Chile and Peru. In May, during a visit to China by Brazil’s president, the Asian nation agreed to lend US$10bn to Petronas in exchange for 150,000 barrels of oil per day in 2009 and 2010, Shaw adds.
China is poised to become a major player in Latin American trade, and already has overtaken the US to become Chile’s biggest trading partner, says Falcon’s Miralles.
For Brazil too, China is expected to take the top slot in 2009, says Issa.
Although Brazil’s exports to China are growing fast, demand for Chinese goods is becoming even stronger as consumers start to spend wealth earned during the commodity boom of the past half-decade. “From 2001 to 2006 we had surpluses in our trade business with China. Since 2007, we have had a deficit,” Miralles notes.
“Even considering the current crisis and its effect on the global economy, China continues to be a very important partner for Brazil and Latin America overall, due to its past growth and its continued potential for consumption,” says Espirito Santo’s Adams.
“Likewise, Latin America continues to be an attractive partner for China due to its abundant natural resources and its potential for trade,” he adds. “Because of these synergies, you are seeing strong efforts on both sides to further develop ties through partnerships, trade arrangements and investment.”
It remains to be seen, of course, whether China fulfils its promise to stimulate Latin America into a sustainable recovery. But with the prices of some key commodities already creeping back up, the growing support of multilaterals, and governments that appear to have done their job right, Latin America is at least poised to take advantage of any upturn when and if it comes.