- Juan Pablo Cuevas
- Head of Global Transaction Services, Latin America and the Caribbean, Bank of America Merrill Lynch
by Juan Pablo Cuevas, Head of Global Transaction Services, Latin America and the Caribbean, Bank of America Merrill Lynch
Those of us holding our breath for a surge in Latin American economic growth may have to wait a while longer – but a rising middle class, abundant natural resources and progress towards more open markets combine to make a strong case for investment.
An economic renaissance for the region was widely predicted just a decade ago yet, according to the International Monetary Fund (IMF), regional growth has slowed for four consecutive years, from a peak of 6.1% in 2010, to 1.3% in 2014.
Faced with those figures, it might be tempting to look elsewhere for business expansion – but that would be to miss out on the very real opportunities for growth and progress that lie behind the headline numbers. Those opportunities are driven by two main factors: the emergence of a middle class of more affluent consumers and a move to lower barriers between markets in the region. A third factor, offset recently by falling commodity prices, is the region’s abundance of natural resources.
The rise of the middle-class consumer
According to a recent World Bank report (Economic Mobility and the Rise of the Latin American Middle Class, October 2012), the middle class in Latin America grew by 50%, from 103 million to 152 million, between 2003 and 2009. According to World Bank Group president, Jim Yong Kim, “Over the past decade, Latin America and the Caribbean have made tremendous progress in reducing poverty and in boosting shared prosperity. Poverty has fallen by half to 12.3 percent. The middle class — currently 34 percent of the population — is growing. Meanwhile, inequality in Latin America — historically the world’s highest — has fallen, even as it rises in practically every other part of the globe.”[1]
This growing prosperity is creating an attractive opportunity for retailers, healthcare providers, insurance companies and corporates in many other sectors. Not only multinationals can benefit from the growing power of Latin America’s consumers: US middle market companies are also looking closely at the region.
Lower barriers, rising trade
As this new class of consumers emerges, business in the region is also starting to benefit from an opening up of barriers to trade. Two organisations are leading the way: first, the Pacific Alliance free-trade bloc, which includes Chile, Colombia, Mexico, Peru and Costa Rica, is designed to increase both intra-regional trade and trade with Asia. Its members already have free-trade agreements with many other countries, including the US and Japan.
By reducing tariffs and lowering non-tariff barriers to free trade, the Pacific Alliance works to create growth and increase opportunities for both domestic corporates and foreign multinationals.
Second, the Mercado Integrado Latinoamericano (MILA) initiative has similar goals to the Pacific Alliance, but was created for the region’s stock markets. MILA aims to integrate the stock exchanges and depositories of Chile, Colombia, Mexico and Peru to promote the growth of trading activity in member countries.
MILA is already one of the world’s most successful stock exchange integration projects, providing an efficient and competitive infrastructure with the ability to access multiple markets in a straightforward way. It creates the scale necessary to attract increased investment by international and local pension and insurance funds, while also offering new opportunities for companies seeking to raise capital.
Resilience in adversity
Brazil’s rapid growth has led the way for the region, but structural reform is vital if its economy is to prosper in the face of sharply lower commodity prices, tighter fiscal and monetary policies and a drop in investment by some of its largest companies. It also needs to diversify its economy as growth in China, its largest trading partner and a major buyer of its commodities, declines[2].
While the challenges facing Brazil are significant, the reaction to them by corporates and investors gives grounds for optimism: 25 years ago, investors faced by an economic slowdown in the country would simply have exited the region, resulting in contagion effects in other countries in Latin America. Now, while the inflow of capital to Brazil has slowed, it has not stopped. Just as important, there are signs that some of that capital is being reallocated to other countries in the region, such as Chile, rather than leaving the region altogether.[3]
Notes
[1] “For the First Time, More Latin Americans Are Middle Class Than Poor,” Young Kim, Jim, The World Post, June 3, 2015
[2] Chinese Gross domestic product (GDP) grew an annual 7.0% in the first quarter, slowing from 7.3% in the fourth quarter of 2014, according to China’s statistics bureau
[3] United Nations ECLAC Foreign Direct Investment in Latin America and the Caribbean, 2015, fig. I.6
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This change reflects the transformation that has taken place in the Latin American economic and political environment. Many of the region’s central banks remain focused on the long term and are held in high regard by the market, while many countries continue to have significant foreign exchange reserves.
Meanwhile, the majority of Latin America has enjoyed decades of relative political stability, in contrast to the turbulence that existed in the past. The rule of law and strong institutions are now an inseparable part of the character of most countries in the region, giving investors confidence in the long-term outlook.
A trusted guide in a complex region
If Latin America is changing for the better, it remains a complex region in which to operate, and one where a trusted advisor with the right experience can make the difference between success and failure.
At Bank of America Merrill Lynch (BofA Merrill), we have widened and deepened our coverage of the region. As well as our physical presence in Mexico and Brazil, we have built a network of Strategic Alliance Banks (SABs) that are closely integrated with BofA Merrill. This deep integration is especially valuable in certain countries when, for example, non-Spanish speaking staff at the headquarters of a company in the US need information on an account in, say, Chile. They are able to go through the trilingual staff at our shared services centre in Miami who will liaise with the SAB on their behalf to get the information they need.
Technology underpins growth and progress
The service we offer to Latin American clients is underpinned by advances in technology that allow for seamless integration between our services and those of the SABs. As other articles in this supplement point out, technology is also the crucial component in the development of efficient treasury and payments services in the region.
At BofA Merrill, we work closely with our clients in Latin America to help them grow, and it is their input that allows us to be as responsive as we are in developing systems and services to meet their needs. Our advisory boards provide a forum for some of the bank’s strategic clients to discuss their challenges as well as regional and global treasury trends. Those conversations feed back directly into solutions such as CashPro®, our cash management platform.
Recently, BofA Merrill developed a new foreign exchange (FX) feature for CashPro. During development, it became apparent that changes would be required to make the solution work in Chile. The bank not only made the necessary changes but also, highlighting the importance of the Chilean market, launched the solution in Chile before the rest of the world.
This application of global scale and expertise to the specific requirements of Latin America is typical of our approach. In this supplement you will find several examples of how this works in practice: reading them, I am proud of the work we are doing and I look forward to helping yet more clients make the most of the opportunities presented by this vibrant region.
