Published: January 01, 2000
Strong economic growth in Latin America, positive demographics and a broad trend towards transparency and efficiency is driving a growth in demand for innovative banking solutions in the region. Two of the most important groups actively pursuing opportunities in Latin America are non-bank financial institutions (NBFIs) – such as insurance companies, pension funds and stock exchanges – and public sector entities, including federal/state entities, central banks, development banks and multilateral agencies.
Deregulation and changing demographics have created opportunities for NBFIs to respond to an increased demand for services. A recent report from the World Bank notes that for the first time in history, Latin America’s middle classes will outnumber the region’s poor by 2016 [1]. This prosperity has led to an increase in consumer spending, particularly on auto, health and other insurance products.
Brazil and Mexico, which are the largest insurance markets in Latin America, represent more than 55% of the gross insurance policies written in the region, and are already sizeable markets. However, they are continuing to grow rapidly. Total direct premium in Brazil increased 14% in 2013, higher than the 10% nominal increase in GNP. Total insurance in Mexico grew at 11% (excluding the impact of a Pemex multiyear property renewal) – well above the country’s 7.5% nominal GDP2. Robust premium growth is also occurring in other Latin American countries: Colombia’s premium growth was 8% in 2013, while total insurance premiums in Peru grew 16% [2].
Latin American pension funds currently manage $650bn in assets under management, with Brazil and Mexico the largest markets [3]. The pension market is projected to grow at 15% a year over the next decade due to demographic changes in working age population –13 million people are expected to enter the workforce over the next 10 years in Brazil alone – and increasing capital accumulation in Latin American economies as prosperity increases [4]. Given huge populations in Brazil (198.7 million) and Mexico (121 million) and broad government support to encourage private pension savings – over the past decade the majority of Latin American countries have made pension provision compulsory – the opportunities for pension funds (both onshore and offshore) are enormous.
As pension fund and insurance company investment grows, stock exchanges across Latin America have been buoyed by increased demand. In response, many have invested in new technology. For example, in Brazil, the exchange group Bovespa has moved to a predominantly electronic order flow by building an electronic trading platform.
Meanwhile, the Santiago Stock Exchange, the Colombia Stock Exchange and the Lima Stock Exchange have formed Mercado Integrado Latinoamericano (MILA) to trade equities from the three countries. Mexico has also recently joined MILA, making it possible to trade equities from many of the region’s most important markets using a single platform. While shares are traded in US dollars, and liquidity is consequently limited, MILA is an important advance for Latin America. Moreover, there are hopes that Bovespa will join the alliance in the future, which would significantly increase trading volumes.
Domestic public sector entities, including federal, regional and municipal governments, ministries, military forces and state-related government entities, including state pension funds, social security and central banks are under pressure to respond to citizens’ increased expectations for more efficient delivery of services, greater transparency and improved accountability. As a recent OECD report notes, governments in Latin America are continuing to adopt sound fiscal policies as well as seeking innovative practices in public procurement and financial management. They are also implementing better banking processes to optimise efficiency and reduce costs.
At the same time, the range of challenges undertaken by government entities has increased. For example, some countries have introduced more comprehensive pension coverage, putting pressure on social security administrations to increase efficiency. Moreover, government ministries dealing with social security must find cost-effective ways to pay benefits to make payments to foreign nationals living in Latin America on behalf of their governments or to Latin Americans living outside the region.
Countries across Latin America have made export growth, and an increase in trade, an economic priority. As a result, many central bank foreign exchange reserves are at historically high levels: in April 2014, the most recent figure available, Mexico’s reserves hit an all-time high. Managing these reserves safely and efficiently is critical to maintain economic stability and growth.[[[PAGE]]]
Meanwhile, international entities, including development banks and multilateral agencies, continue to play an important role in Latin America’s economy. Indeed, some multilateral agencies have taken on a more important role in international trade as regulatory change has prompted an evolution in how banks support trade. Development banks and multilateral agencies have also become more ambitious in the range of strategies they adopt: some have further increased their offerings in guarantees to help small and medium enterprises access trade finance in order to stimulate export growth, for example.
The broad scope of the challenges and opportunities faced by NBFIs and public sector entities in Latin America means that they require an increasingly sophisticated range of solutions if they are to achieve their objectives of transparency, efficiency and control. All types of organisations, for example, require onshore and offshore demand deposit accounts (DDAs), efficient payments and collections capabilities that recognise the divergent financial infrastructure landscape across the region, and robust FX capabilities (given the multiplicity of currencies).
In the public sector, there is an increasing willingness to innovate and use technology in order to improve transparency, efficiency, visibility and accessibility. For example, adoption of sophisticated electronic procurement solutions by governments in Latin America is increasing, with Brazil, Chile and Colombia at the forefront of this trend. Governments must gain access to new technology and tools that can support more efficient reconciliation, improve transparency, lower costs, and further advance their strategic governance. Similarly, the focus on building foreign exchange reserves means that banks require efficient custody services, so that they can discharge their responsibilities effectively and control costs. They also need advanced liquidity solutions to enable them to access a broad range of investment instruments so they can achieve their investment objectives in line with their investment policies.
With so many opportunities available in Latin America, it is essential for NBFIs to work with a bank provider that has a deep understanding of the regulatory and business environment in each country. In addition, a regional and global perspective is increasingly important, given pan-regional M&A activity in sectors such as insurance. Many markets are evolving rapidly and NBFIs need a global bank that can not only keep them informed about regulatory and other developments, but also explain the implications of change for their business model.
More generally, NBFIs should periodically re-evaluate their provider to review their pricing and services, to make sure they remain competitive and are best-in–class, particularly in areas such as FX, cash management, custody and liquidity management. They should also make an ongoing commitment to rationalise bank relationships and accounts across the region to prevent unnecessary complexity, improve visibility and control, and restrain costs.
While public sector entities, such as central banks and state pension funds, have a thorough understanding of domestic challenges, they often lack a broader understanding of international best practice and opportunities from outside their country or the region. It is therefore important for public sector entities to work with a global bank that both understands their domestic environment and can add a regional and global perspective.
By sharing best practices from across the region and worldwide, banks can play an important role in enhancing opportunities for both NBFIs and public sector entities in the region.
Notes
[1] Social Gains in the Balance, World Bank, February 2014
[2] 2014 EY Latin America insurance outlook, Ernst & Young
[3] The 2013 Guide to Latin America Pension Funds, Campollo Consulting and Wall Street Advisors Services
[4] The 2012 Guide to Latin America Pension Funds, Campollo Consulting and Wall Street Advisors Services
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