Moving into the Dark

In June there will be a total solar eclipse in South America.  But an economic eclipse might be on the cards for some countries in the region before then as the impact of the slowing US economy reaches Latin American.  Argentina, in particular, might only grow by as little as 1 per cent this year in the wake of 2 years of recession.  Overall, the region’s growth, by some estimates, is likely to fall to between 3 and 3.5 per cent after achieving 4 per cent in 2000.  An important issue, as many of the developed countries see their own economies slow down, will be the reduction of the market for Latin American exports.  Depressed commodity prices (they are down about 10 per cent this year) will continue to weaken and the flow of foreign direct investment will lessen appreciably.  Even so, many countries in Latin America are better equipped to handle external factors than in previous downturns (such as the devaluations in Mexico in 1994 and, more recently, in Brazil in 1999) because there are now more flexible exchange rate systems in operation and inflation in the region (averaging 6.8 per cent) has declined steadily.  The rate of consumer price rises dropped last year in 5 of the 7 biggest economies as well, so only a few months ago the countries in South America seemed to be gaining economic strength.  The 2 biggest economies (Brazil and Mexico) did very well – Mexico recorded 6.9 per cent growth, which is its best performance in almost 20 years.  Brazil managed 4.2 per cent, with interest rates and unemployment levels set to fall in 2001. 

All of this has improved stability significantly which has itself been bolstered by rationalization in the banking systems.  However, even although the region’s banking sector has improved dramatically in the past decade, the common complaint is that not sufficient credit is being given to businesses; loan rates for small and medium-sized businesses, especially, are exceptionally high.  The restriction on credit could have something to do with the fact that there has been a large number of foreign, and perhaps more cautious, banks entering the market.   In 4 of the largest markets – Argentina, Mexico, Venezuela and Peru – for example, some 50 per cent of bank assets are foreign-owned.  Even Brazil, which has traditionally had most of its banks in domestic hands, has about a quarter of all such assets now controlled by overseas banks.  The fact that the head offices of banks in Europe or North America are, in practical terms, lenders of last resort in many cases is significantly beneficial for Latin America, but still more lending will have to be made to boost economic growth.  Only Chile has a bank loan record comparable with the US and Canada.  There, bank loans account for approximately 64 per cent of economic output, just behind the 72 per cent figure in the US.  Whereas banks in Argentina (where the economy contracted by 0.3 per cent in 2000) contributed to that country’s problems because of an unwillingness to lend.

In banking, as in so many other things, the line drawn between controls and enterprise in Latin America is often a fine one, producing many contrasts and contradictions. 

Stamp Of Disapproval

Much of Nicaragua’s goods (either bought or sold) have to come via the Panama Canal so there has been talk of turning its San Juan River in the east, in conjunction with Lake Nicaragua in the west, into a rival canal.  Nicaraguans well remember that their country had been first choice for a canal ever since the Spanish conquistadors envisaged one back in the 16^th century.  It was only when American congressmen saw the one-cent Nicaraguan stamp depicting volcanic eruptions that the US backed away from supporting the project.  Since then, Costa Rica and Colombia have entered the fray by proposing “dry canals” – railways traversing each country.  This same idea has been mooted by the Nicaraguans as well with thoughts of building a high-speed rail track between the country’s Pacific and Caribbean coasts.  Panama, however, is not only flourishing because of its waterway.  Even as plans are put in place to widen the canal, the country has become the largest transhipment centre in Latin America, overtaking Buenos Aires in Argentina in 2000.  This is testament to Panama’s strategic location which saw 1.36 million containers handled last year, a 7.2 per cent increase from the 1.27 million in 1999. 

Transferring goods between north-south and east-west converging routes is big business in Panama.  Hutchinson Whampoa, a Chinese-controlled company which opened a US$120 million facility on the Pacific coast last November, has obtained a contract to handle 150,000 containers on behalf of Maersk, the Danish container line.  In the previous issue of SA Banker I made mention of Maersk’s intention of trying to highlight Panama as the main hub for hemispheric trade.  And speaking earlier of “dry canals” proposed by Costa Rica, Colombia and Nicaragua:  the once-discarded and rusting trans-isthmian railway in Panama which, in the early part of the last century operated between the Pacific and Atlantic oceans, has been restored and is expected to re-open in June.  The United Nations Economic Commission for Latin America and the Caribbean sees the combination of the canal and the railway turning Panama into a major transhipment centre.  I’m sure that the Nicaraguans are more careful with their stamp designs these days.