Latin America’s economic development: risks and opportunities for corporates
Green shoots to emerge for Latin America? Commerzbank Insights speaks to Marcos Krepel, Commerzbank’s Senior Representative in Argentina
By mid-2020, Latin America had become the global epicentre of the COVID-19 outbreak, and countries in the region had to act fast to mitigate the social and economic impacts of the crisis. A few months on, Commerzbank Insights speaks to Marcos Krepel, Commerzbank’s Senior Representative in Argentina, to discuss the state of play in the region and the efforts being made to encourage a “green” recovery.
What is the latest on-the-ground in the region?
Marcos Krepel: Similar to many other regions, the countries of Latin America are still reeling from the impacts of COVID-19. But – thanks to less restrictive lockdown policies and supported by the warmer season in the southern hemisphere – we are witnessing clear signs of economic recovery. The determined support of governments combined with the increase in commodity prices, which still account for around 45 percent of Latin American exports, have had a positive effect on the stability of financial systems and are now spurring the economic recovery from the "corona valley". However, there are clear regional differences with respect to the breadth and speed of immunisation campaigns. In this context, we see Chile as a “poster child" in the region.
Overall, it was encouraging to see that financial systems in Latin America have coped well with the economic fallout of COVID-19. Of course, governments, supervisory authorities and central banks have learned from past crises, quickly ensuring the liquidity and solvency of economic actors, including banks. It has become very clear that the importance of a well-performing banking system as a catalyst for a sustainable economic recovery in Latin America cannot be underestimated.
How have trade flows and client behaviour altered as a result of the pandemic?
Markus Krepel: Business confidence and trade flows have been strongly impacted by the pandemic. Fortunately, trade has picked up again and although this recovery is still unfolding, there has been little to suggest that a remapping of global supply chains is taking place. Importantly, the recovery story so far has been one of normalisation rather than dramatic changes to the trade landscape. For instance, the South-South trade corridor – which has long been of enormous significance to Latin America – has recovered faster than other trade routes. China and its neighbours were the first to shut down, but conversely these countries have been among the first to re-open. For Latin America’s commodity exporters, this has been a “shot in the arm” – allowing them to normalise part of their operations much sooner.
With respect to the behaviour of our clients, the crisis brought about a far greater degree of risk awareness. In such an uncertain environment, it is only natural that exporters want to ensure that they receive payment on time and in full, as contractually agreed. As such, during the most acute moments of the pandemic, we saw corporates moving away from open account trading towards more risk-mitigating trade finance solutions, such as Letters of Credit – a staple product during times of crisis – as well as Guarantees.
How has Commerzbank been supporting its clients in the region through the pandemic?
Marcos Krepel: As Latin America locked down, the steep and sudden decline in demand and production was highly disruptive for our clients. Many looked towards their banking partners for support in several areas: addressing near-term liquidity shortfalls; keeping credit lines open; and in mitigating risk across the corporate’s day-to-day operations, including trade services.
We have been very active in facilitating Latin American trade flows in our capacity as a risk mitigator for our clients, particularly those located in, and doing business with, certain Central American and Andean countries – countries that already presented weaknesses before the pandemic.
While business has certainly slowed as a result of COVID-19, our longstanding presence, continued credit line availability, and expertise across the region have positioned us well to continue supporting our clients. There is no question that in the current uncertain environment, our physical presence via Representative Offices in the region has allowed for greater client proximity and market knowledge.
What is the landscape now for corporates wishing to do business with the region?
Marcos Krepel: Trade is already picking up again, and this process will accelerate once COVID-19 is under control in the region and Latin American currencies continue to revalue. Much will depend on whether Latin America can avoid further "corona waves" and how quickly herd immunity is achieved. Both the global environment and international liquidity are creating benign conditions for companies that want to expand their business relationships with Latin America again.
Yet, differing sanitary and economic measures and strategies will put Latin American countries on different trajectories of recovery, including beyond 2021. In the case of Chile and Peru, for example, while they suffered more from the pandemic, they had more fiscal and monetary room to finance compensatory measures and should enjoy a strong recovery as early as 2021. Overall, the comparatively slow immunisation of the populations in Argentina, Brazil, Mexico and Colombia is likely to keep the economic recovery process in these countries somewhat in check.
Looking ahead, all eyes will be on the fiscal consolidation strategies that countries in the region adopt to create the necessary fiscal impulses without compromising their creditworthiness – as the latter could impact both market confidence and the business environment in the coming years.
Nonetheless, countries in the region continue to hold great business potential despite the current challenges. Even Argentina, one of the weaker spots in the region, whose government is trying to stabilise its economy and revive national production, should see some interesting opportunities in sectors such as agricultural technology, oil and gas, IT services, and food, once COVID-19 abates and more FX stability has been found.
There has been much focus globally on ensuring that any recovery is a sustainable recovery. Do you see sustainability becoming a more prominent consideration in Latin America?
Marcos Krepel: Absolutely. The role of sustainability was on the rise before the pandemic, and we can expect this topic to be a crucial element of the recovery. As providers and arrangers of corporate financing, many banks are working with clients to help ease their transition to more sustainable practices – a trend that we expect to gather further momentum in this recovery period.
Sustainable finance in Latin America has widely been associated with the activity of multilateral banks which, as well as providing medium- and long-term lending in the region, have offered technical knowledge and expertise on green finance to commercial banks. In Argentina, for example, the International Finance Corporation (IFC) has committed more than US$2 billion to sustainable projects in the private sector over the past few years. Especially in recent times, we have seen sustainable considerations being incorporated into financial institutions’ risk functions, with dedicated resources analysing the environmental impact of projects and transactions. I have no doubt that these considerations will become increasingly important in the region as it looks to recover and attract new business and investment from international sources.
Where does Commerzbank see its role in facilitating future corporate business activity with the region?
Marcos Krepel: As a leading facilitator of trade for Germany’s exporters, our role in delivering support to our clients in key export markets will remain core to our business. Latin America is well equipped for an economic recovery during 2021-22, benefitting our corporate clients in Germany and abroad.
Our role as a risk-mitigating intermediary and trusted advisor for our clients will be even more critical to boosting confidence in the months to come. We were here long before the COVID-19 shock, and we will be here long after this crisis is over, to provide bespoke solutions for our corporate clients interested in doing business with the region.