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I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.

Friday, 24 July 2009

Latin fire

Features

Latin America has seen stable growth for the past few years, but can it ride out a global storm?

With the world’s biggest economy facing a recession – and possible depression – markets around the world are scrambling to prevent a domino effect. Geographically in the US’s backyard and tied closely to its economy through commodity exports, one would expect that the countries across Latin America would fear the worst. But Luiz de Mello, head of Latin America Unit Desk of the Economics Department of the Organisation for Economic Cooperation and Development, doesn’t believe that the contagion will be severe because the region is much better placed than it was in the past to cope with this type of crisis.

“Nowadays they have a much stronger balance of payments, much stronger fiscal positions, there is falling external indebtedness in many cases and high international reserves, so that provides a pretty good cushion for the region to withstand any possible contagion, any possible exteriorisation in global financial conditions,” says de Mello. “Commodity prices remain very high – which are good for the region for many countries are commodity exporters and that also gives them an extra buffer to deal with any crisis.”

Markus Jaeger, global risk analysis, Deutsche Bank Research, warns that resilience hinges on commodity prices staying high. “The main risk from my point of view, in the short to medium term, is the commodity price story – if commodity prices were to collapse (commodity prices are hard to predict but market fundamentals suggest and my gut feeling is that they will remain strong for the foreseeable future) then I think the ballgame would change for Latin America, especially the weaker countries like Venezuela and Argentina.”

The weakness he speaks of is country-specific and depends on their position within the global economy. The countries more reliant on exporting goods to the US, for example Mexico, where 80-90% of its exports goes to the US, and many Central American countries, would be badly hit if there is a slow down in the American market or a continuing devaluation of the dollar, which effectively makes their exports more expensive in comparison. Other countries, like Chile, Brazil and Argentina, have a much more balanced composition of exports, so they are less affected by what happens in the US.

De Mello believes that there will be a deceleration in economic growth across the region but that slow down will not be catastrophic – most countries will be able to compensate for the lower export demand by relying more on the domestic demand, which is expanding and sustaining growth in many countries, particularly Brazil, Mexico and Chile.

“Increase in domestic demand in the old days often ran into constraints, like a weak external financing position or domestic inflation,” says Jaeger, referring to the 1980s and 1990s when these countries were prone to economic shocks. “This time you have – especially in Brazil – a sustainable increase in domestic demand which is driving overall economic growth. This is due to the much greater sustainability of the current macroecononic policy mix, lower interest rates and expanding domestic credit.

“The [Brazilian] government’s fiscal policy is also geared at expanding the consumer. There is a programme called Bolsa Familia, which is basically cash transfers to lower income families so they can increase their consumption levels, so the fiscal policy is also geared towards stimulating domestic demand. But it is different from the past; fiscal policy in the Brazilian and Mexican case is sustainable.”

Bolsa Familia is a programme whereby the government offers low income families money in exchange for their commitment to send their children to school. This has boosted consumption amongst low income families and it is also good news from an economic growth perspective because the next generation of people are better educated.

Historically Latin America has been a region that had a very unequal distribution of income but that is changing. De Mello says: “Income inequality is coming down in the countries where the problem is most severe; this is through a combination of both labour market conditions and social transfers effectively targeting the poor.”

The policy changes have stimulated demand for private banking and wealth management technology.

Technology firm Misys is working with a Tier 1 financial institution in Mexico that is building into this area. Steve Mills, head of Latin America business operations at Misys, explains: “There is a development of a middle class economy. You see that in Brazil with the emergence of products like credit cards and unprotected credit, as well as mortgages. If you looked around the region 10 years ago, finding a mortgage was incredibly difficult. Now with the availability of mortgage financing across the region, you are seeing the lengthening of the yield curve in general so that what was really a two to five year yield curve at the most is now 25-30 year yield curve, which historically wasn’t possible because of inflation.”

He says that the amount of wealth in both Mexico and Brazil is “really astounding”. “The international banks, as well as the local banks, are trying to come in and take part in that and provide some of the expertise that they have for individuals in the markets there. From a technical trend perspective the international players would like to be able to have their international investment banking platform and private banking platform in a single consolidated system. Private banking customers are becoming more and more sophisticated – they want more availability of what you would traditionally think of as investment banking products. So it is not just bond and equity based investment banking business – it is getting into more complicated structures, derivatives, etc.”

And this growth in individual wealth is giving a boost to the stock markets in the region. Mills sees many projects in the equities space – “a building out of custodial equities capabilities with some clients and looking at algorithmic trading, so the ability to do high volume, technically driven trading, which hasn’t been there in the past.”

This is attracting attention from outside the region. Chicago Board of Trade took an equity position in Bovespa, the São Paulo stock exchange. In January this year, voice and electronic interdealer broker ICAP acquired a 15% stake in the Bolsa de Productos de Chile, a commodity exchange in Chile. With this stake, ICAP becomes the first international investor to have an ownership stake in a Chilean exchange.

Exchange consolidation is starting to happen within the region. Mills says that one trend that will be interesting to watch in Brazil specifically is the potential merger of Bovespa and the BM&F, Brazil’s main futures exchange – the discussions are underway and there are still regulatory hurdles, but the merger would create the third largest exchange in the world.

Guillermo Kopp, executive director, global research fellow, TowerGroup, believes that the region as a whole is slightly behind the consolidation curve that is being seen in Europe; right now the move is to interconnect globally. “What is happening now is interconnectivity – exchanges are still playing a role in development of capital markets locally within countries so they have a reason for their existence. But from an order execution perspective and efficiency and access to liquidity there is no reason why they shouldn’t follow the flow in the world.” He believes that they won’t integrate in the near future unless they are engulfed by a bigger international player.

Mills agrees. “I think what you are going to see is partnerships and alliances between the exchanges over the next two to five years and then the next evolutionary step from there further down the road will be mergers of exchanges as well.”

Kopp considers Latin America to be a hotbed of technology innovation because people in Latin America try to do more with less. “That is the general rule. And when it comes to technology, they become very creative.

“If you look at a country like Brazil, it is not that they have little, but they are very ingenious,” he says. “They have a robust industry in some advanced technologies. IT is a little bit of a catch up but they have fairly large institutions – one is Banco Itaú and they have a subsidiary Itaú Tech, which is a service bureau and, indeed, it is one of the top 100 technology companies globally. They are very savvy in managing their resources.”

Guatemala

Population: 12,728,111 (July 2007 est.)

Below poverty line: 56.2% (2004 est.)

GDP: $67.45 billion (2007 est.)

Currency: quetzal (GTQ), USD, others allowed In 2007 the Banco de Guatemala launched a payment system modernisation matrix which included: regulation of the automated clearing house; revision of the administrative procedures of the RTGS system; and selecting one provider for the check processing system.

El Salvador

Population: 6,948,073 (July 2007 est.)

Below poverty line: 35.2% (2005 est.)

GDP: $35.97 billion (2007 est.)

Currency: USD

Stock exchange: Bolsa de Valores de El Salvador.

Nicaragua

Population: 5,675,356 (July 2007 est.)

Below poverty line: 48% (2005)

GDP: $18.17 billion (2007 est.)

Currency: gold cordoba (NIO)

Stock exchange: Bolsa de Valores de Nicaragua.

Panama:

Population: 3,242,173 (July 2007 est.)

Below poverty line: 37% (1999 est.)

GDP: $29.14 billion (2007 est.)

Currency: balboa (PAB); USD Bolsa de Valores de Panamá, Panama’s stock exchange, is among the most developed in Central America; it saw transactions worth a total of $2.28 billion in 2007.

The BVP has tried to modernise the local securities market by creating a securities liquidation and custody entity which led to the creation of the Central Latinoamericana de Valores, or LatinClear, which started operations in 1997 to provide clearing and liquidation services for stock exchange operations through its electronic systems to reduce operational risks and to efficiently liquidate and clear securities transactions.

Mexico

Population: 108,700,891 (July 2007 est.)

Below poverty line: 13.8%

GDP: $1.353 trillion (2007 est.)

Currency: Mexican peso (MXN)

Bolsa Mexicana de Valores, Mexico’s stock exchange, temporarily suspended trading as its main IPC index .MXX posted gains of over 6% on 22 January this year. Traders said huge volume was the reason for the suspension. (source: Reuters)

Dominican Republic

Population: 9,365,818 (July 2007 est.)

Below poverty line: 42.2% (2004)

GDP: $85.4 billion (2007 est.)

Currency: Dominican peso (DOP) In October 2007, Logica won the Banco Central de la República Dominicana bid to implement a new Real Time Gross Settlement system. The BCRD will use Logica’s Central Accounting System, part of the Logica Clearing & Settlement Solutions set, to implement a high value clearing and settlement interbank system. The RTGS system will be the backbone of the Sipard.

Stock exchange: Bolsa de Valores de la República Dominicana.

Costa Rica

Population: 4,133,884 (July 2007 est.)

Below poverty line: 18% (2004 est.)

GDP: $55.95 billion (2007 est.)

Currency: Costa Rican colon (CRC) In May 2007 Banco Central de Costa Rica decided to migrate its database servers to a pure 64-bit computing platform that runs on Windows Server 2003 Enterprise x64 Edition operating system and the Microsoft SQL Server 2005 database. The software, combined with new 64-bit IBM server hardware, is helping the bank improve the performance of financial transactions, increase the reliability of the system, and attain scalability that will enable the transaction system to grow with future demand and new financial services.

Bolsa Nacional de Valores – Costa Rica saw daily trading volume rise to $140 million in at the end of 2005 and market capitalisation was standing at $2.1 billion. There are several thousand listings on the exchange, and around 30 brokerages are permitted to trade securities on the BNV. The trading process is completely automated. The systems used by the Bolsa Nacional de Valores have been created for the needs of the securities market and designed by Costa Rican technicians.

Honduras

Population: 7,483,763 (July 2007 est.)

Below poverty line: 50.7% (2004)

GDP: $24.69 billion (2007 est.)

Currency: lempira (HNL)

Stock exchange: Bolsa Centroamericana de Valores, Honduras.

Ecuador

Population: 13,755,680 (July 2007 est.)

Below poverty line: 38.3% (2006)

GDP: $98.28 billion (2007 est.)

Currency: the US dollar (USD); the sucre was eliminated in 2000

On 5 October 2007, after it had expelled the World Bank representative in April, Ecuador threw out the IMF’s resident representative from the offices of the central bank, Banco Central del Ecuador. Ecuador’s economy minister Ricardo Patiño said that the IMF was welcome to have an office in the country, but that it would have to find its own location in a private building. The IMF has withdrawn its representative from Ecuador entirely.

Stock exchanges: Bolsa de Valores de Quito, Bolsa de Valores de Guayaquil.

Cuba

Population: 11,394,043 (July 2007 est.)

Below poverty line: N/A

GDP: $51.11 billion (2007 est.)

Currency: Cuban peso (CUP) and Convertible peso (CUC)

The creation of Banco Central de Cuba in May 1997 provided the country with an institution capable of concentrating its efforts in the execution of its central banking functions and established a two-tier banking system integrated by BCC and a group of banks and non-banking financial institutions.

Venezuela

Population: 26,023,528 (July 2007 est.)

Below poverty line: 37.9% (end 2005 est.)

GDP: $335 billion (2007 est.)

Currency: bolivar (VEB)

In 1989, the Bolsa de Valores de Caracas, following the liberalisation of the economy, saw large increase in trade volumes. The Automated Exchange Trading System (SATB) developed by the Vancouver Stock Exchange was acquired in order to fulfil the needs of the members for having a high-tech trading application. The SATB system started its activities in November of 1992. In 1994 the exchange implemented two new systems: the Remote Connection System (Sistecor) and the Electronic Compensation and Liquidation System (Secomli).

Haiti

Population: 8,706,497 (July 2007 est.)

Below poverty line: 80% (2003 est.)

GDP: $15.82 billion (2007 est.)

Currency: gourde (HTG)

The Haitian Stock Exchange exists but the exchange’s website is only partially complete. The websites “contacts” and “investor relations” pages list Global Trading Group as a partner of the market; Global is a stock brokerage located in Westbury, New York.

Colombia

Population: 44,379,598 (July 2007 est.)

Below poverty line: 49.2% (2005)

GDP: $320.4 billion (2007 est.)

Currency: Colombian peso (COP)

Banco de la República de Colombia, the central bank, manages the Electronic Negotiation System, which is a centralised electronic trading mechanism. The ENS allows for trading of securities deposited in the Central Securities Deposit, a computerised system designed to administrate the securities by means of electronic records. Its objectives are to eliminate the risks of handling physical paper, to speed up transactions in the secondary market, and to facilitate the payment of principal and/or interest coupons.

The Bolsa de Valores de Colombia is the principal stock exchange. It was created on 3 July 2001 by the union of three extant stock exchanges in Colombia: Bolsa de Bogotá, Bolsa de Medellín and the Bolsa de Occidente in Cali.

Peru

Population: 28,674,757 (July 2007 est.)

Below poverty line: 44.5% (2006)

GDP: $217.5 billion (2007 est.)

Currency: nuevo sol (PEN)

The value of shares traded on Bolsa de Valores de Lima, the Lima Stock Exchange, has increased 55-fold since 1990.

Paraguay

Population: 6,669,086 (July 2007 est.)

Below the poverty line: 32% (2005 est.)

GDP: $26.55 billion (2007 est.)

Currency: guarani (PYG)

Stock exchange: Bolsa de Valores y Productos de Asunción (Bvpasa).

Bolivia

Population: 9,119,152 (July 2007 est.)

Below poverty line: 60% (2006 est.)

GDP: $39.78 billion (2007 est.)

Currency: boliviano (BOB)

Bolivia has a central bank, Banco Central de Bolivia, and nine private banks. About 90% of Bolivian bank deposits are held in US dollars. (source: Wikipedia)

Bolsa Boliviana de Valores, Bolivia’s stock market, expanded in 1998 to include corporate bonds, along with the money market and government bond options that had existed previously. The privatisation of Bolivia’s social security program has bolstered the stock market.

Brazil

Population: 190,010,647 (July 2007 est.)

Below poverty line: 31% (2005)

GDP: $1.838 trillion (2007 est.)

Currency: real (BRL)

Bovespa, the São Paulo stock exchange, is the largest stock trading centre in Latin America, concentrating about 70% of the volume of trades carried out in the region. (source: Bovespa)

On 28 August 2007 Bovespa Holding was created with two subsidiaries Bovespa, responsible for the operations by the stock exchange and the organised over-the-counter markets, and the Companhia Brasileira de Liquiddacao e Custodia (CBLC), which provides settlement, clearing and depository services.

On 21 February 2006 Bovespa agreed to develop its new information technology infrastructure in partnership with HP, Intel and Microsoft. The new platform, launched in 2007, fully replaces the mainframe and gives greater flexibility in adapting to the volume of transactions on the stock exchange. To implement the new system required reconstructing all systems of the Bovespa and the CBLC.

On the table is the potential merger of Bovespa and the BM&F, Brazil’s main futures exchange – those discussions are underway and there are regulatory hurdles still to be met, but that would create the third largest exchange in the world.

Uruguay

Population: 3,460,607 (July 2007 est.)

Below poverty line: 27.37% of households (2006)

GDP: $37.05 billion (2007 est.)

Currency: Uruguayan peso (UYU)

Stock exchange: Bolsa Electronica de Valores del Uruguay.

Argentina

Population: 40,301,927 (July 2007 est.)

Below poverty line: 23.4% (January-June 2007)

GDP: $523.7 billion (2007 est.)

Currency: Argentine peso (ARS)

The Banco Central de la República Argentina continues to promote measures to make the National Payments System more efficient, agile and secure.

Merval (Mercado de Valores de Buenos Aires): after gaining 22% in the second half of 2006, the Merval ended the first half of 2007 with an increase of 4.8%.

Chile

Population: 16,284,741 (July 2007 est.)

Below poverty line: 18.2% (2005)

GDP: $234.4 billion (2007 est.)

Currency: Chilean peso (CLP)

On 2 April 2007, the Banco Central de Chile adopted a new regulatory framework organised according to three general criteria: modernisation, reinforcement and simplification of regulations.

2006 was very positive for the Santiago Stock Exchange, La Bolsa de Comercio de Santiago, reaching a $116 million of daily average volume of traded shares. (source: La Bolsa de Comercio de Santiago Annual report 2006)

In January 2008, voice and electronic interdealer broker ICAP acquired a 15% stake in the Bolsa de Productos de Chile, a commodity exchange in Chile. With this stake, ICAP becomes the first international investor to have an ownership stake in a Chilean exchange.

Brazil and Mexico lead EMV adoption

Brazil and Mexico are leading the wave of EMV chip and PIN card migration in Latin America, and are converting in a phased manner that is unique to the region, transitioning from early EMV to full EMV. Full EMV is where the complete payments infrastructure is EMV-compliant, from the card to the back office processing. Both countries are poised to go for full EMV.

Already well advanced in EMV card issuing, Mexico is making fast progress in migration on the acquisition level by convincing the major retailers to upgrade their point of sale terminals. “Brazil has progressed well in this area too – with almost 95% of POS terminals EMV-enabled”, says David Chevrel, director of Latin America at Aconite Technology, a UK-based firm which helps banks migrate to EMV with minor changes to their core banking system. “At the chip card level, an estimated 60% of active cards are already migrated, hence the desire of the banks to update their back office processing and to go full EMV this year.”

Aconite believes that the north of South America, such as Colombia, Venezuela, Peru and some countries in Central America like Panama and Costa Rica, are likely to move fast this year and will start with issuing EMV-compliant cards to bring them in line with developments in Brazil and Mexico.

The primary driver to move to the EMV standard globally, and certainly in Latin America, in the short term is fraud reduction. Plus compliancy incentives from Visa and MasterCard are helping banks make the decision to migrate. “The fact that Brazil and Mexico are moving to EMV encourages their neighbours to take action to avoid a well-known phenomenon of fraud migrating from EMV-enabled countries to other that aren’t. This occurrence is also witnessed within the same country. For example, in Mexico some card issuers who were slightly delayed compared to the early adopters noticed a difference in fraud levels in their card portfolio,” says Chevrel.

There are some additional mid-term country-specific drivers. For instance, the Brazilian card issuers have a good understanding of the benefits of offline transactions, and therefore most of them are looking forward to the full implementation of EMV to be able to operate offline. In the mag-stripe world, every transaction must go online and be processed by the issuer authorisation system. The chip technology and the EMV standard enable authorisation of a transaction based on certain parameters without communicating with the back office of the banks.

The operation offline is also extremely valuable when the banks experience specific peaks within a short time frame and they want to be able to downsize their processing infrastructure. “In Brazil there is another driver for the adoption of chip card technology because you have a huge amount of cards for food vouchers – national schemes where the company pays some untaxed money for food and the lunches of the employees,” says Chevrel. “That is another huge market in Brazil and a big driver of the offline operation. We are talking about millions and millions of transactions just within an hour and half per day. So if you are able to handle half of the transactions offline securely then your back office system and your whole infrastructure can be downsized considerably.”

Also the Latin American card issuers are developing strategies to address the unbanked and underserved market segments. EMV prepaid cards are designed to offer payment products to this market with applications like salary cards, remittances, social benefits and youth cards, among others.

Looking at migrant workers sending remittances back to their families, a migrant worker in the US, which is not yet a chip card area, can have an EMV card which resides with their family or whoever it is in the home country. They can transfer money to that chip card and ring-fence the amount of funds they want to be credited to that chip card in Mexico or wherever. This is also another way to integrate a large percentage of the world’s population that is still unbanked without increasing risk or fraud and at the same time increase the number of bank customers.

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