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
In June, Latin America became 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, Senior Representative, Commerzbank in Argentina, to discuss the state of play for 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, Latin American countries are still into the first COVID-19 wave and in economic recession. But strong, blanket responses – through direct support schemes and the banking system – have had a positive impact, with signs of economic recovery emerging in parts of the region, largely in correlation with rates at which lockdowns are being gradually lifted. Brazil and Mexico, who have generally prioritised the economy over strict and lengthy lock-downs, are currently ahead of many countries in their economic recovery.
On the whole, it has been reassuring to see how financial systems in the region have coped with the economic impact of COVID-19. Clearly, governments, regulators, and banks have learnt from past crises, keeping solvency and liquidity largely stable throughout the past months. The importance of a well-performing banking system should not be underestimated as a catalyst to a sustainable economic recovery across the region.
How have trade flows and client behaviour altered as a result of the pandemic?
Markus Krepel: Of course, business confidence and trade flows have been strongly impacted by the pandemic, but trade volumes are now starting to trickle back. Although it’s still early in the recovery, little evidence so far suggests that new patterns are emerging regarding a remapping of global supply chains in the future.
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 – is recovering 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 perceived risk. In such an uncertain environment, it’s 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 products 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 pre-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 rebounding gradually, and the recovery will continue to strengthen once COVID-19 is under control in the region, and Latin American currencies strengthen against the US dollar again. Much will depend on whether Latin America can avoid the “second wave” and how fast vaccines are rolled out next year in the region. Due to seasonal conditions, there are good reasons to believe that the environment will continue to improve for corporates seeking to do business with the region next year.
Recovery rates will differ substantially across the region. Uruguay, for instance, was only mildly impacted by the virus, and should bounce back at a faster pace than Argentina, for instance. Chile and Peru, though harder hit, had more fiscal and monetary space to offer compensatory measures and should rebound well in 2021. Looking ahead, all eyes will be on the fiscal consolidation strategies that countries in the region will 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 will continue to hold great business potential, despite the challenges. Even Argentina, one of the weaker spots in the region, whose government is trying to stabilize 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 ascending pre-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 some of the projects we created value by “tagging along” different multilateral institutions catering to the region. 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 of increasing importance 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 will be well equipped for an economic recovery moving into 2021, benefitting our corporate clients in Germany and abroad.
Our role as a risk mitigating intermediary and a trusted advisor for our clients will be even more critical to boost 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.