Presentation for the CSBS International Banking Conference Rob Schenck Federal Reserve Bank of Atlanta February 3, 2004

2 GDP Growth Across the Globe

3 The Latin American Economy n After three years of turbulence, most countries achieved stronger domestic performance. n For the first time since 1997, there are no projected contractions for any Latin American economy in n 2004 brings few presidential elections.

4 Latin America enjoyed improved prices for many of its most important commodity exports. n Rebuilding of reserves in the US and increased global consumption helped the price of oil remain high. n Demand from China and supply disruption concerns lifted copper prices. n Gold is viewed as continuing safe haven.

5 Improved conditions translated into increased capital flows for the region n During 2003 investors displayed a greater appetite for risk as interest rates remained low in the US, Europe, and Japan. n However, the size of the investments remained much smaller than the amounts risked by foreign investors during the 1990s.

6 Improved conditions translated into increased capital flows for the region n On average, the cost of external financing has declined across the region. n Some countries have taken advantage of the lower financing costs and accelerated their bond issuance schedules. n While FDI flows differed from country to country, they have not yet recovered on a regional basis. n Remittances remain very important, particularly in Central America.

7 Other Developments n Brazil’s social security system, which appeared to be fiscally unsustainable, remained in need of reform. n Venezuela remained a divided nation as the presidential recall referendum loomed. n Colombian President Uribe’s 15 point reform referendum failed to gain voter approval. n Ecuador’s ability to service its external public debt remained in question.

8 n In the end, very little progress was made at the summit. F All agreed on the need to battle poverty and corruption, but how to achieve these goals was not clarified. n The FTAA proposal continued to face vehement opposition. n Yet, there were some encouraging signs for the US: F Chile praised its free trade pact with the US. F Mexico’s Fox praised Bush’s immigration initiative. Update: 2004 Summit of the Americas

9 Update on the FTAA n Miami Declaration and America’s Summit communiqué both reaffirmed 2005 deadline. n The “flexible approach”, also known as “FTAA Lite” n Resistance from Argentina, Brazil, and Venezuela persists.

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11 Exchange Rates n Regional trend towards flexible exchange rates. n The real exchange rate in Latin America and the Caribbean is 18% higher than the average for the past five years. n Will the weak dollar hurt trade in 2004?

12 Reform Fatigue is a concern in n Some Latin Americans are disappointed that free- market reforms failed to enhance living standards throughout the entire region. n Reform fatigue in Mexico? F Tax proposals defeated. F Are electric and labor reforms in jeopardy in ’04? n Reform fatigue in Brazil? F Fiscal and social security reforms are still pending.

13 Banking in Latin America The Year in Review n Several foreign-owned banks have either scaled back operations in or withdrawn from Latin America. n Financial systems are recovering from years of recession. F Argentina’s banks made progress, but still have a ways to go. F Brazilian banks benefited from growing investor confidence. F Venezuelan banks improved operating efficiency. F Colombian banks benefited from an improving economy. F Chilean banks not significantly affected by Inverlink scandal. n Further privatizations were postponed in Brazil and Colombia until 2004.

14 Banking in Latin America Prospects for 2004 n “It seems to me that no fortune-teller should be able to look at another fortune-teller without laughing.” - Cicero addressing the Roman Senate, 81 B.C.E.

15 Banking in Latin America Prospects for 2004 n While the past two years have been difficult for Latin American banks, the future is looking brighter. u Brazil - improved market confidence, less volatile economic conditions worldwide, and an improving domestic economy. u Argentina - outlook improving, but still limited by legal uncertainties. u Chile – stable operating environment. u Colombia – outlook good, but still constrained by weak credit demand and the country’s persistent security concerns.

16 Banking in Latin America External Factors n Global macro-economic conditions. u Upturn in US economy likely to stimulate trade in region. n The question is “how strong will the recovery in the US and Europe be?” u A strong recovery should lead to increased demand for commodities. n Continued stability in the big three (Brazil, Argentina, and Mexico) affects the whole region. u Stability in the major countries could lead to an increase in FDI throughout the region.

17 Banking in Latin America Internal Factors n Banks are actively seeking ways to improve operating efficiency. F Adoption of new technologies F Significant room for improvement in many countries. n Banks are pursuing growth strategies that include building financial ties with non-traditional trading partners. F China, Russia, and India.

18 Countries Subject to the FBO Supervision Program System: 193 FBOs from 55 countries

19 FBO Growth Rates Growth Rates Since 2000: Number Assets System Wide FBO Bank -8% -9% FBO Nonbank 14% -2%

20 FBO Trends n Consolidation u In many countries, challenging economic times have led to a consolidation in the banking industry. n Restructurings and Retrenching u Volatility in Latin America inspired some banks to partially or completely exit the region. n Regulatory Realignments u Strategic reasons.

21 Supervisory Challenges n Emerging risks associated with outsourcing F Internet site outsourcing. F The “Offshoring” challenge. n Coordination/Collaboration with domestic and foreign supervisors F Information agreements sometimes viewed by Latin American supervisors as being too restrictive. F CCS is still a challenge. n USA PATRIOT Act F Majority of FBOs are doing a great job of complying with this complex set of requirements. F Consistent application going forward.

22 Ten things to watch closely in ’04 … 1. Brazil’s social security reform. 2. Argentina’s external debt renegotiation. 3. The progress of the FTAA negotiations. 4. The weak dollar and the region’s competitiveness 5. The resurgence of populism in the region. 6. The rate of progress of structural reform in the region. 7. Venezuela’s probable recall referendum. 8. Capital flows into the region. 9. Uribe’s “Plan B”. 10. Ecuador’s fiscal performance.

23 QUESTIONS ?