Just as the banking industrys big names turned their attention towards Guatemala, the credit crisis struck, plunging the countrys modernisation plans into jeopardy.
Guatemalas economy had been humming along nicely, if not spectacularly, for the past few years of its post-civil war recovery, with gross domestic product (GDP) accelerating from 2.6% in 2005 to an expected 5.6% this year. The country has been diversifying slowly away from agriculture, which still accounts for 50% of its economy, into service industries, such as call centres, business process outsourcing and tourism.
Recently, Guatemala has been realising a host of new and lucrative opportunities that could substantially increase foreign investment and GDP, says Mario Marroquin, head of the countrys investment bureau Invest in Guatemala. These include a large acceleration in mining for nickel and gold; the exploitation of oil and gas deposits found in the Pacific coast straddling the border with El Salvador; the development of alternative energies; and infrastructure. The expansion plans of Goldcorp in its Marlin silver mine will require a $4bn investment alone.
The potential may be there but growth forecasts are being cut as inflation leaps and the rest of the world wilts. And, these are long-term investments that require institutional stability, better infrastructure and social acceptance. Fears of poor labour standards and environmental destruction in mining, in particular, have galvanised local communities and non-government organisations.
For example, Marlin mine has suffered from power outages, which are blamed on local landowners. Meanwhile, much of the potential for alternative energies lies in the centre and north of the country, where the grid is weakest.
A strong lead from the government is required. The administration of president Álvaro Colom, who has been in power since the start of the year, has prioritised poverty reduction, but is yet to say much of substance on economic policies. The president is trying to steer a path that combines growth with wealth redistribution, and sustainable mining practices with a higher tax take, but, says one banker, until there is more direction, investors are unlikely to commit substantial money, particularly in todays constrained market.
The size and potential of the economy, population and demographics, and the logic of a regional platform, made Guatemala attractive to foreign banks during boom times. ¬Citigroup bought two large banks in the region: Banco Uno and Banco Cuscatlán; and HSBC acquired Panamas Banistmo.
Juan Miro, country head of Citibank Guatemala, says: We will be number one in cards, retail and in commercial in most areas. With the three banks together, we will be among the top three banks in Guatemala. Citigroup plans to bolt on Banco Unos credit card business and Cuscatláns commercial bank to its merchant banking franchise. The plan is to cross-sell products moving clients up from one or two products up to four or five.
Sceptics wonder how much attention HSBC and Citi are going to give to developing the central American business. They have spent two years focused on integrating management, cultures and systems but now need to deal with global chaos. Mr Miro says he is being told to continue to expand, although the office is keeping a careful eye on expenses and seeking efficiency. We are being smarter with capital and focusing on monitoring asset velocity, he says. As a sign of its commitment, Citi recently carried out a $500m, long-term financing for the new cement plant of Cementos Progreso.
The crisis gives local banks more time to upgrade systems and customer services. Local banks have suffered from poor efficiency, low capitalisation and relatively low profitability, says Leonardo Bravo, analyst at Standard & Poors. Guatemalas banks average less than a 1% return on assets compared to 2% in Panama, and 1.5% in El Salvador.
Banco Industrial, the countrys largest bank, has been expanding at home. It has also been moving into southern Mexico and negotiating licences in El Salvador as it focuses on the northern triangle of central America, say managers. At home, the bank aims to attract the 43% of the population that remains outside the banking system and has opened 200 branches in the past seven years, they say. The bank is working on producing a Disney culture of excellent customer service and rolling out internet and phone banking. Already, 55% of transactions are carried out electronically.
Banco Agromercantil, recognising that foreign banks will be tough competitors in corporate banking to large corporations and consumer banking, is focused on fast-¬growing small and medium-sized enterprises and microfinance, says the banks CEO, Rafael Viejo. While large companies are clinching rates of 7% from banks, small companies pay 10% to 12% or more despite low ratios of non-¬performing loans and high deposits, which cover 25% of loans. As the bank moves into more rural areas, it is stepping up its insurance offer.
Still, the global crisis is deferring plans for local banks to use long-term financing. We were working on plans for an initial public offering in Mexico. It is all ready but we do not consider this an appropriate moment to come to market, say the managers at Banco Industrial. Banco Agromercantil has often looked at securitisation to free up its balance sheet but the cost is too high. We analyse it every year but it is twice as expensive as funding through branches when you add in the fees from structuring, legal and marketing ex-Guatemala. Banco Industrial is now working with the International Finance Corporation to increase equity but cannot sell more than 5% of equity to any one outside shareholder.
Guatemalas banking system is crying out for the modernisation and efficiency that sophisticated international banks can bring. Just as it seemed the country would gain efficient banks, the credit crunch is calling commitment into question.
Interview with Juan Fuentes
The Guatemalan economy has big potential, particularly in fuel and food production. The countrys minister of finance talks about his fiscal reform programme and intent to create a sustainable tax base.
Q What are your expectations for growth in Guatemala?
A Official estimates for growth are being revised downwards but should not fall to less than 4%. Guatemala is not the most affected in the region by the deceleration, and the Economic Commission for Latin America and the Caribbean estimates central America will grow by 5% in 2008 and 4.5% in 2009.
The biggest risks to our economy are exogenous. Central America is a net importer of food and fuel and although Guatemalan remittances are continuing to grow, they are doing so more slowly. The only sector that is performing poorly is textiles, largely due to competition with China; both traditional and non-¬traditional exports are growing. This is a very different, diversified economy compared to 20 years ago when we depended more on coffee, bananas and sugar.
We see energy and food production as being two new growth areas. Energy will be produced from hydro, geothermal and wind sources and we share gas reserves with El Salvador. There is a long list of projects being considered by the private sector. In foodstuffs, we are already the main exporter in central America.
Q Could you outline the plans for your fiscal reform programme?
A We envisage changes both to public expenditure and fiscal modernisation in two stages. The first includes measures on indirect taxation and tax administration and has been presented to Congress. The second stage is for a minimum income tax and we are proposing implementation in 2010. The idea is not to increase rates, and in fact we will reduce the top rate from 31% to 25%, but to eliminate loopholes, strengthen controls and reduce the number of exemptions.
The idea is to have a workable tax system, reducing the number of bands and the difference between each band and limiting deductions and exemptions. We are working closely with the Inter-American Development Bank on this. This income tax reform will be more difficult but is crucial for a sustainable tax base.
Q What would be a desirable tax take?
A Tax revenues are equivalent to 12% of gross domestic product and by 2011 we expect to increase that to 13.2%. That was the target decided at the time of the peace agreements 10 years ago and we have had a lot of difficulty in getting there. This is an incremental process and it is very difficult to establish an ideal rate.
We are working to make public expenditure more transparent with more control over trust funds that are not controlled directly by government. We have created a vice-ministry of transparency within our ministry and aim to provide much more information on public contracts, including the criteria on which they are decided and a list of all the bidders.
We are also putting in place a budget by results, trying to evaluate efficiency of public spending and link public expenditure to targets in health, education and security. The initiative is supported by the EU and involves our ministry as well as ministries of planning and security, health and education. It will be a simple scheme with three targets for each department. It is clearly difficult but we are making progress.
Q How is Guatemala mitigating inflation on the poor?
A Guatemala has not introduced unsustainable subsidies or ineffective administrative measures, we are moving to a system of subsidies targeted at vulnerable communities. We have introduced a cash transfer programme which took ideas from Brazil and Mexico and covers the poorest municipalities and families. The cost totalled GTQ150m ($20.2m) through to September of this year, a relatively modest amount, but will increase to GTQ1bn next year. The scheme will cover 300,000 families in 90 municipalities.
Q How important is it for Guatemala to receive an investment grade rating?
A We consider it important. Crucial factors are fiscal reform and relations between the private and public sector. There has historically been a conflict between implementing tax reform and developing good relations with the private sector, which we now have, and we expect that will make tax reforms easier. But we do not intend to bring down debt much as it is already at a sustainable level and one of the lowest in Latin America.
Interview with Maria Antonieta Del Cid Navas de Bonilla
In response to rising inflation, Guatemala has adjusted its interest rates eight times in the past two years, and is working carefully to co-ordinate its monetary and fiscal policies, explains the president of Banco de Guatemala.
Q What is the perspective on inflation in Guatemala and how is it impacting upon monetary policy?
A Inflation is affecting every economy but it is particularly strong in central American nations, which are net importers of oil and commodities. The region is experiencing two-digit inflation and even dollarised nations have been getting close to that level.
Price rises have been severe in staples, such as corn and wheat, which account for much of our consumer price index [CPI]. Whereas in developed nations, food accounts for 12% to 14% of CPI, in Guatemala it accounts for almost 39%.
To meet this challenge, we adjusted the interest rate six times last year by 150 basis points and had made two adjustments this year by September. The future of inflation depends on whether external shocks dissipate we have recently seen a decline in the prices of oil and corn and wheat but it is very unclear whether this will last.
Q How is Guatemala working to harmonise monetary and fiscal policies?
A We pursue monetary policy with a high degree of co-ordination with fiscal policy. We have a long tradition of low fiscal deficits and low external and total debt, which has supported monetary policy. Fiscal policy has been positive, especially in a year with so many external shocks, and the ministry of finance is now presenting a reform package to congress.
There is a concern about how monetary tightening could affect growth in a year in which we are experiencing deceleration. Thats why the monetary board has been cautious and implemented measures gradually.
Last year, gross domestic product growth was 5.7% and this year the initial estimate, forecast at the end of last year, was for growth of 5.3%. That has been reviewed down to 4.8% and will probably be reduced again. We think that it could be close to the recent projections of the International Monetary Fund and others of 4.4% for the region.
Q Where does the inflation-targeting regime leave control of the quetzal?
A We have a flexible exchange rate regime that is determined by market. We only intervene when theres excess volatility, such as in May and June. Theres a simple, flexible rule to determine when we do this, which has been approved by the monetary board. We are reviewing this law to make it even more flexible. But remember, nominal exchange rate appreciation of 2.5% is mild compared to countries such as Chile, Colombia and Brazil.
Q What is happening to remittances with the slowdown in the US?
A Remittances have been growing more slowly than 2007. In September, the rate of growth was 13% and this year it is below 8%. We estimate a year-end rate of between 11% to 12% compared to last years 14.4%. Most Guatemalan migrants work in the agricultural sector, which has been less affected than areas such as real
Remittances are the second largest ¬contributor to our balance of payments after exports and if we experience a big drop, it would put pressure on short-term local rates. In the medium term, we are seeking to attract more long-term foreign investment to compensate and create more jobs locally.
We have been working to make it easier to establish a business and the World Bank has identified Guatemala as being a leader in improving the business climate every year for the past three years. Government and private entities are working to promote Guatemala and we are investing in ports and airports to improve infrastructure.
Q How is Guatemala developing relationships with multilaterals and donors?
A We have a very close relationship with them and have a programme of fast-disbursing loans for budgetary support linked to reforms, for example. The first is in the fiscal area to encourage transparency and quality of expenditures. Programmes are made on a three-year basis and those countries that stick to reforms qualify for more. We have six years of consecutive performance.
The multilaterals are also changing, becoming quicker and more effective at poverty reduction and emphasising country ownership of projects. In the past, the projects for small developing countries used to be prepared by Washington. Thats changed.
Q What will be the effect of foreign ownership in the Guatemalan banking sector?
A Foreign banks still dont have a significant presence in Guatemala but they are arriving. We expect them to bring international standards and practices in risk management, and technology and efficiency for clients, which would be positive for the whole banking system. Local banks are following technology advances closely too. Two local institutions are reducing costs by taking advantage of new technologies for remittances and we have one institution that is rolling out voice-activated ATMs using regional languages in rural areas. Also, the number of banks has fallen from 35 in 2003 to 20 due to consolidation.
We are also seeing more lending to small business. The US Treasury is working to identify obstacles that have impeded this. Many banks do not have adequate infrastructure, but some are working hard in this area and including small business financing in their business plan. Large banks are also starting to pay attention to this niche.