u
economy
Argentina
Rectification
IO What sNewS Issue W'October 1998
social security net,
is the psychological
blow that would
follow a devaluation
of the peso against
the dollar. Everyone
you speak to refers
to the peg sooner or
later. For ten years,
it has represented
an achievement that
can't be under-
estimated and the
Argentineans are
afraid its loss would
mean the loss of a
stability they have
grown accustomed
to and are unwilling to relinquish.
Through proximity and Mercosur
agreements, Argentina's prospects are
closely linked to Brazil's - 30% of
exports go north. Still, this remains a
comparatively closed economy with only
10% of GDP exported, so in that sense
there is some cushioning.
While the world dwells on the gloomy
prospects of so many countries, RI in
Argentina is expanding both its cliënt
base and product range. It's pretty much
business as usual in Buenos Aires,
although obviously our people are
treading even more carefully than usual
in a potentially volatile situation.
Willem Cramer, Brazil:
In macroeconomic terms, Brazil is the
eighth largest economy in the world,
with a GDP of around USD 800 billion
(to compare, the Russian economy is
around USD 200 billion). With a
population of 160 million, this country
plays a prominent role in the economics
of the continent. In spite of its huge
economy, it still counts as an emerging
market. 'There is a saying here that
Brazil is the country of the future and
always will be,' says Cramer, grinning
even though there is little else for Brazil
and its people to smile about at the
moment. For more years than most
people care to remember, Brazil was
synonymous with hyper inflation and
debt crisis, sharing this doubtful
sobriquet with neighbouring Argentina.
BACK IN OUR JULY ISSUE WE
PUBLISHED THE ABOVE
PHOTOGRAPH WHICH WA5
INCORRECTIY CREDITED TO
RON WILLEBRANDS. THE
PHOTOGRAPHER WAS
INSTEAD HERMAN JONKMAN.
Buenos
Aires
around 8%
These southern neighbours
put their house in order ten
years ago. Brazil followed
suit in 1994. The plan was
simple. Stabilize the
currency by using a
crawling peg against the
dollar and open up the
country to imports. 'In
doing so, you keep your
currency relatively stable,
forcing inflation out,' says
Cramer. 'This was
successfully done, this year
we reckon inflation will be
less than 2%.' But
everything has a price tag.
'Government deficit -
is increasing, although debt
as a percentage to GDP is not high for
international standards, and government
has to carry debt at high real interest
rates. Financing this deficit, and the
attached domestic and international debt
depends on access to international
funding. And in the
case of crisis, it
becomes even more
difficult to get those
funds and they end up
in a liquidity squeeze.'
The re-election of the
President in the first
round (despite the fact
that he made it clear he
would impose austerity
measures before
elections), is a clear
sign of Brazil's
determination to
prevent the return
of inflation (which
would surely follow a devaluation of the
currency). Unlike many countries in Asia,
Brazil has experienced hyper inflation in
the past, and (if given a choice) Brazil is
not willing to risk that again, even at the
expense of recession.
The uncertainty surrounding Brazil's
future fate is making life difficult for
many of our people in Sao Paolo. 'We're
actually operating on a number of
different parameters here,' Cramer
explains. 'If you look at our lending
business, which is linked primarily to
import and export, with a strong focus
on exports, then business is not much
affected. But the problem comes when
we have to capture funding
internationally. To some extent our
customers would benefit from a devalued
Sao Paolo
currency, given the fact that many are
exporting agri-commodities priced in
dollars whereas their cost-base is in the
local currency. If you look at advisory
services, such as corporate finance, M&A
or RIAS, then again we're doing well. A
lot of companies here are in the market
for strategie advice or looking for
partners or investors. In the treasury, we
manage activity according to value at
risk principles. There has been a lot of
volatility. We're also considering possible
scenarios where government can't hold
the currency. That would mean even
relatively small positions could
potentially lead to huge losses. So we're
being cautious. Yet at the same time
we're active in sales, helping our clients
hedge exposure wherever possible.'
Banking in emerging markets like Brazil
under the current circumstances, requires
a careful balance between risk and
reward. A customer focus oriented - but
conservatively managed bank will not
drastically increase its
risk appetite in good
times, but will equally
not simply walk away
from the customer's
needs in difficult
moments. We notice
that, despite the fact
that we are extremely
cautious and have in
fact reduced cross
border (and even credit)
exposure significantly,
our key customers
greatly value the fact
that we continue to
support their
sw operational needs
(albeit sometimes with extra risk-
mitigant conditions attached).
It is gratifying to note that, despite the
tension generated by such circumstances,
the Sao Paulo team as a whole has
reacted very professionally. Through a
strong cooperative effort of all involved
(in Utrecht, London and Sao Paulo), we
were able to ensure that the managing
board, risk management and global
product managers were well inforined of
the status of our risk profile. 'The
preemptive actions taken to defensively
manage those risks and maintain a
steady course in the face of the current
adverse economie conditions has
prevented any knee-jerk reactions - like
those we have seen with some of our
competitors,' explains Cramer.
