Optimistic outlook
country pro file
Setting country limits
6 What's NewS Issue 3 April/May 2000
This month marks the beginning of a series on economie recovery in emerging
markets. First, we'll look at Brazil, Russia and Indonesia, top-level players in
these markets. With their immense resources in terms of land, people, and
commodities, the state of their economies has global influence. Our teams
around the world have met the challenges, and now they're ready to take us
down the road to recovery.
Currency control
New culture
Core concentration
Encouraging rates
In a volatile market, our team
in Sao Paolo has certainly
faced many obstacles. Inflation,
devaluation and political insta-
bility are only a few. But when
asked about the market today,
here's what we're hearing: The
currency is stabilizing. Industrial
productivity is surging. Compe-
tition is heating up. And foreign investors
are buying in. This is all building confi-
denee and generating optimism in the
Brazilian market. 'We're still very much
aware that we're working with an emerg
ing economy,' says Arnout van Schelven,
general manager in Sao Paulo. 'But opti
mism about the future is really growing.'
Kesponding to the crises in Asia and Rus
sia, in 1999 the economy in Brazil faced a
credit crunch, high interest rates and a
stop in foreign lending. 'There was an at-
tack on the value of Brazil - the market
found itself in a liquidity squeeze,' ex-
plains Van Schelven. 'Brazil's Central
Bank always had the policy to back the
currency, the real. In January 1999, the
real was left to free float for the first time.
This led to a devaluation of 40%, which
had a dramatic effect on the economy.'
While a rise in inflation was predicted,
this didn't happen. Inflation is now
around 8%, a level which is dropping to
6%. 'Apparently, the remedy was well-
timed and effective. The Brazilian econ
omy has become much more competitive.'
Contributing to economie strength is a
stabilization of the political situation and
a reorganization in the Central Bank. The
popularity of Brazil's president, Fernando
Henrique Cardoso, has strengthened, in-
Arnout van Schelven
creasing market confidence.
And the government has
made changes in Central
Bank command, bringing in
a team of industry analysts,
investment bankers and
other experts chosen for
their experience and exper
tise. 'In the past, these fac
tors contributed to economie
instability in the country,' explains Van
Schelven. 'Now, the government has re-
gained the people's trust,
so market sentiment is
changing. A new culture
of ambition and optimism
in Brazil is emerging.'
tk
Renewed confidence in the
economy is allowing
companies to think on a Henrique Costa
longer-term basis. During
the crisis, concerns centered around mere
survival - companies were limited to a
very short-term perspective. 'The eco
nomie stability has created a new hori
zon,' says Henrique Costa, head of credit
risk management. 'Our clients are now
looking for better management of their
working capital needs, demanding longer
term financing for these activities.' The
higher demand for long-term credit is pri-
marily focused in food and agri, as 90%
of the Sao Paulo office's transactions are
in this sector. 'As the economy strength-
ens, income grows and people can pur-
chase more goods,' explains Costa. 'Take
the poultry and beverage businesses,
which constitute 30% of our F&A clients
- with the increase in the population's pur-
chasing power, these companies will show
increasing sales, which will require more
working capital and equipment financing -
this means more business for the bank.'
I.ow interest rates are further stimulating
growth, creating a surge in investments
front local and foreign investors alike.
'The economy is really heating up," de-
scribes José-Roberto Machado who heads
up treasury. 'While the year-based interest
rate is still very high - around
18.5%, the real interest rate is
lower than ever. We're around
10% right now - and the Central
Bank is working to lower this.'
Taking advantage of these rates,
companies in Brazil are now bor-
rowing in local currency. While
the free floating regime may be
volatile, it's cheaper to borrow in
Brazil - leading to rapid expansion
of the local credit market. 'Banks
are looking for more capacity to lend
money in local currency - the Central
Bank is working on improving the chain
to lenders to increase this capacity.'>-
The Country Risk Research team investigates about 80 emerging market coun-
tries semi-annually, annually or bi-annually. Based on factors such as eco
nomie structure and policy, balance of payments, liquidity, debt position, and po
litical stability, the team develops a risk analysis and then proposes a limit to the
country limit committee. 'This limit determines the maximum amount of expo-
sure the bank will run in a country,' explains Geert Embrechts, who heads the
team. 'Based on the risk assessment, our proposals should diversify the bank's
portfolio.' Other considerations are position in world trade, role in GDP, and the
amount of business generated in that country each year. 'We look at the long-term
prospects, focusing on the fundamentais and structural issues. Economie intprove-
ment doesn't mean the risk profile will bc changed. We need to considcr the long
term horizon for the country.' Final limits are set by the country limit committee
and ratified by the Executive Board.
