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Internationalisation inLatin America: steppingstone to global expansion

BBVA case study

www.pwc.com/es

Intelligent growth

Internationalisation


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2

Contents

Presentation 3

Executive Summary 4Introduction 6

Part One: International expansion ofSpanish companies in Latin America 9

1. Outlook for the world economy 10

2. Outlook for the Latin American economy 13

3. International banking expansion:structural context 20

4. Deployment of Spains internationalinvestments 22

5. Internationalisation of Spanish companiesin Latin America 24

6. Spanish bankings internationalexpansion 28

6.1. Theimportanceofthenancialsystem and the role of banks 28

6.2. A look at the internationalbanking sector 30

6.3. A look at the banking sector in LatinAmerica 31

6.4. Internationalisation of Spanishbanking in Latin America 33

Part Two: BBVA, a success story in LatinAmerica 35

1. Going International: A vocationalendeavour 361.1. BBVA: First stage, growth in

Latin America 38

1.2. Second stage and current situation 441.3. Overall view 46

2. BenetsoftheexpansioninLatinAmericaand the leap to the United States,China and Asia 47

2.1. BenetsinLatinAmerica 472.2. United States 472.3. China 502.4. Asia 53

2.5. Growing bond between Asiaand Latin America 55

3. BBVA: Global consolidation 563.1. South America 563.2. Mexico 573.3. United States 583.4. Key success factors

in internationalisation 58

4. Analreection 59

4.1. BBVA: Coming from the past,looking to the future 59

4.2. BBVA: A global bank 59Third part: Conclusions, annex,bibliography, acknowledgementsand contacts 61

Conclusions 62Annex: The world economy in 2050 68

Bibliography 72

Acknowledgements 74

Contacts 75

1 Lecturer on the ocial masters programme: Contemporary Latin America and its Relations with the European Union. A Strategic Union. Institute o Latin American

Studies (IELAT). University o Alcal de Henares.

Lecturer on the inter-university masters programme: Diplomacy and International Relations; Diplomatic School o Madrid; Ministry o Foreign Aairs and Cooperation.

International business consultant.

Author:Ramn Casilda Bjar1

[email protected]


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Presentation

The social and economic circumstanceswe now face pose a challenge thatrequires us to rethink our economicmodel and explore new ways of doingbusiness. At PwC Spain we have drawnup what we call the Intelligent Growthprogramme which, led by Jordi Sevilla,

will accompany our clients throughoutthe process.

In this new economic modelinternationalisation is key. Overseasexpansion is one of the best recipes forgrowth. Not only does it offer newmarkets in order to diversify risk; it alsosignicantlyraisesthelevelof

entrepreneurial expertise by facilitatingaccess to new talent and newtechnologies.

As the internationalisation process getsunder way, companies come up against a

number of internal and external barriersthat, to a varying degree, hamper theprocess and must be addressed: lack offamiliarity with outlying markets; the

need to invest and cater for high initialcosts; our ability to empower existinghuman capital.

In this brochure, which begins a seriesof analyses of successful internationalexpansions, we take a close look at thewayBBVAcopedwiththesedifculties,

howitovercamethem,andthebenets

it obtained from going international.

Here at PwC we believe that this serieswill provide adequate evidence of ourkeynding:goinginternationaldoesnot

depend on the size of the company. Ifthe concept, product or service issufcientlydifferentiatedtoprovidea

competitive advantage, the size of thecompany is irrelevant.

It is our hope that the following casestudies will persuade other companiesthat have yet to begin this process to

look on internationalisation not as aremote hypothesis, but as a practicalmeans of stimulating meaningfulgrowth.

Carlos Mas

Chairman o PwC Spain


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4 Internationalisation in Latin America: stepping stone to global expansion

international expansion took placein France, Morocco, Portugal and,in particular, Latin America. Theencouragement this movereceived from investors in termsof the speed and volume of their

response surprised not only thenancialcommunitybut,more

importantly, the Latin Americansociety2.

In general terms, Latin Americanbanking was in the process ofbeing deregulated but the level offoreign penetration was still low.Potential margins, on the otherhand, were high and the

standards of regulation andsupervision were improvingrapidly.Therewasasignicantshortage of capital resources andof appropriate products to meetthe rising demand for bankingservices.

In this context, of the Spanishbanks involved the case of BancoBilbao Vizcaya Argentaria (BBVA)

stands out. In less than a decade itmoved from being a Spain-onlyoperator to becoming a recognised

world player, a position in which,given the experience obtained andskills learnt, it now enjoys a soundreputation, being regarded as aplus factor in all the countries it

The overseas expansion of Spainsleading banks in Latin Americabegan in the 1990s when thedomestic, European andinternational markets wereundergoing major changes and

Latin America offered a goodopportunity to win new business.

Spains entry in 1986 into theEuropean Economic Community(Treaty of Rome, 1957) initiated agradual liberalisation andderegulation of the domesticbanking sector, which acceleratedfollowing approval of the SingleEuropean Act (SEA, 1993) and

Economic Monetary Union (EMU,1993), two moves that preparedthe ground for adoption of thesingle currency the euro

within the European Union (EU,1993). These legislative initiativeshad a major effect on thestrategies and approaches adoptedby Spains largest banks.

The banks found themselves

obliged to transcend nationalboundaries in search of newmarkets as a means of increasingtheir competitiveness, diversifyingrisk, keeping their identity andprotecting themselves frompotential takeover bids by foreigncompetitors.Therststepsin

Executive Summary

2 For details and an in-depth analysis see Casilda, 1992, 1999 and Caldern & Casilda, 1999 and 2000.


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Executive Summary 5

operates in, providing customerswith greater opportunities both tosave and to obtain credit.

This case study takes a close lookat BBVAs international expansion

in Latin America as a steppingstone to global growth. To beeffective the bank had to create anew organisation, managementteam and technology, as well asadaptitsglobalnancialservices

tothespecicneedsoflocal

markets. As the task progressed,greater guarantees, transparency,quality and security had to bebuilt in.

In short, BBVA gained widespreadacceptance as a banking allycapable of providing improvedservices for retail and corporatecustomers, particularly small andmedium-sized companies, whilestill contributing to the economicgrowth and progress of the hostcountries through its customisedmodel of global and retail

banking.

Key words:

Latin Americapenetration and availabilityo banking services, BBVA

value creation, tradedemographics, efciencycompanies, strategyexpansion, globalisation

language, oreign directinvestment, innovationinternationalisation,banking business,emerging countriesrisk, technology.


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Introduction

At the end of the 1960s the Spanishgovernment subjected the bankingindustry to an intensive programme ofregulation. By the mid 1970s, a newphase had begun. The authorities begantentative moves to liberalise thenancialsector3 in an effort to improvethelevelofefciency.Onthewholethe

process mirrored the programmes being

introduced in most European countries.It extended into the early 1990s,bringing Spanish banking up to speed

with its counterparts in the developedcountries4.

On Spains entry into the EuropeanEconomic Community in 1986 theprogress of the Spanish banking systemspeeded up considerably, with newtechnologies, new products and newservices. At the same time banks

intermediation

5

declined, promptingnew awareness and initiatives on thepart of its customers.

This development was accelerated bythe creation of the single Europeanmarket, which removed the barriers

againstcapitalowsamongthemember

states of the EU and instituted thefreedom to set up and provide bankingservices throughout the continent.

The process was further advanced bythe introduction of the euro (1/1/1999),

which accelerated change and cuttimetables to an extent that radicallyrevised European banking strategies,

particularly in Spain, where the banksfacedamajordifculty.Giventheirlow

market capitalisation, they were indanger of being bought out by Europeanor international majors, notably thosethat (a) had cash and (b) were underintense pressure in their home markets mature markets with scant room forgrowth to cut costs and compensatethe reduction in margins. For suchbanks international expansion was theobvious answer.

For this reason it was no surprise thatthe internationalisation campaign bySpanish banks began in the 1990s andfocused in the main on the Latin

American countries, which at that timewere regarded from an economicstandpoint as emerging nations6.The banks assessment of the move wasbased on a number of factors: afavourable international economicclimate, plus the increasingdemocratisation and stability of theregions political systems; the wide-ranging structural reforms introducedin the wake of the WashingtonConsensus (1989)7; low labour costs; theremoval of obstacles to foreign direct

3 Capital fows and interest rates were allowed greater latitude and the rules on new market entrants, domestic and oreign, were relaxed. At the same time existing

players were permitted to expand.4 For details, see Casilda, 1997 and 1999.5 This is the process whereby the ro le o the banks, traditionally the intermediaries par excellence, was gradually assumed by direc t exchanges between the holders o

unds and those requiring them or investment or purchases. One o the reasons behind this trend was the growth in public-sector unding requirements, which

resulted in the issue o debt eligib le or subscription by members o the public. For more details, see Casilda, 1997 and 1999.6 Moodys, the rating agency, upgraded Mexican long-term debt to investment level (Baa) in March 2000. At that time Chile, Panama, El Salvador and Uruguay enjoyed

that status. Subsequently things changed. At present the debt o Mexico, Brazil, Chile, Panama, Peru and Colombia is investment grade.7 For details see Consenso de Washington: Una nueva poltica econmica, (Washington Consensus: a new economic policy), Casilda, 2002.


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have successfully positioned themselvesinthekeysectorsofnance,

telecommunications, energy,infrastructures and concessions. Overallthe positive effects can already be seen intermsofincreasedsecurity,efciency

and diversity, with cheaper prices andimproved services in the marketsconcerned. This has a direct impact onraising the living standards of

populations and the competitiveness ofcountries industrial capabilities, thanksin the main to the spillover effect onproductivity.

That said, the activity undertaken andthe attention obtained have also raised,at least temporarily, doubts among thegeneral public, regional institutions andcentral governments. For this reason it isof prime importance to reinforce theMade in Spain image to a level at which

it vies with peoples association of, forexample, Made in Germany withMercedes Benz motor cars. Obtaining thegreatest possible leverage from a positivecorrelation between the image of Spainand its leading brands is crucial to themedium-term success of Spanishcompanies16.

In this case study we look at theinternationalisation route taken by BBVAin Latin America and how it used itsexperience, skill and learning capacity tomake it a stepping stone to expansion inother developed and emerging marketssuch as the United States and Asia,consolidating a global presence on thebasis of reliability, innovation,transparency, competitiveness andcommitment to the host countries.

In Latin America BBVAs presence hashelped to reinforce local bankingsystems,introducingnewnancial

products and services, together withinnovative funding methods andtechnological advances designed tobroaden the banking presence whileensuring a safer and more productivecustody of savings. At the same time ithas facilitated access to credit forhouseholds and small and medium-sizedcompanies, thereby promoting a broaderunderstandingofnancialtechniques

and initiatives.

Its effectiveness is evidenced by the clearimprovements it has obtained in security lower prices and in making availablenewnancialproductsandservices

adaptedtothespecicconditionsofhost

markets, encouraging transparency andbuildingcondence.Bythesemeans

BBVA has won a reputation for reliability,sound advice and proximity to itscustomers, becoming in the process a

trusted partner in the drive for economicgrowth and improved living standards.

16 Espaa y la Marca Pas como ventaja competitiva (Spain and the Spain brand as competitive advantage): Casilda 2002 and 2011.


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Nombre seccin 9

Part One:International expansion oSpanish companies in Latin

America


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1. Outlook or the world economy

Before examining BBVAs expansion inLatin America as a springboard to globalgrowth, it is worth taking a brief look at

world economic conditions17, where wesee that despite the present crisis, Latin

America still offers opportunities forFDI thanks to its improved resilience totemporary setbacks. Also, it is in a

position to bounce back faster thanother regions, particularly incomparison with developed countriessuch as Spain.

The World Bank (WB) estimates thatworld economic growth in 2010 was3.9%, but reduces this in 2011 to 3.3%,moving up to 3.6% in 2012. Thesegrowth rates fall into two categories: thedeveloping world grew at a rate of 7.0%in 2010 and will maintain a pace of

6.0% in 2011 and 6.1% in 2012. At thisspeed it will continue to outstrip thegrowth of the developed world, whichachieved 2.8% in 2010, with 2.4%forecast for 2011 and 2.7% for 2012(Table 1)18.

Theseguresshowthatmostdeveloping

countries, including those of LatinAmerica, have recovered quickly and areexpected to achieve sustained growththroughout 2011 and 2012. On the otherhand, the recovery of a number ofemerging economies in Europe andCentral Asia and in some developed

economies is uncertain in the absence ofstructurally corrective domestic policychanges, the probable outcome beinghigh levels of unemployment andhousehold debt, combined with

weakness in the construction industry,particularly the housing industry, andbanking that will stall recovery. TheInternational Labour Organization (ILO)predicts that unemployment will remainhigh in 2011 and that, with theexception of some emerging economies,

the level of employment achieved in2008 will not return until 2015 when,even then, job security will be low19.

A positive note is the marked increase indomestic demand in developing

17 For the latest gures see IMF: World Economic Outlook(September 2011).18 For the latest gures see World Bank: Economic Forecast(September 2011).19 For the latest analysis see World Bank, Global Economic Prospects

Table 1. World Growth Forecasts by Region World Bank: 2010-2012

(in percentages)

2010 2011 2012

World 3.9 3.3 3.6

Developed countries 2.8 2.4 2.7

Developing countries 7.0 6.0 6.1

Developing countries excl. China andIndia

5.2 4.3 4.5

East Asia and Pacic 9.3 8.0 7.8

Europe and Central Asia 4.7 4.0 4.2

Latin American and Caribbean 5.7 4.0 4.0

Middle East and North Arica 3.3 4.3 4.4

South Asia 8.7 7.7 8.1

Sub-Saharan Arica 4.7 5.3 5.5

Source: World Bank (2011): Global Economic Prospects: Navigating Strong Currents.


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International expansion o Spanish companies in Latin America 11

countries, which is driving the worldeconomy, although the persistentproblemsofthenancialsectorinmany

developed countries pose a threat togrowth and need to be addressedimmediately20, as is the case in Spain,

which recently introduced its FinancialReinforcement Programme.

Another favourable sign comes from themajority of the developing countries,

which made good progress in trade in2010 and whose GDP rose overall by5.3% in that year. The increase wasdriven by a rise in the price ofcommodities and, to a lesser extent, by

workers remittances and tourism21. As aresult,expertsarecondentthatthe

outlook for these countries in 2011 and2012 will be positive (Tables 1 and 2).

Animportantfactoristhenetinowof

international funding in the developingcountries, which increased in 2010,rising by 42%, in particular in ninecountries that received the bulk of thesefunds. Foreign direct investment, on theother hand, rose more slowly, 16% in2010, reaching 410 billion dollars,having fallen by 40% in 2009. A goodpart of the increase was the result ofgreater investment within the southernhemisphere, in particular thatoriginating in Asia. This surge in theinuxofinternationalfundsfuelledthe

recovery in most developing countries.Thatsaid,theselargeinuxesofcapital

in a number of medium-sized economiesmay include risk factors that couldthreaten medium-term recovery,particularlywhereinationsetsinor

asset bubbles develop22.

For its part, the International MonetaryFund (IMF) has revised its forecasts of

world economic growth for 2011. Therevision was upward, from the original4.2% given in October 2010 to 4.4% inJanuary 2011. It maintains its forecast of4.5% for 2012. The upbeat reviewresponds on one hand to the greater

growth forecast in the second half of2010 and, on the other, to the positiveeffect of the new stimulation measuresintroduced in the United States, whichof all the economies examined wasawarded the highest upward revision.

Of particular note is the performance ofthe developed economies, which faredbetter than expected in 2010, althoughthe IMF considers that growth is still too

weak to reduce the current level of

unemployment. Also, tension in theEuropean debt market constitutesanother risk in the current scenario23.More recently, political developments inthe Arab world and the resultingincrease in the price of oil undoubtedlyadd to the risks threatening theuncertain recovery of some developedcountries, such as Spain, while placingthe stability of others in jeopardy.In 2011 the US economy will achievegrowth of 3%, an increase of 0.7percentage points, thanks to theapproval at the end of 2010 of anadditionalscalprogramme.However,

the forecasts are that the withdrawal ofa number of stimulus packages as from2012willhaveasignicantimpacton

the economy, a perception that has ledthe IMF to revise downwards (-0.3%) itsforecast for 2010, to 2.7% (Table 2).

20 Francesc Granell: The International Economic System in 2010, BICE No. 3005, Ministry o Industry, Tourism and Trade, Madrid, January 2011.21 Justin Yiu Lin, senior vice-president or Economic Development at the World Bank (2011).22 Hans Timmer, director o the Development Prospects Analysis Group at the World Bank (2011)23 Multinacionales espaolas. En un mundo global y multipolar(Spanish Multinationals in a Global Mulltipolar World), Casilda, 2011.


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Followingthersteverdowngradeof

the USs sovereign debt by the ratingsagency Standard & Poors from AAA to

AA+, these forecasts, and those of other

international organisations, may berevised downwards, alongside those ofother developed countries, notably thoseof the eurozone.

Table 2. World Economic Outlook As at January 2011

(in percentages)

Source: International Monetary Fund (January 2011).

Enero de 2011 Octubre de 2010

2009 2010 2011 2012 2011 2012

World GDP -0.6 5.0 4.4 4.5 4.2 4.5

Developed economies -3.4 3.0 2.5 2.5 2.2 2.6

USA -2.6 2.8 3.0 2.7 2.3 3.0

Japan -6.3 4.3 1.6 1.8 1.5 2.0

Eurozone -4.1 1.8 1.5 1.7 1.5 1.8

Germany -4.7 3.6 2.2 2.0 2.0 2.0

Spain -3.7 -0.2 0.6 1.5 0.7 1.8United Kingdom -4.9 1.7 2.0 2.3 2.0 2.3

Emerging economies 2.6 7.1 6.5 6.5 6.4 6.5

Russia -7.9 3.7 4.5 4.4 4.3 4.4

China 9.2 10.3 9.6 9.5 9.6 9.5

India 5.7 9.7 8.4 8.0 8.4 8.0

Brasil -0.6 7.5 4.5 4.1 4.1 4.1

Mexico -6.1 5.2 4.2 4.8 3.9 5.0

World trade -10.7 12.0 7.1 6.8 7.0 6.6

Price o oil (US$/b) 78.9 89.5 89.8 76.1 89.5

Ination

Developed economies 0.1 1.5 1.6 1.6 1.3 1.5

Emerging economies 5.2 6.3 6.0 4.8 5.2 4.5


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2. Outlook or the Latin American

economy

According to the Preliminary Overviewof the Economies of Latin Americaconducted by Cepal in 2010, the region,following a contraction of -1.9% in GDPper capita in 2009, will consolidate therecovery begun in the second half ofthat year. According to these estimates,in 2010 Latin American and Caribbean

countries will have achieved an averagegrowth in GDP of 6%, which works outat an increase of 4.8% per head ofpopulation, although, broken down bysub-region, performance will show wide

variations.

Whereas the economies of SouthAmerica grew by 6.6%, Mexicosincreased by 5.3%, Central Americas by3.5% and those of the countries of theCaribbean by only 0.5%. Over the sameperiod the economies of Venezuela andHaiti shrank by -1.6 percent and -7.0percent respectively (Image 1).

Image 1. Latin America and the Caribbean: GDP growth in 2010

Source: CEPAL (2010)

Annual growth rate (%)

-8,0 -6,0 -6,0 -4,0 -2,0 0,0 2,0 4,0 6,0 8,0 10,0 12,0

0,5

-1,6

-7,0

1,0

1,9

2,5

2,5

3,0

3,5

3,5

3,8

4,0

4,0

5,3

5,3

6,0

6,3

6,6

7,0

7,7

8,4

8,6

9,0

Caribbean

El Salvador

Cuba

Guatemala

Honduras

Nicaragua

Ecuador

Central America (9 countries)

Bolivia

Colombia

Costa Rica

Mexico

Chile

Latin America and the Caribbean

Panama

South America (10 countries)

Dominican Republic

Brazil

Argentina

Per

Uruguay

Paraguay 9,7

Haiti

Venezuela


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positioned. Exporters of basiccommodities obtained greater value fortheir goods, whereas the countries of

Central America and the Caribbeanagain suffered net losses.

However, a number of factors combinedin the second half of 2010 to paint a lessrosy picture of the internationaleconomy which, together with the hikein public spending and the relativeabsence of slack in the productioncapacity available, pointed to a gradualslowdown in the economies of Latin

America and the Caribbean in 2011,with forecasts averaging at 4.2%,

equivalent to a GDP growth per capita of3.0% (Image 2).

Thisgrowthin2010conrmedthe

recovery made by most Latin Americaneconomies in the second half of 2009,

driven by counter-cyclical factors and bythe upturn in the world economy. It hada positive effect on employment, with

jobless totals declining by -7.6%. Moreimportantly, it improved the quality ofthe jobs on offer. There was a modestincreaseinination,whichmovedup

from 4.7% in 2009 to 6.2% in 2010, dueto hikes in the international tradedprices of several basic commodities.

The rise in demand was the result of thetighter labour market, the increase in

credit and the improved outlook, whichfuelled additional private spending andgreater investment in tools andmachinery. External prices varieddepending on how countries were

Image 2. Latin America and the Caribbean: GDP growth in 2011

Source: CEPAL (2010)

Annual growth rate, in %

0,0 2,0 4,0 6,0 8,0 10,0

2,0

2,0

2,0

2,2

3,0

3,0

3,0

3,0

3,5

3,5

3,9

4,0

4,0

4,2

4,5

4,5

4,6

4,8

5,0

5,0

6,0

6,0

7,5

Venezuela

Caribbean

Nicaragua

Cuba

Guatemala

Costa Rica

Ecuador

Mexico

Central America (9 countries)

Colombia

Paraguay

Latin America and the Caribbean

Bolivia

South America (10 countries)

Brazil

Argentina

Dominican Republic

Uruguay

Peru

Chile

Panama

Haiti 9,0

El Salvador

Honduras


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As stated, 2010 saw an overall recovery,though there were marked differencesamong countries and sub-regions. The

highest growth was achieved in thegrouping known as South America, withthe notable circumstance that this timeround the country with the largesteconomy, Brazil, came top of the list,followed by Uruguay, Paraguay,

Argentina24, and Peru. Another featureof 2010, notable for the rapid bounce-back from a crisis of major proportions,

was the widespread success ofgovernment policy. The economicstability of most of the Latin Americanand Caribbean countries in the years

leading up to the international crisismarked a notable departure from theproblems the region had beenaccustomedtointimesofdifculty.It

enabled the majority of countries to fendoff the worst effects of the downturn.

In general, countries took full advantageof the boom. Regional GDP rosesignicantlybetween2001and2009,

enabling the gross regional product tomore than double. This was mainly due

to the strong growth of Brazil, which isnow the economic driver of the region,having taken over the reins from Mexico(Image 3).

Also, more or less throughout the regioncurrency earnings were used to balancepublic accounts, reduce and improve thedebt position and build up reserves.Thus, for example, public debt, boththat of the central government and ofthe public sector as a whole, fell f rom60% of GDP in 2002 to 30% in 2009,i.e., 30 basis points in just seven years(Image 4).

In the same way, external debt, thoughit rose from USD 740 billion in 2001 toUSD 800 billion in 2009, fell from 40%of GDP in 2001 and 2002 to 20% in2009 (Image 5). The region alsoachievedasignicantincreasein

international reserves (Image 6), whichmoved up from USD 163 billion (8% of

24 These our countries comprise MERCOSUR.

Source: CEPAL (2010a).

Image 3. Latin America and the Caribbean: GDP growth 2001-2009

-

USD

billions

500,00

1.000,00

1.500,00

2.000,00

2.500,00

3.000,00

3.500,00

4.000,00

4.500,00

2001 2002 2003 2004 2005 2006 2007 2008 2009

Brazil Mexico Argentina Venezuela

Colombia Chile Peru Rest

Source: CEPAL (2010a).

Inpercentage

ofGDP

2001 2002 2003 2004 2005 2006 2007 2008 2009

Central government debtNon-nancial public-sector debt

Image 4. Latin America and Caribbean: government debt, 2001-2009

10

20

30

40

50

60

70

0


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economic output as the year advanced,which consolidated in 2010 thanks tothe sharp increase in private-sector

consumption, investment and, to alesser degree, exports.

The World Bank, on the other hand,estimates that Latin America willachieve sustained growth in 2011, albeitat a reduced pace (Table 1). In line withlocal economic observatories it considersthat the region has emerged relativelyunscathed from the crisis, in contrast toboth its own past experience and to therate of recovery of other regions. After a

25 According to CEPAL (2010c) international reserves reached USD 563 billion in the second quarter o 2010.

regional GDP) in 2001 to USD 576billion in 2009 (14% of GDP)25.

All this made funds available forpublic-sector initiatives, which weremany and varied, aimed atcounteracting the negative effects of theinternational downturn and permittingthe start of a regional recovery in thesecond half of 2009. The introduction ofscalandmonetarystimuli,inacontext

ofgrowingcondence,relativestability

in the money markets and increasedaccess to credit, laid the foundations fora gradual pick-up in

Image 5. Latin America and the Caribbean (excluding Cuba): external debt2001-2009

Source: CEPAL (2010a)Notes: [a] includes the debt due to the International Monetar y Fund; [b] Provisional gures

-

USD

billions

PercentageofGDP

450

5.0500

10.0550

15.0600

20.0650

25.0700

30.0750

35.0800

40.0850

45.0900

2001 2002 2003 2004 2005 2006 2007 2008 2009[b]

Total gross external debt (let axis) [a]

Total gross external debt (right axis) [b]

Image 6. Latin America and the Caribbean: international reserves 2001-2009

Source: CEPAL (2010a)Notes: [a] Preliminary gures.

USD

billions

PercentageofGDP

- 7,5

100 8,8

200 10,0

300 11,3

400 12,5

500 13,8

600 15,0

2001 2002 2003 2004 2005 2006 2007 2008 2009[a]

International reserves (let axis)International reserves (right axis)


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26 Multinacionales espaolas. Compitiendo en un mundo global y multipolar(Spanish Multinationals: Competing in a Global and Multipolar World), Casilda, 2011.

slows in 2011 and liquidity increases.Looking further ahead, question marksappear as to whether the present swift

recovery will provide a basis forsustained growth, given that the worldas a whole is still undecided on thestrength of the advanced economies. Inthe meantime, the resurgence of theemerging economies, particularly ofsome countries of the region, hasattractedcapitalinowstowardsLatin

America and the Caribbean, adevelopment that in itself generates risk.

The situation has resulted in theappreciation of some currencies,althoughthisisnotthersttimethatinuxesofspeculativemoneyhave

temporarily jolted exchange rates, withnegative, not to say destabilising,consequences.

The medium-term effects, however,could be dire. The risk is that the moneyis used to intensify the production andexport of raw materials, thus exposingthe economies even more to externalturbulence and internal economic

volatility. Also, growth accompanied bya steady decline in foreign currencyreserves would leave local economiesincreasingly dependent on externalsavings, precisely the opposite of whatoccurred in the period 2003-2008.

As documented in other studies26,several countries have introduced orstrengthened mechanisms to control theinuxofshort-termcapitalalthough,

given the volumes concerned, they mayprove inadequate, as was seen forexample in Brazil. Some central bankshave opted to accumulate reserves in aneffort to avoid or moderate theinationaryeffectontheircurrencies.

Such measures should be complementedwith counter-cyclical strategies focusedonboththescalandnancialfrontsto

try to reduce the pressure on domesticdemand and fend off a dangerousincrease in the availability of credit.There are also good grounds for

contraction of -2.2% in 2009, regionalGDP rose by 5.7% in 2010, similar to theaverage growth recorded in the boom

years of 2004 to 2007.According to the World Bank report,Global Economic Prospects 2011, there

will be a moderate deceleration ingrowth leading up to 2012, caused inthe main by the slowdown of theadvanced economies and, in particular,that of China. A number of countries inthe region have been subjected to thepotentially destabilising effects ofcapitalinows,whichresultedinstrong

upward pressure on exchange rates,particularly in Brazil and Colombia. The

forecasts are for the world economy tomove from an upward trend in the wakeof the crisis to a more stable but slowerrate of growth.

It should be pointed out that althoughthe recovery was reasonably swift,thanks on the whole to the internalstrengths countries have achieved,question marks remain with respect tothe world economy, which may wellimpinge on regional performance in the

medium term. One example is the crisisnow affecting some Europeaneconomies, aggravated by the suddeneffect of rising oil prices as the result ofpolitical turmoil in the Arab world.

These effects could have an impact onthe international outlook, althoughpossibly not immediately. At presentthey are depressing volumes and exportprices, together with the remittancesreceived by some Latin American andCaribbean countries. Also, although theregion performed well overall in thecrisis, differences from one country toanother are still wide and concernremains about, for example, some of theCaribbean economies, whose highforeign debt levels render them

vulnerable.

As for State spending, this will beaffected by the need to cater for counter-cyclical measures as the world economy


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savings to fund investment28. Toincrease their capacity for growth andthe competitiveness of their economies

the countries of the region mustsignicantlyraisetheirlevelofinvestment in infrastructures,equipment and industrial goods. Despitethe progress made, the countries ofLatin America and the Caribbean stilltrail a long way behind the levels ofinvestment achieved in the 1970s. Toregain them they must ensure that suchinvestment relies to a much greaterextent on domestic savings in order tobetter defend exchange rates andnurture a specialisation model that

meets the development needs of theregion and, at last, achieves the level ofindustrialisation necessary to moderniseon the basis of improved levels ofinternational competitiveness.

Lastly, in Box 1 we show how LatinAmerica is riding out the present crisisbetter than other more developedregions.

introducing measures to increase themargins for producers of marketablegoods. Notwithstanding, it is doubtful in

present conditions whether theseproblems will resolve themselveswithout greater coordination at theinternational level to reduce globalimbalances, a possibility that, as thingsstand, looks remote.

In terms of economic management thechallenge facing the region is to restoreits ability to introduce counter-cyclicalmeasures while maintaining theconditions for productive developmentthat is not over-reliant on the export of

commodities27. To this end it will benecessarytoreachanewscal

consensus on how to gradually adapt theneeds for development to the pace andstructure of the taxes required to fundspending programmes. In this context, itis worth noting the important rolereservedforscalpolicyinoffsetting

the dangers of external conditions ofhighgloballiquidity,magniedbythe

shortfall in domestic savings and the asyet underdeveloped banking facil ities.

It will thus be essential to raise the levelof domestic savings, therebystrengthening the medium-term balanceand containing public debt, while liftingthe capacity to generate domestic

27 Primary goods traded internationally: or example, grain, minerals, energy products (oil, coal, gas) and the so-called sots, such as coee, cotton, sugar, etc.28 For a broad analysis o the present situation and the measures required to encourage credit while expand ing and stabilising the regions banking institutions, see

Unlocking Credit: the Quest or Deep and Stable Bank Lending; 2005 Annual Report on Economic and Social Progress in Latin America, Inter-American

Development Bank (IDB), 2004.


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Inthersthalfof2010economicrecoveryinLatinAmericaconsolidatedfasterthanexpectedasaresultofthestrengthofdomestic demand in most countries. There were ew exceptions to this rule, though Venezuela remained in recession, and

Mexico recovered more slowly than the rest.

Priceperformancewasalsoreasonablyencouraging.Averageinationtendedtostabiliseatjustover6%followingasurgeat

the start o 2010 to 6.6%. Although these gures obscure multiple dierences between countries, it is sae to say that infation

has headed towards target in those countries that actively try to control it, despite the narrowing o gaps in levels o

production. This moderation also extended to orecasts, though in varying degrees rom country to country.

Thisresiliencehelpstoexplainwhytheturbulenceresultingfromthescalandsovereigndebtcrisisinsomecountriesofthe

eurozone between April and June and the subsequent ears o a urther slowdown in the United States ailed to have a lasting

impact on Latin American nancial markets or dent the growth orecasts or 2010 and 2011. In act, the reverse occurred.

Growth orecasts have continued to trend upwards, underlining the resilience o a region which, among other actors, has

beneted rom increasing trade with Asia, due to the strong demand in that region or raw materials.

Asaresultthecreditratingsofvecountries(Chile,Colombia,Uruguay,EcuadorandArgentina)movedup.Inthisoptimistic

environment, with positive interest-rate dierentials vis vis the industrialised economies and the prospect o an

extraordinary and ongoing monetary stimulus in the United States, the infux o investment capital (mostly portolio

investment) has surged in recent weeks and is beginning to cause concern among managers o the economy in a number o

countries, principally due to its impact on exchange rates, domestic liquidity and monetary policy. At present these pressures

are being relieved in the main by accumulating reserves, although some countries have taken administrative steps to restrict

the fow.

TheoutlookforLatinAmericaisthusonthewholepositive,althoughaslowdownisexpectedinthesecondhalfof2010due,

in part, to a moderate tightening o monetary policy. External conditions, notably the long-lasting lax monetary policy

maintained by the United States and the strong growth in Asia, point to a broad expansion in the region, which domestic

policies should try to temper by introducing more restrictive measures. In act the main risk at present would appear to be

that political leaders ail to react appropriately and adopt pro-cyclical policies. Governments ace the option o adopting morerestrictive measures to protect themselves against a slump in the world economy or sitting back, at least on the monetary

ront, an approach that may trigger even larger capital infows.

Box 1. Latin America weathers the crisis

Source: Banco de Espaa (2010): Inorme de economa latinoamer icana. Segundo semestre de 2010 (Report on the Latin American Economy: Second Hal 2010).Boletn Econmico, Madrid, October 2010. For an updated analysis, see Global Economic Prospects


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markets, not only in the eurozone butalso in the US and Asia. In short, Spanishmembership of the eurozone acted as apowerful lever for the internationalexpansion of the countrys major banks,thanks to the removal of trade barriersandtheimprovedefciencyofthe

Spanisheconomicandnancial

structure, itself the result of deregulationand greater competition in a context offalling interest rates, relative economicstability and other factors that galvanisedand modernised the Spanish economy,coincidingwithamajorcapitalinux

resulting from the interregional cohesionpolicies of the renamed European Union.

Opening up the Spanish economyproved the main driver of economic

liberalisation and the expansion ofmarket forces that succeeded in pushingaside the backlog of regulatory rigidity.That liberalisation has continued toprogress, driven in the main fromoutside, in the form of bringing locallaws into line with European rules andby virtue of the local reaction to foreigncompetition. This explains why theprocess was jerky and uneven, makinggood progress in the area of cross-bordertradablegoodsandnancial

services but relatively ineffective in themarkets for goods and services lessexposed to foreign competition34.

Thanks to the impetus provided bycompetition and the opening up of

3. International banking expansion:structural context

As stated above, at the beginning of the1990s Latin America was the region thatin terms of structure offered the bestprospects for the expansion of thebanking sector, among other reasons forthe opportunities it presented: ashortage of banking penetration29 and a

rapidly expanding population30. To givereaders an idea, the banking presence inSpain is over 95%: in Latin America,using the same yardstick, it is estimatedat 35%. The room for growth is clear.Other reasons for banks going abroadare the decline in interest rates in thehome market, the differential betweendeposits and loans, the saturation ofconventional banking services and thegeneral decline in prices31.

Surveys revealed that in Latin A merica450 million people were being served bybanking groups presenting a low level ofdevelopmentandefciency,

unproductive structures and outdatedtechnology. The presence ofinternational banking organisations inthese countries was minimal.

In addition, the consolidation movesintroduced in the European Communityfostered this investment drive. Theestablishment of the eurozone in 199932

had a particularly dramatic effect on amedium-sized economy such as that ofSpain33. These two factors proved apowerful lever for expansion of thedomestic banking sector into new

29 On banking in Latin America, see Remesas y Bancarizacin. Servicios fnancieros que orecen bancos y cajas de ahorros a los inmigrantes latinoamericanos en

Espaa(Remittances and Banking Services: What Banks and Savings Banks oer Latin American immigrants in Spain), Cuadernos SEGIB, No. 3; Secretara

General Iberoamericana, Casilda, 2008; Remesas y bancarizacin en Iberoamrica, Documentos de Trabajo IELAT No. 2; Instituto de Estudios Latinoamericanos

(IELAT); Alcal University, 200830 In Spain the growth in population by 2050 was orecast at 800,000 (not including immigrants). For Latin America or the same year the predicted increase was 200

million. (IDB, 2000)31 For urther details, see Casilda 2002a and 2002b.32

It was precisely on 15 January 1999 that Banco Santander merged with Banco Central Hispano to orm Banco Santander Central Hispano (BSCH), by ar the largestSpanish bank. (That move anticipated by several months the merger o BBV and Argentaria on 19 October 1999.) By the end o the 20th century the Spanish banking

industry was gearing up or major achievements.33 At that time, 2000, Spain had a GDP o around 600 billion euros, compared with over a trillion in 2010.34 Jos Luis Malo de Molina: Diez aos de la economa espaola, (Ten years o the Spanish Economy), AB Asesores, Madrid 2004; quoted in Ciento cincuenta aos,

ciento cincuenta bancos, (One Hundred and Fi ty Years: One Hundred and Fi ty Banks) Gonzlez (ed.), Aries y Mendoza 2007.


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average, higher than more developedeconomies such as Spain, which wasmoving up at 2.8%, or the rest of

Europe, just above 2.0%. As noted, thepopulationgures,akeyfactorforthebanking business, were an addedattraction, given the predicted growthto 205035. And in terms of the businessitself, the low penetration of bankingservices in the region and the high netinterest income available made the idealook very attractive.

To this should be added the key factorsof cultural36 and linguistic37 proximityas determining the speed of the

investment, the high level of mutual

understanding, the fast adaptation androll-outofnancialproductsand

services, and the technological

platforms and business techniques thatenabled huge strides to be made both inefciencyandintransferringknowledge

and skills in a manner that was fast,simple and inexpensive, both withinorganisations and between these andtheir business counterparts.

markets, Spanish companies began tolook abroad in search of clearer growthopportunities than those available at

home, in order to provide stable fundingat low rates of interest. Companies werealso conscious that they had to gain sizeto avoid hostile takeover bids byinternational and European majors and,in particular, as one of the conditions ofperforming successfully in competitiveinternational markets.

In this structural context Latin Americaappeared as an historic opportunity thatamplyjustieditspromise,giventhat

the region was growing at a fast pace in

the period 2003-2008, 4% plus on

35 The increase in the population o Latin America by 2050 is estimated at 200 million.36 For details consult among others the works o Arturo Galindo, Alejandro Izquierdo and Liliana Rojas, which analyse in depth the key actors determining the success

o banks overseas expansion, noting that cultural actors (especially the common language) played a key role. 37 On the impor tance o language in internationalisation and investment in Latin America, see Casilda, 2001.


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4. Deployment o Spains international

investments

Although this huge direct Spanishinvestment in Latin America beganin the early 1990s, there was almostno reference to it on corporatebalance sheets, as FDI was practicallyunheard of.

Spains customary position was that of a

net recipient of foreign investment, dueeither to legal impediments or thepractical impossibility of undertakinginvestments abroad, given that thedegree of economic development of itscompanies and banks militated againstaccumulatingsufcientfunds.

Moreover, the domestic economy wasnoted for its reluctance to engage ineconomic and commercial exchange, acircumstance that severely curtailed itspotential as an overseas investor.

Spains presence as a major FDI player inLatin America ended an era ofprotectionist measures (that spannednearly half a century) to ward offforeign competitors. That trend alsoresulted in the dismantling ofmonopolies, thus creating a genuinelycompetitive market based on a gradualliberalisation of the Spanish economy,laying the groundwork for a proactiveEuropean market equipped to competeat the world level. From that moment on,Latin America became the preferredtarget of Spanish companies38.

The transatlantic crossing was led byTelefnica and Iberia, which startedbidding in privatisations of regionaloperators. By about the middle of thedecade,theowofFDIhadrisen

signicantlythankstotheactive

presence in the region of the powergens

Endesa and Iberdrola, together with theoil major Repsol. The pattern extendedstill further in 199539 as a consequenceof the acquisition strategies rolled out bySpains two largest banks, BBVA andSantander.

In aggregate terms the banking sector is

a net foreign investor, outranked only bythe telecoms and powergens. The staketaken by Telefnica in the privatisedSistema Telebras (Brazil) in mid 1998and the control assumed by Repsol andEndesa over the two largest privateenergy companies of Argentina andChile, Yacimientos Petrolferos Fiscales(YPF) and Enersis at the start of 1999,werethelargestevernon-nancial

corporate transactions at the time.

As for the two banks, they took fulladvantage of the opportunity to obtain asizesufcienttocompetemore

efcientlyininternationalnancial

markets and, at the same time, fend offthreatened takeover bids, particularlyby their European rivals.

This all-in commitment to LatinAmerica, conducted swif tly anddecisively, means that in the currentcrisis, considered likely to produce anadjustment to the internationalbanking map that has bankersthroughout the world sweatingnervously, the two Spanish banks havesucceeded in pulling off internationalmergers and alliances in Latin

America40, the United States and Asia, aswe shall see below in the case of BBVA.

A notable feature of the investmentdrive in Latin America is the speed at

38

PFor more details rom an analysis conducted by the companies themselves, see Casilda, 2008.39 See Caldern and Casilda, 1999 and 2000.40 This reers to the specic case o Santander in its acquisition, in partnership with Royal Bank o Scotland and Fortis, o ABN Amro. Santander also acquired the

Banco Real (Brazil), obtaining a leading posi tion in the Brazilian market given that, by merging it with Banespa (2011) it became the third-largest independent bank in

Brazil in terms o deposits, with a network o 1,900 branches and 13 million customers.


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decisions quickly and effectively, asidefrom reducing the number of Spanishexecutives having to take charge ofLatinAmericanoverseasofces,almost

none in fact. On the contrary, there areincreasing numbers of Latin Americansnowworkingintheheadofcesofthe

banks in Spain.

whichitunfolded,chieytheresultof

thelinguisticandculturalafnities,two

factors that proved decisive in layingdownefcientorganisationalstructures

for managing and monitoring localsubsidiaries, by means of centraloversight and standardised procedures.

The term centralisation refers to thedegree in which decisions on matterssuch as the introduction of newproducts, changes in design ormodicationsofprocessingsystemsare

workedoutatheadofce.Asfor

formalisation, this relates to thepresenceofasetofwell-denedrules

and procedures that govern the dutiesassumed and the approaches adopted indifferent situations. These mechanismslimittheautonomyoflocalofcesbut

theyalsofreeheadofcefromhavingtointerfere too much in their day-to-dayoperations, precise rules and proceduresachieving the same end as a physicalpresence.

On the other hand, where there is a wideculturaldifferencebetweenheadofce

and local staff, such organisationalprocedures rarely operate well, as theyare seen as a straitjacket designed toprevent the local staff from getting togrips with the complexities of themarket they are in. At a practical levelalso, the greater the cultural distancebetweenheadofceandlocalofce,the

higher the cost of executives, as a muchgreater proportion of ex-pats is required.

At the same time, the success of theinvestments undertaken to date hashighlighted the importance of a sharedlanguage in implementing these


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5. Internationalisation o Spanishcompanies in Latin America

The degree of permeability of a countryto foreign trade and internationalisationcan be measured in various ways, onebeing the sum of exports and imports asa percentage of its GDP. At the start ofthe1960sthisgureaccountedforno

more than 10.5% of Spains gross

domestic product. By the 80s it hadmoved up to approximately 30% and bythe end of the 90s had reached 60%. Atpresent Spain represents one of the mostopen economies in the world, with the

value of incoming and outgoing goodsand services representing approximately64% of GDP.

With respect to Spains foreign directinvestment,theguresspeakfor

themselves. In the course of the last two

decadestheowsofFDI,incomingsandoutgoings, have described a steadyupward curve. Whereas in 1980 only0.9% of GDP was invested abroad, at thestart of the 1990s total direct investmentmade and received was 1.5% and 3.0%of GDP.

Intherstveyearsofthe1990s,the

owsofFDIoriginatinginSpain

accounted for 6% of total foreigninvestment in Latin America, whilethose originating in the United Statesmade up 71%. However, in the secondhalf of the decade Spain contributed30% of FDI whereas the United Statesreduced its contribution to 39%. In theearly years of the new century, therewasaradicalshiftintheseows,astotal

Spanish foreign investment reached17% of GDP, with Latin America aloneaccounting for 10% of its gross receipts.The Spanish economy, in its bid for

internationalisation,passedasignicant

milestonein1995whenforthersttime

the FDI undertaken topped EUR 5.59billion, more than that received, EUR5.39 billion. And the trend continued. In1997,outowssurpassedEUR10.52

billion,comparedwithinowsofEUR

6.82 billion.

As from 2000, the accumulated volumeof Spanish FDI amply exceeded the sumreceived. It reached EUR 60.15 billion,making Spain the sixth-largest foreigninvestor in the world, according toUNCTAD41gures.ThismadeSpainanet investor, thus attaining the mostadvanced stage in theinternationalisation of a countryseconomy.

In this investment quest, theestablishment of the Single EuropeanMarket42 marked a major turning pointin the internationalisation of Spanishcompanies, which learned to appreciatethat they operated in a very demandingarena where, given their relatively lowmarket capitalisation, as noted above,they had to protect themselves againsthostile takeovers from majorcorporationsorinternationalnancial

conglomerates.

As a result, by means of theirinternationalisation strategy, theSpanish banks Santander, BBVA43 andSCH were responding on one hand tothe need to defend themselves and, onthe other, to having to compete on equalterms in international markets, to whichendtheyactivelysoughtsufcientsize

and international presence, necessary

41 United Nations Conerence on Trade and Development. This world organisation coordinates the integrated treatment o development and related subjects in the

areas o trade, nance, investment and sustainable development.42 It stipulates, broadly speaking, the ree movement o capital and the end o restrictions on oreign banks.43 As with its peers, BBVAs market capitalisation was relatively low, making it an attractive target or European and international nancial conglomerates.


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butnotsufcientrequirementstoward

off the big players.

In essence the purpose of a defensivestrategyistokeepprovidingnancial

services to local customers who also

internationalise their activities in orderto deter them from establishing contacts

with local service providers in the targetmarket, which reduces your business

volume. The goal of an offensivestrategy, on the other hand, is to buildan initial owned platform of localoperators and operations to obtain asolid footing in a given market. Normalpractice is to start off with the initialdefensive strategy and, havingestablished a bridgehead, move onto the

offensive.

Initially, the Spanish banks, given thespeed and success of their establishmentand positioning, quickly attracted theattention of their competitors, plus theauthorities and the local andinternational media, such as, forexample, the Washington Post44, whichcalled the Spanish investors The NewConquistadors.

At roughly the same time, takingadvantage of or even defying certainrisk factors, a select group of recentlyprivatised Spanish companies such asthe power generator Endesa, the oil andgas company Repsol, with others

awaiting privatisation, such as theairline Iberia and the telecomTelefnica, and in cooperation with theindependent banks Santander andBBVA45, gambled openly on a direct-investment strategy in the region that

would make them major players in theirrespective areas of activity.

They were followed by other largecompanies that joined the hard-coreinvestors, such as powergens Iberdrola

and Gas Natural and the water companyand engineer Aguas de Barcelona. Theleadership they achieved in theirrespectivesectorswassufcienttosee

them through a succession of regionalcrises, such as the Asian crisis of1997-1998(Asianu),theRussian

crisis of August 1998 (vodka effect),and the worst of the three, the

Argentinian default of 2001-2003(tango effect), regarded by some as

44 Washington, 12 February 2000.45 In Spain there was a period o intense competition between the two banking majors, Santander and BBVA, successively rolling out new products such as the super

deposits, super accounts and super savings accounts. For urther details, see Casilda, 1997.


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and increasing access to the select rank ofkey international players by a broadspectrum of Spanish technological

companies, a development that injectedconsiderable added value into theinvestmentmadeandstronglyinuenced

Spainsforwardstrategy,rstinLatin

America, then worldwide (Box 2)50.

In June 2011 for example, the Ibex 35companies generated 59.4% of theirturnover abroad, while that earned inthe home market was 40.6%. The yearbefore local sales had accounted for42.5%. Of all the companies in the indexthere are no fewer than 20 that

currently invoice a greater sum abroadthan at home.

The above is no more than a briefintroduction to the complexities of FDIand what going international entails forSpanish companies, both in Latin

America and, by extension, globally. ForSpainFDIhasbeenextremelybenecial

as it has taught its entrepreneurs thatthey can follow the paths trodden by themost advanced and prosperous

economies in the world, noted for theircommitment to free trade and their

willingness to adopt a scaleddevelopment approach, asrecommended in the model drawn up byJ.H. Dunning and R. Narula51.

According to the so-called theory of theitinerary of foreign direct investmentarrived at by these two authors, there is alink between the level of economicdevelopment of a country and itsinternational position with respect toFDI; that is, with respect to the FDI

the most serious since 1914, graver eventhan the Depression of the 1930s46.

The returns on these investments werequick to come in and the relativeweighting of the overseas assets,togetherwiththeprotsearned,rose

apace,generatinggurespreviously

unknown. For Endesa they represented40% of its total assets, for Telefnica,30%, and about 30% also for Santanderand what was then the Bilbao Vizcaya47.

The arrival of these companies in LatinAmerica came at a critical time for theregion as it was undergoing structural

reform under the aegis of theWashington Consensus (1989), designedto extend business activities andfacilitate the access of overseas investorsby means of a range of measures,including privatisations, liberalisation,commercial deregulation, greaterprotection of property rights and certainconditions of economic stability,modelled on the economies of theOECD.

As evidenced by the reams written onthe subject, the initiatives taken by theSpanish companies, recreatingthemselves as full-blown multinationals,formed no part of any pre-arrangedscheme with the government. On thecontrary, the idea was attributed to whatonlookers termed the private impulse,impulso privado. Certainly, theinternational expansion had producedgood, even spectacular, bottom-lineresults by the end of the 1990s and turnof the new century, only to suffertemporarily in the fraught period

2001-2003, before bouncing backstrongly right up until the present crisis.

The intense investment activity in LatinAmerica saw some losers, as is the caseof the airline Iberia, which failed tocapitalise on its acquisitions in

Venezuela (Viasa) and Argentina(Aerolneas Argentinas). Anotherinteresting fact concerning theinternationalisation of Spanishcompanies is that, according to the

various rankings, it made Spain one ofthe top ten countries in terms of thenumber and turnover of itsmultinationals. Thus the US magazineFortune 500, which ranks the top 500world companies, in 2006 carried nofewer than seven Spanish companies interms of market capitalisation. TheGlobal 500 of theFinancial Timescurrently includes ten Spanishmultinationals among its big caps. Notmany years ago such prominence wouldhave been unthinkable48.

The sudden surge had a major impact onthe Spanish economy, taking it to the

frontoftheeldasthetenthworldpower (2008), as indicated by severalinternational rankings49.

On top of this, mention should be madeof another 30 multinational companiesthat could rub shoulders in terms ofquality and competitiveness with the bestin the world in sectors such as ceramics,automobile parts, civil engineering,

wind- and solar-driven renewable energysources, machine tools and capital goods,plus IT and communications systems, i.e.,agrowingdiversicationinSpanishFDI

46 For an in-depth analysis, consult Casilda and Sotelsek, 2002.47 For an in-depth analysis, consult Casilda and Sotelsek, 2002.48 Casilda, 2011.49 Casilda, 2011.50 Casilda, 2011.51 J. H. Dunning y R. Narula (eds.): Foreig Direct Investment and Governments, 1996.


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Scenario I

IInvestment in geographiclocations

Invest in other developed regions:

EU, US.

Invest in other developing regions:Eastern Europe and Asia.

Invest in other emerging markets:

Turkey, Indonesia, South Arica,

Vietnam.

Scenario II

IInvest - Disinvest

- Continue investing in Latin

America

- Start disinvesting.

- Consolidate regional areas.- Adopt joint strategies with third

countries: EE.UU., Canada,

China?

Scenario III

New opportunities

- Abandon traditional and mature

businesses.

- Focus on new privatisations.

- Concentrate on new businesses:renewable energies, Internet,

high-speed transport,

inrastructures, concessions.

- New mergers and local, regional

and international alliances.

- New partners outside the region.

Scenario IV

Structural changes

- Contribute to social development

and the strengthening o

institutions.

- Contribute to the development obanking and regulatory

compliance.

- Contribute to educational and

environmental progress.

- Contribute to the introduction and

development o social

responsibility and corporate

governance.

Box 2. Forward strategies or Spanish investment in Latin America

Source: own ormulation.

InstageIII,FDIcontinuestoarrivebut

at a slower rate than before, while therstoutowsbegintoleavethe

country in the form of foreign directinvestment.WhenoutowsofFDIsurpassinows,stageIVcommences.

Finally,stageVisreached,whenthe

countryhasachievedasignicant

level of economic development andthereisabalancebetweeninows

andoutowsofFDI.Atthisstagethe

net position of the country versus theoutside world varies, beingsometimes positive, sometimesnegative.

received and the FDI made. When thedifference is positive, the country is a netimporter of capital. When it is negative, it

is a net exporter of capital, which impliesa more or less advanced state of economicdevelopment, driven by the investmentcapacity of its companies.

The theory says that the developmentprocesshasvestages:

Stage1iscreatingvarious

infrastructuresandtheinitialinows

of FDI, together with the resurgence ofthe consumer goods market, whichleads on to stage II, industrialisation.


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52 Development Report on Financial Systems and Development, World Bank, Washington, 1989.53 Inter-American Development Bank (BID) report: Economic and Social Progress in Latin America, 2005. Unchaining Credit, Washington, 2004.

6. Spanish bankings international

expansion

6.1. The importance o the

nancial system and the role

o banks

Theimportanceofanancialsystemfor

the growth and prosperity of a countryhas long been recognised by economics

practitioners. Banks play a key rolewithin the institutions that comprise thenancialsystem,hencetheirinuence

on the economic activity of countries.

Althoughnancialsystemsvaryfrom

country to country, they have numerousthings in common. They differ for a

variety of reasons, such as size,complexity, the technology available, as

well as on account of the political,cultural and historical circumstances in

which they arose. They also changewith the passage of time. Thoughinstitutions may be broadly similar, the

jobs they do can differ considerably(Merton and Bodie, 1989)52.

Bankscarryoutaveryspecictaskin

the economy, which is to act asintermediaries between lenders andborrowers of money. At the same time,they have the ability to stimulate andabsorb the savings of a society anddistribute them among the companiesand sectors that require funds in orderto conduct their economic activities. Themajority of banks operations are relatedtotheefcientdistributionofthe

resources they capture, an essential taskfor the smooth operation of a productiveeconomy and, thus, for economicprogress itself. In fact, there is a closecorrelation between bank credit, GDPand per capita income. Countries withsmall banking sectors suffer low levelsof development. This strong correlation

is a sure sign of the link betweennancialandeconomicdevelopment53.

Bymeansofthisprocessofnancial

intermediation, the banking sector candetermine and alter the trajectory ofeconomic progress, particularly in

countries that lack alternative sources ofnance,suchasdevelopedcapital

markets. Thus it is true to say that acountry is more or less developeddependingonthesourcesofnance

availabletoitsnancialsystem.The

dutyofbankstoactasnancial

intermediaries also extends to theefcientdistributionandallocationof

credit, the payment system and theprotection of savings in all their forms.In this way banking becomes the

cornerstone of a countrys economicprosperity.

In this process of intermediation thebanksnancethemajorityoftheir

loans by means of the deposits theyreceive, thus avoiding high levels ofleverage. The nature of this operationrequires banks to move their assetsaround in such a way that they all runthe same risks at the same time. Whena bank makes a loan it faces what isknown as credit risk (the risk of notrecovering the amount lent), liquidityrisk (resulting from the different duedates of assets and liabilities) andinterest-rate risk (caused by, amongotherthings,uctuationsinunderlying

prices such as the exchange rate). Thecombination of these risks makesbanking an intrinsically hazardousenterprise, carrying a risk that isexacerbated by global economicimbalances (such as, for example, thepresent crisis.)


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To recap, we can say that the ultimatedutyofanancialsystemistoadjustthe

performance of the savings andinvestment variables by intervening inthe decisions taken by savers andinvestors. In this way banks can makesure that channelling funds either way

takes place without causing tensions andinefciencieswhile,atthesametime,

facilitating the payments and exchangesthat occur within a given economicsystem.Thus,anancialsystemisa

structured whole, comprising a varietyof institutions, assets, liabilities andmarketstogetherwithspecic

techniques, the main purpose of whichis to channel savings from economicunits having a surplus to those having ashortage.

Lastly,wecandeneabankmoresimply

asaninstitutionofnancialmediation,

whose main activity is that of receivingdeposits from savers, i.e. households,companies and institutions, and lendingmoney or granting credit to borrowers,

who in turn are households, companiesand institutions54.

54 For more details, see Casilda, 1992, 1997 and 1999.


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have made irreversible changes in theway agents compete, with marketparticipants moving from a relatively

stable traditional context, to one that ismuch more dynamic, bearing the DNAof a broad and deep competitiveness,

with declining margins and constantpressure to reduce prices, devote greaterattention to customers, offer a broaderrange of products, despite the fact thatthey have a shorter life-cycle and thuscost more to develop, as well as carryingthe risk of being copied, as there is nowaytopatentanancialproduct.

Banking is one of the sectors to suffer

most from these irrevocable changes,fuelled by deregulation,disintermediation and the globalisationofnancialmarkets.Thenetresultof

this transformation is the continualappearance of new competitors, theconstant application of new informationand communication technologies thattransform and revolutionise bankmanagement and organisation,resulting in relentless competition that,by hook or by crook, always acts directly

on net interest income. As a result, wehave embarked on an unknown period,characterised by relentless competitionthat obliges bankers to radically revisetheir traditional modus operandi and, asthe jargon puts it, reinvent themselves.

More and more, banking is conditionedby global forces, with scant room fordifferentiation between domestic andinternational markets. It is a market in

which major groups offer worldwideservices with just a handful of specialistofcestocaterforspeciccorporateor

high-net-wealth services.Internationalisation is by no means anisolated incident. It is an ongoingsymptom of globalisation, in whichSpanish banking, far from beingoutclassed, has come into its own.

6.2. A look at the international

banking sector

Thedecadeoftheeightiesandthersthalf of the nineties of the twentiethcentury saw major structural changes inthe world economy, particularly in Latin

America, where things moved on fromthe so-called lost decade of the 1980s,withitsnancialandbankingcrisesthat

in many cases resulted in banks beingnationalised. At the start of the 1990s,

with adoption of the WashingtonConsensus55, which included budgetarydiscipline among its points, changes inpublic spending priorities, agreement on

the need to open economies up to foreigndirect investment, on privatisations andon the right to hold property, all aided arecovery of the banking industry. It wasfurther strengthened by a string ofprivatisations of previously nationalisedand/or publicly owned banks.

These far-reaching reforms in theinternational banking sector over thelast few decades have had majorconsequences for both banks and other

nancialintermediaries.Globalisationof markets, the appearance of regionaleconomic groupings such as theEuropean Union, NAFTA andMERCOSUR, the emergence of the Asianand Latin American countries, along

with the unstoppable progress achievedby means of the new information andcommunication technologies (ICT) inthe design, production and marketing ofnancialproductsandserviceshaveled

to new methods of organising andrunning banking enterprises, a foretasteofthenewinternationalnancial

structure and organisation.

A constant for the banking sector and,by extension, for other sectors of the

world economy, is that to a greater orlesser degree the above developments

The response of Spanish banks can bebrokendownintovestrategicdecision

categories:

Thesearchforsizeand

competitiveness, obtained in the mainby means of mergers and acquisitions;

Entranceinexpandingmarkets,tothe

detriment of mature markets (as thatof Spain is fast becoming).

Thesearchforinitiativesleadingto

diversicationoutsidetraditional

banking activities.

Theabilitytouseresourcesand

organisational and managementcapacities globally, using seamless

worldwide computerisation.

Fastrelentlessinternational

expansion, making the necessaryadjustments to the architecture of thebanks organisational, control andmanagement systems accordingly.

55 Casilda, 2002.


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6.3. A look at the banking sector

in Latin America

It is clear that Latin American banking isoperating in an environment that hasaltered radically since the 1980s and1990s. In that period and subsequentlyall countries introduced changes in theirbanking regulations, in most casessignicantchanges,thoughthesearch

forreliablenancialandbanking

systems was by no means a new goal forLatin American governments. In fact, itgoes back to the 20s and 30s, whenProfessor Kemmerer recommended theintroduction of new legislation to set up

or revamp central banks in variouscountries of the region56.

By and large it can be said that that thereforms have produced a reaction againstthe successive crises or grave problems ofthe banking systems or, looked at theother way round, the crises have helpedpush the reforms. Although it should benoted that the existence of banking crisesis not exclusive to the region, it is truethat the need to respond to and prevent

such problems is the main reason for thereforms implemented to date.

One of the important facets of thisprocess of reform and adaptation of thebanking systems is the overall reductionin the amount of state property, givinggreater scope to the action of the privatesector at both the local and theinternational level. Such was the case inMexico, where there was a move froman almost totally state-run economy to amuch more open system dominated bysecurities markets, thanks to majorreformsofnanciallegislationin1984

leading, among other things, to thereturn of banks to the private sector in1985.

With the exception of the so-calledDevelopment Bank, all Mexican banks

were privatised to pave the way for agradualinuxofforeigncapital57, acircumstance that BBVA took advantage

of to gain control of Bancomer58

(July2000), when the shareholders of theBancomernancialgroupagreedto

merge it with the BBVA-Probursa group,at the time BBVAs Mexican subsidiary.

It is true to say that the last few decadeswere a period of more or less constantinstability as the entire banking sectorof Latin America and the Caribbean(LAC) was transformed. If we go back to1970,mostofthenancialsystemwas

in the public sector and the government

played a dominant role in bankingactivity. Within the next ten years, aftera brief period of liberalisation and someprivatisations, the banks were again indifcultiesandthegovernmenthadto

intervene, particularly after the debtcrisis of 1982. By the end of the 1980sthere was widespread concern aboutbank regulation and supervisionthroughout the world but especially inthe LAC area. This triggered a fresh boutof privatisations and reform of the

sector, in a context of greater regulationand prudential control.

In Latin America, as elsewhere in thedeveloping world, bank credit is themain source of corporate funding.Unfortunately, a characteristic of theregion is that this credit was scarce,costly and volatile. Lacking the presenceof a stable resourceful money market, itwasextremelydifcultfortheregionto

achieve the strong levels of growth

neededtoghtpovertyeffectively(IDB,2005)59.

By the mid 1990s, with a new wave ofprivatisations in full stride, bank creditbegan to expand at record ratesfollowingamajorinuxofforeign

capital. Notwithstanding, at the end ofthe decade at the turn of the century,

56 Between 1923 and 1931 Edwin Walter Kemmerer, proessor o economics and nance at the University o Princeton and international economic consultant, led a

number o missions resulting in major reorms o scal, monetary and banking legislation in Bolivia, Chile, Colombia, Ecuador and Peru. Kemmerer, known locally as

Doctor Dinero, also had a big hand in restructuring the nancial systems o Mexico and Guatemala. See Liliana Rojas-Surez (ed.)Sae and Sound Financial

Systems: What Works or Latin America?, IDB, Washington.57 The law allowing oreign banks to invest in Mexico was aimed at recapitalising local institutions, as well as encouraging new technologies and a closer involvement in

international markets.58 The bank had been nationalised, like most Mexican banks, under Presidential decree o 1 September 2008, signed by President Jos Lpez Portillo.59 Inter-American Development Bank (BID) report: Economic and Social Progress in Latin America, 2005. Unchaining Credit, Washington, 2004

many countries suffered crises thattested the strength of their bankingsystems, which stood their ground,

although credit conditions becameextremely tight.

Withthesedifcultiesresolved,

including the effects and after-effects ofthe Argentinian debt crisis, creditconditions eased again, resulting in aswift recovery with, atypically, no banksaffected.Thisconrmedthesolvencyof

the Latin American banking sectorwhich now, with some notableexceptions, is entirely denationalisedand dominated by foreign companies,

BBVA enjoying a leading position in thecountries it operates in. Thus, thebanking sector was able to keep pace

with the strong growth experienced inthe region in the period 2003 to 2008and which, fortunately, has continuedonce the present crisis was overcome.


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This manifest strength and security hassettled once and for all the debate on

who should own the banks. As notedabove, in the last twenty or thirty yearsopinions on this topic veered back andforth from one extreme to the other,both at the level of practical politics andon an intellectual plane. The banks ofLatin American and the Caribbean havebeen tossed in and out of Stateownership a number of times but, now,

with the arrival of foreign independentbanks, the debate appears settled, nowthat the interlopers have shown thatthey are the most effective guarantors ofthenancialandbankingsystemofthe

LAC economic area, conferring on it ahitherto unknown degree of reliability,consistency, transparency andinnovation.

Equally, doubts over the presence offoreign banks and their ability to put an

effective end to the see-sawing instabilityand accompanying handicaps suffered byusers have now been settled favourably.This encouraging result, with a greaterdegree of continuity and many morefacilities for borrowers has more than alittle to do with BBVAs presence in theregion, given its regional andinternational leadership, plus itspromising future as a global bank, asubject we enter into in greater detailbelow.


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60 The terms are used in nancial jargon as synonyms. Globalisation is derived rom globe or sphere, the orm approximating to that the Earth. The French

expression is mondialisation.61 Casilda, 1997 and 2002.62 For a study o the leading p layers, see Casilda (ed.) La gran apuesta. Globalizacin y multinacionales espaolas en Amrica Latina. Anlisis de sus protagonistas

(Globalisation and Spanish Multinationals in Latin America)63 The most reasonably priced, those o the countries o Central and Eastern Europe, were not a viable option or Spanish banks as, despite their physical proximity, on

the same continent, the language and cultural barriers were seen as too high. For details, see article in The Banker, July 1999.64 The percentage o adults having regular access to banking acilities in Mexico was estimated at 25%; in Colombia, 40%; Brazil 30%; United States 90%; Spain 98%.65 For more details, See Caldern y Casilda, 1999; Casilda, 2002 and 2008.66 Whereas the Spanish economy is slowing as a result o the present crisis, Latin America is growing much aster (Images 1 and 2).67 Casilda, 2001, El Espaol en el mundo; Anuario del Instituto Cervantes,

banks. They were compelled to crossnational boundaries to compete indemanding international markets in

order to grow in size, diversify risks,maintain their identity and defendthemselves from potentially hostiletakeover bids.

For these and other reasons LatinAmerica presented the bestopportunities. The option of nearbymarkets in European countries had lessto offer as these were, in general,mature markets, with fewer acquisitionpossibilities and higher prices63. On theotherhandtheLACsnancialservices

were in the process of beingderegulated; the levels of availabilityand use of banking facilities64 were asyet extremely low; margins wereattractive; and the standards ofsupervision and regulation hadimproved considerably. Also, as notedabove, there was a dearth of funds andproducts to cope with the rising demandfor access to banking services65.Demographic conditions made it aregion offering room for growth, the

average age of the population being 26,compared with 39 in Spain. There wasthe additional advantage of a mismatchbetween the economic cycle of Latin

America and that of Spain, making it agood means of diversifying risk, a factorthat hands-on experience has shown tobe of major importance66.

And, to make things better still, theresponse from the Latin American banksand regulators was positive, as the entryof foreign investors and partners wasseen as a means of overcoming existingsavings and funding limitations andthus helping to modernise andstrengthentheregionsnancial

systems.

So, on this basis, the motives for Spanishbanks to embark on aninternationalisation campaign in LAC

countries can be ranked as follows:

Language67and cultural afnities, ahandicap in other regions, but a boonin Latin A merica, favouring speed notonly in transferring capital but also interms of products, services,technology and basic managementcapabilities.

Creation o a single currency, whichwould fuel competition in thedomestic business and alter thecongurationofEuropeanmarkets,

removing many of the nationalboundaries.

Market structure and the demographicpotential, a particularly relevantfactor.

Counter economic cycle orcorrelation, combined with thestrengthening, deregulating andliberalisingofthenancialservices

industry in the region.

Low level o usage o fnancial serviceswith limited access to bankingfacilities for large sectors of thepopulation, with major variationsbetween customer types and country.

The maturity o traditional business

and the narrowing of marginsobtainable from Spanish bankingbusiness.

High net interest margins in LatinAmerica.

The FDI being undertaken by other

Spanish sectors and the volume of

6.4. La internacionalizacin de la

banca espaola en Amrica

Latina

Wecanperhapsbestdenetheprocess

ofnancialinternationalisationasthat

in which the agents and institutions thatmakeupthenancialsystemofone

countryndthemselvesobliged,ifthey

want to defend and extend theircompetitive position, to transcendnational boundaries and establish amarket on a world scale.

The process is intimately related withwhat has come to be known as the

globalisation60ofnancialmarkets.Infact, the decision by Spanish banks totake an active part in the internationalbanking system was more or lessinevitable once the Spanish economyitself opened up to world trade. Thisinternationalisation, therefore, is in no

way a one-off. On the contrary, it is alogical consequence of the globalisationofmarkets,industriesandnancial

services that Spain has no option but totake part in. Recent developments in the

nancialsectorpointtoascenarioofglobal markets in which the traditionaldistinction between what is national(domestic) and international(foreign)61 no longer conveysmeaning.

As a result of these alteredcircumstances, BBVA62 has had to takeon board major changes on both thedomestic and the international stages.

As noted above, the liberalisation and

deregulation of the Spanish market, thenewcongurationofthesingleEuropean Market, the process ofmonetary and economic union and thelaunch of the euro all affected thestructure and strategies of Spanish


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These positive conditions haveundoubtedly favoured a broader use ofretail banking services (households and

small and medium-sized companies),which is BBVAs speciality. They havealso allowed the bank to position itself

very well in a segment that promisesextraordinary potential, the mortgagebusiness. As yet this segment isunderdeveloped, despite having grownat an average annual rate of 8% since2004, supported by the populationgrowth, the increased security ofbanking systems and affordable monthlypayments made feasible by the relativeeconomic stability of the region.

Thanks to these and other argumentsbased on the prospects of growth, Latin

America has become a key market, onethat represents a great deal in terms ofinternational expansion for Spanishbanking which, from the outset, hastaken up the challenge of becoming aglobalnancialplayer,astheBBVAcase

amply demonstrates.

trade between Spain and LatinAmerica, scheduled to grow.

Strategic importance o the region interms of establishing alliances orworking agreements with European,US and even, as time has shown inBBVAs case, Chinese banks (see PartTwo, point 2.3).

Keeping an eye out or the investments

o leading Spanish companies, severalof which BBVA is a major shareholder.

Scant investor competition,particularly on the part of the US

banks, thereby making prices muchmore accessible.

For these and other reasons LatinAmerica was the natural target for theinternationalisation of the Spanishbanking industry. That said, although theabove list reads like sweetness and light,it should not be forgotten tha

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