Private initiative and financial inclusion - Latin America between two models

Private initiative and

financial inclusionLatin America between two models

Alvaro Uribe Velez

September 2012

Issues to be addressed

1. The current context of Emerging Markets and the

evolution of Latin America 1980-2012

2. Latin America between two policy paths

3. Lessons from the Colombian Experience

Confidence

Communitary State Policies

4. Private Initiative and Financial Inclusion: The region and

Colombia

1. The current context of

Emerging Markets and the

evolution of Latin America 1980-

2012

1. The current context of Emerging Markets and

the evolution of Latin America 1980-2012

1. Emerging economies have become engines of economic

growth.

2. During the last three decades developing countries have

experienced a profound transformation driven by two

components:

On the one hand a rapid demographic transition. Since 1980 the

World population has increased by 2.5 billion people and 95 percent

of that growth has taken place in the developing World.

The other element has been a dynamic period of sustainable

economic growth. In 1980 developing economies represented 33

percent of the World GDP and today that number is closed to 46

percent.



1. By 2050 19 of the top 30 economies by GDP will be countries that we

currently describe as ‘emerging’

2. China and India will be the largest and third-largest economies in the

world.

3. Eight countries – India, China, Brazil, Russia, Indonesia, Korea, Mexico and

Turkey – will be responsible for most of global growth up to 2025

4. Emerging economies will account for 68% of global growth by 2030.

5. In 1980, 5% of goods were sourced globally. By 2000, this was 20%. By

2025, it will be 50%.

6. In 1980, world exports accounted for one-sixth of global GDP. Today it is a

quarter. By 2030, it will have risen to a third.

7. By 2030 the urban middle class will rise to 42% of the global population.

The number of people with daily income of $10 to $100 a day will rise from

1.8 billion today to 4.9 billion by 2030.



According to FAO: Demand for food could increase 50% by 2030

Demand for water has been projected to rise by 30% between

2000 and 2030

The International Energy Agency has said energy needs will grow

by 40% by 2030.

According to BP China represents 20.3% of the World Energy Consumption (The

world largest energy consumer in 2010 for the first time over the U.S)

Natural Gas consumption has experience its strongest consumption rate since

1984 (7.4%)

Coal share in world energy consumption has reached its highest level since

1970 (29.6%). China represents 49% of the world coal consumption.

In 2010 Global Biofuel consumption grew by 13.4%

How does Latin America fit in this panorama? Between 1980 and

today some changes have occured…

1. The inflation tragedy is over: in 1985 regional inflation average

was 159%, today is below 6%. This means that fiscal and

monetary prudence have become policy principles.

2. Debt is no longer a threat: Debt to GDP ratios in the region

have passed from 40% in 2002 to 20.4% in 2009

3. Between 2003 and 2007 the region experienced a growth

average of 5%...the highest since 1967-1974

4. Democracy has expanded in the region with few exceptions…

5. Regional exports have increased 160% betwee 2002 and 2010

6. In 2008 the region faced a record number in FDI reaching almost 100 US$billion



1. The current context of Emerging Markets

and the evolution of Latin America 1980-2012

Population

Close to 600 million people

Average age between 24 and

28

Per Capita Income in PPP

close to US$10.000

Poverty reduction

64% of our population is a expanding middle class.

During the last decade 40 million people have left the poverty line

Life expectancy has increased from 65 to 75 years.

Child mortality has been reduced by 50 per cent.

Literacy rates are above 94%.

Mobile phone penetration has increased by 78 per cent.

Internet access has increased by 33%

Healthcare coverage has increased by 50 percent.

water and sanitation coverage has reached 80%.

Commodities in time of Demand

10 percent of the World oil reserves.

6 percent of the World Gas reserves

Almost 50 percent of the World cooper

reserves.

50 per cent of the World silver reserves.

13% of the World iron reserves

26% of the World fertile land.

24% of the World beef supply.

Bio Reserves

20 per cent of the World

Biodiversity is concentrated in the Amazon ring.

Almost 50% of the World

potable water supply.

57% of the world primary forest

Policy Changes match four range of

opportunities

The change process and the potential for the years ahead has happen by accident and it is a consequence of the

consistency, congruence and sense of urgency that a group of countries have adopted as their policy cornerstone.

Brazil, Mexico, Colombia, Chile, Peru and Uruguay represent 70 per cent of the region’s population and 75% of the

regional GDP.

This group of countries have common characteristics that explain their outstanding performance:

1. The strengthening of Liberal Democracy

2. The adoption of an institutional Framework in favor of foreign and national investment.

3. The construction of a sound and sustainable social safety net.

4. The expansion of export markets and the commercial integration with the World (FTA’s)

5. A public administration driven by results.

6. A sound Macroeconomic Administration driven by fiscal and monetary prudence.

7. Better regulatory environment

8. Construction of strategic infrastructure.

9. The consolidation of an innovation agenda leaded by an improvement in education.

10. A well capitalized financial sector and the constant expansion of financial services.

Today countries like Panama, Dominican Republic, Costa Rica, Salvador, Guatemala, Honduras, Belize, Paraguay, as

well as most of the Caribbean States, are following that line of behavior



Policies have been the root of Latin American Changes

Building Modern Democracies

(5 parameters)

Security

Freedoms and Private Initiative

Independent Institutions

Social Cohesion

People Participation

A dynamic Economic

transformation

Investment Target Policies

Maintaining Fiscal and Monetary transformation

Integrate commodity and knowledge based

economies.

Expand export markets

Create an Entrepreneurship culture

(Innovation agenda)

Closing Social Gaps

Improve education (quality, coverage,

vocational)

Insure Universal Healthcare

Formal Job creation

Access to Finance

Climate Change, Environment and

Energy Sustainability

Expand renewable sources

Install an energy efficiency conscience

Improve waste management

Protect the Amazon Ring

Reduce Co2 Emissions

1. The current context of Emerging Markets

and the evolution of Latin America 1980-2012

Despite the changes that have been achieved some important

challenges remain…

2. Latin America between

two policy paths


The regional current Political Map is a “Tale of two cities” like the Charles Dickens Book… (The ALBA and the non Alba Model)

ALBA (Leaders: Venezuela,

Ecuador, Bolivia, Nicaragua and Cuba)

Anti-U.S

Anti-Free Trade

Lack of investment Confidence

Weak institutions

Political Insecurity

Ideology driven countries

Political Polarization

Modern Democratic Center Countries (Brazil, Colombia, Peru, Chile, México, Uruguay, Paraguay, Panamá, Republic

Dominican, Costa Rica, etc)

Cooperation with the U.S

Pro Free Trade

Investment Confidence

Independent Institutions

Political Stability

State Long Term Policies and Mgt by Results

Organized Party Systems

The Democratic Center takes the lead: • Investment grade countries are in this Group: Mexico, Brazil, Chile, Colombia, Peru and Panama.• Countries with more market access through FTA’S are in this group• Countries with more FDI are in this group• Countries with more Middle Class Expansion are in this group.• Better fiscally sustainable social programs: Chile, Mexico, Brasil and Colombia.

Only the group of Countries in the Democratic Center will become the regional active

participants of the Emerging Markets Boom…some

of the ALBA Members will see some benefits, but without solid long term development agendas, they will face transitory profits…

Venezuela

Inflation

Reduction in oil production

Brain drain

Social conflict

Insecurity

Private initiative in Jeopardy

Bolivia

Loss of citizen support

Quality of live deterioration

Lack of private initiative.

Loss in private investment

Ecuador

Press Liberties in danger

Lack of long term private investment.

Political stability at the expense of higher

tensions.

Oil driven political power

Nicaragua

Institutional deterioration (Reelection without

constitutional authority)

Corruption

Private initiative: Uncertainty

Shameful Chavistas


Bad policies are deteriorating the political and economic context in

the ALBA Countries….

3. Private initiatiative and

social innovation: Lessons

from the Colombian

Experience

Security

28.837 homicides

2882 kidnappings

69 homicides per 100.000 habitants

1645 terrorist attacks

350 mayors out of their municipalities

158 municipalities without police

Economy

Average Economic Growth 1994-2001: 2.1%

GDP per Capita: US$2377

Investment as % of GDP: 16.5%

Exports: US$11.975 million

FDI: US$2.100 million

Inflation: 6.99%

Fiscal balance: -3.2%

Social

Unemployment: 16.2%

Health Coverage: 25 million Colombians.

Pension affiliates: 4.5 million

Poverty: 57%

Education Coverage: Primary 97%, High school: 57%, University: 24%.

Mobil Phone Lines: 4.6 million

Internet coverage: 1.9 million

Ten years ago Colombia was a fragile state…

The Colombian Paradox: a long and stable democracy in a

permanent threat from terrorist groups, drug dealers and

organized crime…

Colombia faced a Confidence Deficit

The elusive quest for peace

Many governments exhausted all their political

capital attempting to reach peace through political dialogue…the result was

military strengthening from illegal armed groups and a

rapid growth in their criminal activities (68% thought the

country was going in a negative track)

Terrorist Groups (Guerrillas and Paramilitaries) had

created a sense of defeat in the Colombian people.

Fear impacted in the Colombian people Mindset

The lack of investment

The drain of human capital

The sense of danger in Colombian roads.

The expansion of massive kidnappings created an emotional domino effect

Building Confidence became our

priority

We introduced a comprehensive

policy framework…

Social Cohesion

Investment with

fraternity

Democratic Security

Confidence

Security as a Democratic Value

Security for all

Confront all criminal

organizations

Security without

martial law

Security with freedoms and human rights

protection

Security in coordination

with the people

Investment Target

Security:

Human

Legal

Political

Sound Macroeconomics

Incentives

Access to

markets

Competitiveness factors:

•Infrastructure

•Regulation

•Connectivity

•Logistical chain

Social Cohesion

Highest quality in education

Universal healthcare

Access to Finance

Stable Jobs and

entrepreneurial spirit

Connectivity

Our policy achievements generated a

turning point

Indicator 2002 2010

Homicides 28838 15000

Kidnappings 2882 228

Homicides per

100K Habitants

69 30

Terrorist

attacks

1645 250

Municipalities

without

mayors

presence

350 0

Municipalities

without police

158 0

Indicator 2002 2010

Average

Economic

Growth

2.1% 4.3%

GDP per

Capita

2377 5300

Invest % GDP 16.5% 24.6%

Exports US$11.0

00

US$

39.000

FDI US$2.10

0

US$ 7.000

Inflation 6.9% 2.5%

Indicator 2002 2010

Unemploymen

t

16.2% 11.6%

Health

Coverage

25.1 million 43.1

million

Pension

affiliates

4.5 million 7.1 million

Poverty 57% 38%

Education

coverage (Primary, Hs, University)

97%

57%

24%

100%

79.4%

35.5%

Mobile phone

users

4.6 million

lines

41 million

lines

• Reached the highest economic growth in more than 20 years.

• The largest education, health and connectivity coverage in its history.

• The largest poverty reduction in Colombian history

• The biggest FDI rates in history

• The lowest violence records in 30 years

• Expanded the middle class

• Highest exports in Colombian

History.

• Paramilitary groups dismantled

• FARC structure severely

dismantled

• Per Capita income more than

doubled

4. Private Initiative and Financial

Inclusion: The region and

Colombia

The importance of the Regional Banking system

1. Mandatory Capital Requirements: 15.9% on average Vs 14.2% in Asia

and 13% in developed economies.

2. Moderate balance sheet leverage: 9.5 times Vs 16 times in developed

economies and 10 times in Asia

3. Low levels of delinquency rates: 3.5% average Vs 4.7% in Asia

4. Provisions 165% Vs 108% Asia and 52% Developed economies

5. Banking is a concentrated business in the region 12 Banks control 69% of

the business and 70% of the profits according to Banco Sanatander.

6. As middles class expands more people will access to finance. According

to the IDB in the next 7 years credit could expand from 1.1US$trillion to

2.2US$ trillion, while savings could expand from US$2.5 Trillion to 4US$ Trillion

Credit Cards Panorama

1. Credit Card penetration in linked to the expansion of Per Capita Income:

Regional average is close to 0.5 per capita.

1. Credit Cards represent 58% of the world non cash payments.

1. In Colombia between 2002 and 2010 credit cards jumped from 3.5 million to

almost 8 million.

1. E-Commerce is increasing in the region and credit cards are the more

important on line method of payment: (IDB Figures)

• Mobile subscribers in LAC 81.6 in 100 habitants

• Fixed subscribers in LAC 15.6 in 100 habitants

• Internet Subscribers are 4.2 per 100 habitants

• Broadband subscribers 3.4 per 100 habitants

• 9.0 personal computers per 100 habitants

2. The importance of Credit Card Penetration: a) Financial culture, b) Support

consumer habits , c) Incentives for complementary products, d) Trigger of e-

commerce.

1. Challenges: a) Cost, b) penetration in the bottom of the pyramid, c)

Complementary products, etc

Four elements to expand financial

services in the Region

The role of governments for financial services

expansion and private sector development

High investment levels

Inclusive and sustainable

social policies

Middle class expansion

Sound Macroeconomic

performance

Rule of Law

Financial services in Colombia 2002-2010

Policies and

initiatives

Micro-finance

expansion.

Bank of opportunities

Consumption credit

expansion

Credit Card Penetration

Bancarization

Portfolio Quality

Indicators 2002 2010

Delinquency rates 9.5% 4%

Coverage for bad loans 80% 125%

Solvency 13.8% 15.2%

Colombian Financial Sector Penetration 2002-2010:

Quantity and Quality

Financial inclusion, quality of life and consumption….

Sales 2002 2010

Motorcycles 73.000 470.000

Refrigerators 628.000 1.4 million

Cars 56.630 300.000

Computers 500.000 2 million

Bank of opportunities: Lessons learned

Partners

Non Financial intermediaries Banks NGO’s Cooperatives

Functional elements

Non Financial Intermediaries

Saving Accounts Account opening

red tape reduction.State of the art

information systems.Differential interest

ratesMobile Banking

Principles

Do not make sustainable unsustainable projects.

Sustainable interventions for long term sustainability.

Never distort markets

Why Bank of Opportunities

Correct market failures Social and private sector improvement.

Public-Private Alliance

Government provides the regulatory framework and pro market incentives to insure sustainable and profitable financial products

Private sector expand coverage, products and services to the non financially included population.

Issues for the future

The road

ahead

Financial education

Entrepreneurial education

Angel Investment framework

Venture Capital Funds

Local Capital markets

development

Guarantee Funds for SME Development.

Knowledge Economy and

Creative Industries

development

Final Thoughts

Financial inclusion and sustainable private sector development can only take place in

Countries with socially responsible capitalism… (Good Capitalism, Bad Capitalism Framework)

State Guided Capitalism

Government guides the market

Particular industries are supported

No sustainable structure for private investors.

Uncertainty for long term investment.

Discretional regulation

Oligarquic Capitalism

State is captured by a small group of individuals.

Monopoly and oligopoly

Few families and corporations control strategic sectors.

Weak competition

Corruption

Big Firm Capitalism

Multinationals and large local corporations control the

economy.

Lack of emerging new corporations

Weak entrepreneurial spirit

Non dynamic innovation

Tailor made regulation

Entrepreneurial Capitalism

Easy to start a business

Business registration

Bankruptcy protection

Access to finance

Rule of law, property and contract rights.

Transparent taxation

Rewarding new ideas

Competition

Research and Development

Investor friendly legislation

www.alvarouribevelez.com

Private initiative and financial inclusion - Latin America between two models

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