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AmericasOctober 1 2006

Bulls in the high country

Jane Monahan in La Paz explores the paradox of radical Evo Morales boosting the county’s banking sector.If it was just officials in the 10-month old Bolivian government of President Evo Morales who expressed optimism about the landlocked country’s prospects, it might not be so convincing.
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But central and private bankers, businessmen, academics and (some) foreign investors are also confident about the future of South America’s poorest country and its possible industrial take-off.

There are two reasons behind this optimism. One is that, after years of disturbances, and weak and often corrupt governments, the country is stable politically and socially. This stems principally from Mr Morales winning an outstanding 54% of the vote in general elections last December. But it is also, apparently paradoxically, due to his government’s decision to nationalise Bolivia’s lucrative oil and natural gas industry on May 1, in accordance with Mr Morales’ electoral pledges and the results of a 2004 referendum, to increase the state’s share of revenues, to reduce poverty and inequality and improve governance.

Foreign energy companies with significant investments in the industry, notably Brazil’s Petrobras and Spain’s Repsol, were dismayed by the measure. They are unlikely to invest more in the sector unless acceptable arrangements can be reached on key issues, like export pricing and payment for assets being nationalised. However, independent surveys conducted after the nationalisation showed that 80%-85% of Bolivians supported the move.

Gianfranco Ferrari, CEO of Peruvian-owned Banco de Crédito de Bolivia, the only foreign-owned commercial bank left in the country, which was the leading bank in terms of profits at May 2006, says: “From a social point of view, Bolivia is very calm now. There are no more road blocks, barricades or mass protests, which were frequent in the last five to six years. I am very positive about what is going to happen in Bolivia.”

The second reason for generalised confidence in Bolivia’s future is that, after a long recession starting in 1999, the country’s economy and the banking sector have turned a corner. In 2005, the economy grew 4%, its best performance since 1999, reflecting largely big mineral and oil and natural gas exports, and high international prices for these commodities. At the same time, the budget deficit was down to just 1.6% of gross domestic product (GDP). And in May 2006, international reserves had climbed to $2.5bn, “which is unparalleled in the history of the central bank of Bolivia,” says Raúl Garron, Bolivia’s central bank president, sitting with the lofty views of tiny houses scaling the side of a mighty canyon, jagged Andes mountains and an azure sky, as the backdrop in his 25th floor office in Latin America’s highest capital, La Paz.

Stability grows

Further providing stability to the system, commercial banks’ liquid reserves in December 2005 amounted to $1.1bn (covering 43% of total bank deposits). And Mr Garron says he expects inflation at end-2006 to be just 4.5%.

Foreign investment, which fell 26% in 2005 to its lowest level since 2000, has picked up again. An agreement has been reached for Franklin Mining, a US company, to invest in a gas-to-liquids (GTL) plant, for instance, and in mid-August the government approved a massive $2.3bn, five-year investment by India’s Jindhal Steel and Power, to develop the world’s largest iron ore reserves at Mutun, next to the border with Brazil.

“I’m very optimistic. I’m bullish about Bolivia,” says Mr Garron, a former World Bank banking expert. “And in view of the economic indicators, I think the country is on the brink of a new phase, which will probably signify the reactivation of traditional industries and services, that have been stagnant for a long time, such as textiles, food, canning, construction and housing; the start of new, value-added industries in the mining and hydrocarbons sectors, such as iron, steel, electricity, plastics, fertilisers and GTL; and infrastructure development, which is badly needed and creates jobs.”

Bolivia’s minister of planning and development, Carlos Villegas, confirmed these goals mid-year, announcing a 2006-2010 government plan for “a process of eradicating poverty and exclusion in Bolivia, especially among the majority, consisting of farming communities and indigenous groups”.

“I hope the private banking sector will play an active role participating and helping to finance this plan,” says Mr Garron, adding that to encourage investment in some of the sectors, “incentives would have to be put in place”.

Tomás Barrios, CEO of Banco Bisa, Bolivia’s leading bank in trade finance and the second biggest by assets, says: “President Morales has given us assurances that his government will not take measures that will distort the market, like interest rate controls.” The new government has not introduced price controls, exchange rate controls or controls over capital flows either.

Loan reduction

Meanwhile, small and medium-sized enterprises (SMEs) in Bolivia have the best record of repaying loans while large companies have the worst record. Not surprisingly, bankers have sought to reduce their loan portfolio with big companies. Corporate loans amounted to 74% – $1.7bn – of the total $2.3bn commercial bank loans in 2005, but that was 83% lower than lending in that segment in 2004.

Mr Barrios says: “In the late 1990s, during an economic boom, companies took on too much debt and the banks made the mistake of being too confident and continued lending.

“So at Bisa we decided to diversify. We moved away from corporate loans and we are working much more with small and medium-scale companies as well as in consumer banking, especially mortgages, and also in treasury. Because of our interest in trade finance, we are also the only private bank that holds deposits in euros, in addition to US dollars.”

While Banco Bisa (which also belongs to the country’s biggest financial conglomerate) had a 17% non-performing loan (NPL) ratio in 2005 and set aside $7m of its total $9m after-tax profits in provisions, to achieve a 90% NPL coverage, Banco de Crédito could invest all of its profits in growth in 2005 because its provisions already represented 136% of past-due loans.

The difference, says Mr Ferrari, is: “We took the approach of collecting [on our debts] and not refinancing for the sake of it, in the late 1990s. This made us unpopular with the community. But at the end of April 2006, our NPL ratio was just 5% compared with an average of 12% in the sector. And we are now marketing loans aggressively.” Banco de Crédito is also a leader in the mortgages segment of the loan market, which has been growing fastest since late 2004; and its income from fees and services is also higher than that of other Bolivian banks.

Robust enough

Reflecting how robust they are, Banco de Crédito, Banco Mercantil (Bolivia’s biggest bank) and Banco Santa Cruz complied immediately with new credit risk provisions introduced by the Superintendency in 2005, rather than using the three-year allowance granted.

The Superintendency also raised banks’ reserve requirements on dollar deposits in 2004 and 2005, which helped to increase the coverage of these deposits and encouraged de-dollarisation. Combined with various other measures, these requirements helped to reduce the percentage of dollar deposits from almost 90% of all deposits in the system at December 2004 to 80% a year later. And, providing more stability, a law on a deposit insurance scheme is also due to be submitted soon to Congress.

Nevertheless, banks have not fully internalised the risks of lending in dollars to non-dollar earners: almost 92% of all bank lending was still in dollars at December 2005.

Higher provisions and reserve requirements have squeezed bank profits, but at least a majority of banks reported profits in 2005 after several years of many reporting losses; and this positive tendency continued in the first quarter of 2006. At end-March 2006, the commercial banks’ average annual return-on-earnings and return-on-assets ratios were 8.8% and 0.98% respectively.

Turning point

“The performance of the banks in 2005 could represent a turning point in the negative tendency of the last five years, both in the level of operations and in the generation of profits,” the Superintendency’s latest annual report stated. “It’s also important to emphasise that the general elections in December did not upset the operations of the banking system, unlike previous electoral processes (eg: in 2002 and 2004).”

Nor was there a run on deposits at the time of Bolivia’s May 1 nationalisation. On the contrary, after contracting by $1bn between 1999 and 2004, commercial bank deposits grew 8.5% to a total of $2.7bn in 2005 and continued to increase in 2006.

A chief reason for this stability is, ironically, that the banking system reflects the country’s profound social inequality. Almost 60% of deposits are held by just over 1% of savers, according to the Superintendency, and those crucial few are maintaining their faith in the system rather than pulling the plug on it.

There is also a high concentration of ownership in the private banking sector. In December 2005, Bolivia had only eight commercial banks. This small number, moreover, declined in 2006 to just seven, following Banco Mercantil’s acquisition of Spain’s Santander-owned Banco Santa Cruz, completed in June.

As a result, Banco Mercantil, Bolivia’s second most profitable bank, has become the biggest bank in loans, deposits, ATMs, branches, customers and personnel – “and by a long chalk”, says Mercantil CEO Carlos Salues. “We thought it would take 10 years to become the size we have become now,” he says, adding that the merger is the first in Bolivia in years and the two banks have many synergies.

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