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Announcer: You’re listening to the Scotiabank Market Points podcast – season 3. Market Points is part of the Knowledge Capital Series. Designed to provide you with timely insights from Scotiabank Global Banking and Markets’ leaders and experts. As Pacific Alliance economies emerge from the pandemic, the conversation has shifted. To things like rising inflation, corresponding interest rate increases, and the implications for the region and individual countries.This episode of Market Points is all about the growth of the Pacific Alliance economies. You’ll be hearing a conversation led by Stephen Meurice, the Director and Editor in Chief of the Scotiabank Perspectives Newsroom. He’s joined by Scotiabank’s Chief Economist, Jean-François Perrault, and Stephen Guthrie, Scotiabank’s Senior Vice President of International Corporate and Commercial Banking. They’ll discuss the reasons underpinning this inflationary period and a macro view of how policy makers and central bankers are responding. Also, how Scotiabank's global expertise, local knowledge and tailored products and services are positioned to support clients in Latam. Here’s Stephen Meurice….
Stephen Meurice (SM): Jean-François, Stephen, welcome to the show. Thanks for joining us today.
Jean-François Perrault: Thanks, Steve.
Stephen Guthrie: Thanks Stephen.
SM: Jean-François, I’ll start with you. Despite current forces affecting the Pacific Alliance countries, those countries being Mexico, Chile, Peru and Colombia, including the pandemic and some political uncertainty, these economies are still projected to grow. What sectors are driving that growth?
JFP: Well, it's really pretty broad based. Obviously, there’s a bit of the COVID-19 recovery, right. So as parts of the economy are closed and they reopen, you're getting the usual bounce back – by now usual bounce back in food and accommodation, some extent travel, but it’s a little bit broader than that. You've got economies that are still in some cases working their way through fair amount of stimulus. So, you’ve got households with a fair amount of liquidity. So, consuming, buying things. You’ve got governments that in some cases have launched infrastructure programs or other types of support programs, so public investment in some countries has been pretty strong. And you’ve got on top of that, which is arguably the most important driver if you think of the next couple of years, the pandemic has been associated with a pretty significant increase in commodity prices and that increase in commodity prices has kind of been amplified by the war in Ukraine. And of course, the Pacific Alliance countries in general are pretty important commodity producers. So, the rise in the value of their exports has been pretty beneficial. So, all those things put together, you know, really suggest that there’s a pretty diverse set of drivers that are sending those economies forward and those will probably continue in a fairly favorable way for the next couple of years.
SM: Stephen, let me turn to you. Many companies have needed to adapt to these changing circumstances and their financial needs have also changed. How has Scotiabank been able to help them through these challenging times?
SG: Well, there’s no question that our that our clients are having to react and adapt to changing financial needs. Not just because of the pandemic, but because the world just overall is a lot more competitive. So, in addition to the traditional lending activities, I’d like to talk a little bit about developments in cash management and also what I would call the digital journey from onboarding through to the credit process, and finally through to disbursement of the loan. Really, what Scotia is trying to do here is develop a single sign-on capability for our customers so they can act on a local basis, on a regional basis, and across the Americas in a consistent way with the Bank for their cash management as well as onboarding requirements.
SM: OK. Interesting. Jean-François, what does the inflationary picture look like right now for the Pacific Alliance countries? It’s obviously a big deal here in Canada. What does it look like there?
JFP: Well, it’s a big deal around the world. So, one thing to keep in mind when we talk about inflation in the Pacific Alliance is a lot of the drivers of inflation there are the same drivers that you know are affecting us. They’re affecting the Americans. They’re affecting the Europeans. And that is, to a very significant degree, the pandemic related surge in commodity prices, which on the one hand is good for their economies as we’ve discussed, but also represents an increase in the cost of doing business. So that is a feature of the inflation picture in the Pacific Alliance for sure.
In addition to that, and to some extent preceding that a little bit, in the Pacific Alliance there had been uncertainty in financial markets, and it led to an exchange rate depreciation. And of course, when exchange rates depreciate, it makes things more expensive. So, you’ve had effectively, in Latin America, a longer period of high inflation over the last 18 months than you’ve experienced in the more northern countries. And that is something that obviously policymakers have responded to in a pretty aggressive way. Just the nature of the challenge is a little bit more complex in the Pacific Alliance, given that some of this results from how investors have viewed the countries over the last 18 months. Rather than say how we’re dealing with it here, which is basically we’re taking input prices now that they’re much higher and that’s kind of leading to inflation dynamics here. So, a little bit of a tweak relative to how things are happening elsewhere in the world or in the more advanced countries. But by and large, they’re in the same boat that we all are.
SM: And likely to continue sort of along the same timeline as it is happening elsewhere?
JFP: Absolutely.
SM: OK. Stephen, how’s Scotiabank set up to offer solutions to help clients to weather this inflationary storm?
SG: Well, I think as Jean-François alluded to, the Central Banks in many of the emerging markets and in the markets in which we operate, acted ahead of the Fed and ahead of some of the more developed markets. Pretty aggressively raising short term rates. And in response to that, and also the inflation, long term rates have also spiked up across most of the markets in which we operate. And so that has led to a little bit less activity in the debt capital markets. But I would say that the activity of the loan markets and the traditional loan markets, either on a bilateral basis or the syndicated loan markets across Latin America, have continued to be very robust. And Scotiabank has been very active in both the syndicated loan market as well as lending on a on a direct bilateral basis. We continue to be top three in the syndicated loan market across the Pacific Alliance countries, and we continue to be top five in the dept capital markets in many countries both on a local basis as well as on the international debt capital markets.
SM: Right. JF, interest rates typically are higher in Latin America than they tend to be in in the northern part of the hemisphere. What other measures can be taken to cool inflation if it is an issue there? Do you foresee a recession in the Pacific Alliance countries?
JFP: Yeah, well as Steve has just indicated, the Pacific Alliance countries have been very aggressive in trying to control inflationary pressures. Now part of the aggressiveness earlier on was to try and effectively control the exchange rate a little bit. So, you control the exchange rate, you reduce the depreciation pressures on the exchange rate. You’re effectively helping control inflation. So, they’ve been very active on that front. Far ahead of the curve in terms of what the Bank of Canada or the Fed has done. But you know, it’s important to keep in mind, Central Banks are in the business of fighting inflation. You know, interest rates are the principal tool that can be used to control inflation. So, there isn’t a whole lot more these governments can do. They could, if they’d wanted, run a little bit tighter fiscal policy. So, pull a little bit of fiscal stimulus out of the system to cool economic growth a little bit further. It’s not clear if that’s going to help in the current situation because a lot of the inflation that they are dealing with, as well as other countries now that they’re basically kind of global in nature, right. It doesn’t really matter if you tighten fiscal policy, if what you’re dealing with is an oil price shock. It’s not like Chilean monetary policy or fiscal policy is going to affect oil prices. And that’s one of the challenges that they’re faced with. I mean, there are non-traditional ways of fighting inflation. They could lower tariffs, you know, make the cost of imports a little bit less expensive. But by and large, interest rates are mostly the game in town. In terms of the conventional tool set, there are occasionally countries that will use price controls. And we’ve seen some of that in some Pacific Alliance countries. Over history, we haven’t really seen that recently, which is a good thing. So, we’ve kind of learned from history in terms of managing inflation. But of course, the higher interest rates that are required to bring inflation down, do increase the risk of a recession. I mean the reality is when Central Banks are raising interest rates, they’re raising interest rates to slow economic activity and it’s very difficult to be super precise and raise just the right amount to make sure that the economy slows just the right amount to bring inflation down without encountering a recession. We’re confident that that’s going to be the case. At least that’s how we think about it now. That doesn’t mean that you’re going to avoid recessions. In Chile for instance, we do think growth next year, so 2023, is going to be pretty low. That’s not a function of inflation. That’s more a reflection of the fact that Chile had an extremely strong rebound out of the pandemic.
So, you got a bit of a normalization of economic activity coming out of that. But, that’s not the type of recession that, for instance, folks are talking about in the European context, or even a North American context. Which is Central Banks have tightened and that leads to a recession. We don’t really see that happening in the Pacific Alliance countries.
SM: So, it's a delicate balance that the Central Banks have to strike. But you do see them continuing to increase rates?
JFP: Absolutely. I mean the reality is inflation control is a challenge and the Pacific Alliance countries have been models, if you will, in terms of moving aggressively to control inflation and we think that’s going to be the case going forward. Inflation is still not under control down south as it is up north, further interest rate increases are required. And you know, we’re hopeful that as those rate increases are calibrated, that they’re done in just the right way to strike this felicitous balance between a return of inflation to better levels, along with the moderation of economic activity that doesn’t lead to a more a more worrisome recession.
SM: Right. So, my last question goes to you, Stephen. What’s the overall sentiment from Latam clients that you talked to around the economic future of their region or their countries?
SG: Well look, I think we have to differentiate between the short term and the long term. You know, I think that on a short-term basis, obviously there's some concern with respect to the issues that we’ve we spoken about: inflation, and the fear of wages also becoming inflationary. We haven’t seen that yet, but that might be next on the horizon. And so, they worry about their supply chain, they worry about interest rates, and they worry about liability management. But if you talk to clients across the region, on a long-term basis, they’re pretty bullish with respect to the long term prospects for the region. I mean this is a resource rich region, with a fairly young population that’s rapidly improving in terms of health standards and in terms of educational standards. Scotiabank continues to believe, as do most of our clients that I come in contact at least, continue to feel pretty bullish about the future for the region. And if I could just add one more thing that I think people are continually thinking about in the region, it's ESG.
SM: Yeah absolutely, go ahead.
SG: This is something that our clients are continually thinking about as they manage their business going forward. You know, how do I establish for my company, certain targets for reduction of CO2 emissions? How am I going to measure that? How am I going to build that into my capital structure in the way that I build my investments? And Scotiabank has been doing a lot of thinking about that as well and we've been delivering sustainability financing solutions to our clients at a much greater pace over the last, I would say, year and a half. And I can proudly say that we're now number one on the Latam Sustainability League Tables*. Having led a number of transactions, both on the loan side as well as the debt capital market side. So that’s something we’ll also be continuing to keep focus on as we go forward.
SM: Well, that’s great. And I think always nice to end on some bullish sentiment around the economy as well as the positive momentum on the ESG front. So, we will leave it there for today. Stephen, Jean-François, thank you so much for joining us.
SG: Thanks, Stephen.
JFP: Thank you.
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