Chile and Peru Comparison (Part II)
Bill (portaro@erols.com)
Mon, 14 Dec 1998 11:49:49 -0500
and several foreign banks with smaller corporate finance operations.
Presently five banks in Chile hold 60 percent of the system's deposits
which is up from 49 percent in 1995. In Peru the figure is even higher
with the top four banks accounting for nearly 70 percent of deposits and
assets in 1996. As perhaps expected, Chilean HHI ratios have been
slowly increasing over the past several years, growing from .84 in March
1995 to .93 in March 1998. In Peru while the concentration ratio is
likely lower than in the early 1980s (most recent figure obtainable is
.12 for 1994), it is almost certain that the ratio will rise. (See
Table 1 for more years).
The reason behind this increasing consolidation unleashed by the
financial reforms can probably be explained rather simply. In both
countries the growing capital markets, though still underdeveloped, have
begun to compete with the banks for financing private sector expansion.
Furthermore, the fact Peru is still woefully under banked with only 10
percent of the population holding a bank account or using bank services,
provides an indication of growth potential. In Chile, the story is one
of a saturated market that has pushed traditional corporate banks into
the retail sector and vice versa. In both cases, however, the
philosophy seems to be the same, the best way to increase business is to
get bigger, and the easiest way to do that is to merge with an existing
institution (see Table 4 for consolidation trends). The result has been
a fierce competition for new customers which have sent margins
tumbling. Reinforcing this trend is the global deregulation of the
financial services industry. In both countries commercial banks are
increasingly being permitted to expand into new lines of business. As
in many countries around the world, Peru and Chile are seeing the lines
that previously divided insurance companies, commercial banks, and
securities firms become increasingly blurred. The expansion of banks
into other financial services allow them to expand their revenues, and
to exploit gaps in the regulatory framework which simply cannot keep up
with the changes brought about by deregulation. For example, insurance
services are generally viewed as providing a ceratin "social good" and
usually receive tax breaks because of this. Therefore, a commercial
bank has a strong motivation to repackage a "bank product" as an
"insurance product" in order to reduce its tax exposure.
The greater efficiency, improved regulatory practices, and even the
trend toward consolidation have increased the sophistication of the
financial system in both countries. In examining Chile's financial
depth as measured by M2/GDP, there is a clear upward trend. In 1970
this ratio was .12, while in 1987 it rose to .34 and in 1997 reached
.43. Peru's development has been more erratic, though since 1990, the
financial depth has increased sharply, rising from .09 to .25 in 1997
(see Table 1 for more years). These improvements are buttressed by an
upward trend in the use of contract intensive money (CIM) which Lewis
Snider has convincingly argued is a good measurement of institutional
credibility (e.g., a high degree of public confidence in the security of
property rights, and contract enforcement). In Chile, this figure has
been above .90 since the mid-1980s, while in Peru, after falling to .70
in 1987 (the year of the attempted bank nationalization), it has risen
to .91 in 1997.
For all of the deserved praise these banking systems have received over
the past several years, however, there are still some areas which could
be cause for concern. In August 1998, The Banker ranked the Top 100
Latin Banks by "Strength" (using Tier One Capital as the measured
variable). Chile placed four banks in the top 25, more than any other
country save Brazil and Argentina. However, when ranked by "Soundness,"
as measured by their Capital Assets Ratio, only one bank even made the
top 60. Peru, with only four banks on the list did not place any banks
in the top 50 when measured by "Soundness." Another possible concern
for Chile is the political nature of the post of Banking Supervisor.
The post, an appointed position which reports directly to the President,
just changed hands with the old Supervisor now serving as Minister of
Defense. It would seem that in the present tumultuous financial
picture, it would be important to maintain continuity in a regulatory
system that has been so lauded.
Finally, although both countries have taken steps to prevent banks from
becoming the financial heart of conglomerates, especially in Chile, a
cursory review of current bank ownership perhaps raises some flags.
Table 3 provides an overview of the ownership profile of some of the
major banks in Chile and Peru. Nearly all have stakes held by one or
more conglomerates. It is difficult to say with a high degree of
confidence whether the regulations that are in place actually provide
for "cleaner" and better performing banks, or if the right (or wrong)
mix of factors just has not yet materialized to exploit the system's
weakness. Some of the data is briefly summarized below.
Some of Chile's largest banks, including Banco Santiago , Banco de
Credito e Inversiones (BCI) , and Banco Sud Americano have significant
stakes owned by many of the country's most profitable conglomerates,
such as the Luksic group, the Yarur family, and the B&G group. In many
cases, however, there seems to be a "policing" factor. For example, the
Central Bank owns 35.4% of Banco Santiago as a result of the 1985
bailout, though by law this is a non-voting stake. Canada's Scotia
Bank 27.84% of the shares of Banco Sud Americano, perhaps resulting in
more traditional banking practices. It seems that the only bank with a
diluted ownership structure is Banco de Chile , the country's fourth
largest bank. The bank's principal shareholder, Penta Group, has only
5.7% stake in the bank, while the next 15 largest shareholders own a
combined 27.5% of the bank. It should be pointed out, however, that
among its other holdings, the Penta Group has a 47.35% stake in one of
Chile's 11 pension fund administrators. While recent ownership
statistics are not as widely available for Peru, a somewhat similar
picture develops when reviewing a few of the country's largest banks.
Grupo Brescia, one of Peru's largest conglomerates formed a 50-50 joint
venture with Spain's Banco Bilbao Vizcaya to purchase 68.57% of Banco
Continental. Banco Wiese, and Banco de Credito, probably the two
largest banks in Peru each have significant stakes held by one family
grupo.
It is hard to know exactly what to make of this ownership snapshot. It
seems that in many of the examples cited there is a "policing factor"
(e.g., Central Bank stake in Banco Santiago, or Scotia Bank's stake in
Banco Sud Americano). Concentrated ownership of financial institutions
in the hands of diversified conglomerates does not in and of itself
result in opaqueness or counter- productive business practices because
there can be "fire walls" built between ownership and management
control. It does, though, create an environment in which unsound
business practices can emerge, or reemerge as the case may be. As
discussed earlier there are two trends which are shaping the financial
sectors in both Peru and Chile. The first, toward consolidation will
witness an increasing number of mega-banks, ala Banco Santiago and Banco
Santander Chile. The second is the deregulation which allows commercial
banks to expand into new lines of business. Over the past several years
Chile and Peru's financial regulators have received high marks for
their ability to keep the system in check, current trends will
undoubtedly test them.
WHAT NEXT?
As for many developing countries, 1998 has been an especially difficult
year for both Peru and Chile. The Asian recession has meant that a
chief market for the countries' exports has dried up, while imports from
that region are increasing. Chile has further been hurt by rock-bottom
copper prices, which still account for some 40 percent of export
earnings, while Peru is still suffering from the effects of El Niño on
some of its key export sectors. For example, its fish catch plunged by
88 percent between February 1997 and February 1998, sending export
earnings in this sector tumbling by 75 percent. These factors have
been strong contributors to the rapid rise in the current account
deficit which will likely reach more than 7 percent of GDP in both
countries.
While Chile used to be concerned with an appreciating peso, it is now
taking several steps to strengthen it, including maintaining high
interest rates, which some in the business community have labeled as
"suicidal," as well as eliminating one of its much ballyhooed capital
controls (the encaje). Private sector forecasts of GDP growth in the
two countries have been almost continuously revised downwards for 1998,
with some calling for close to zero growth for Chile in 1999. It is
likely that the robust economic growth of the past dozen years has
spoiled Chileans of all classes, but especially the poor. Buoyed by a
relatively strong peso, the population has been able to reach increasing
levels of material well-being. In fact, the absolute number of Chilean
households which live in poverty fell from 45.1% in 1987 to 23.2% in
1996. Anything which causes these trends to reverse may very well make
life difficult for the Concertación. Further, the much heralded private
pension funds (AFPs) which have done much to help achieve such a high
savings rate, and have been held up as a model for developing and
industrial countries alike, are also reporting losses as Chile's stock
market continues to decline.
In Peru, weak growth rates exacerbate a situation in which as many as
two-thirds of Peruvian workers are either unemployed or underemployed.
Perhaps just as disheartening is that even swallowing IMF medicine has
not always produced positive results. As one official in the economy
ministry lamented in trying to understand the 1996 downturn, "Our role
has been reduced to sending a monthly spreadsheet to Washington. All we
do is follow IMF directives." A former World Bank official is even
more pessimistic, "There is a good economy for 5 percent of Peruvians,
so-so for 20 percent and a disaster for everyone else." It is
generally acknowledged that Peru's dynamic GDP growth over the last
several years is largely as a result of the collapse of the economy in
the late 1980s. In other words it is mostly "catch up" from a low base,
making any slowdown more painful.
With Chile holding presidential elections next year, and Peru in 2000,
economic performance and future direction of policies should be featured
prominently. The leading candidate, within the Concertación comes from
the more left leaning Partido por la Democratica (PPD), and although he
has indicated he would generally stick to the liberal economic model,
some of the Christian Democrats (the Concertación's largest party) do
not seem convinced. While it is presently unclear whether some
Christian Democrats would risk breaking the alliance to push their own
candidate, the conservative wing has made its preference known for
another CDP candidate to run. While it is still unclear who the
candidates will be in Peru (Fujimori has not yet announced his
candidacy, but is expected to do so), the tough year has already
prompted a sharp slowdown in the country's privatization program, a
cornerstone of its reform. A continued lull in growth could result in
more curbs to its liberal model as well.
CONCLUSIONS & THEORETICAL IMPLICATIONS
By tracing some of the methods used to implement neoliberal reforms as
well as their impacts, this paper has sought to show that there appear
to be more similarities in the experiences of Chile and Peru than one
might expect. In both countries the reforms were implemented under
highly centralized executives, neither of whom was afraid to use extra
legal means to achieve their goals. Could Fujimori be the "tough guy"
who did the "dirty work" necessary to save Peru from terrorism, and
place it on the path to economic development? This is often how
Pinochet is remembered. Fujimori's affinity for strong personalized
rule has led many to call him "Chinochet," a variation on his nickname,
"El Chino." It is also interesting to consider this in the larger
Latin American context. Minus the element of subversion, Argentina and
Mexico also undertook neoliberal reforms under the leadership of strong
executives (Salinas, and Menem) who exploited or co-opted weak
opposition parties and labor unions. Brazil, on the other hand, has had
a much more difficult time largely because of strong political
opposition, especially by labor-based organizations.
One key difference between the two countries is, of course, Chile's
successful, albeit nascent, transition to democratic rule. Although,
democratically elected, Fujimori could hardly be considered as an
institution builder. In fact, over the last few years, several rating
agencies have expressed concerns about the concentration in the hands of
the President because it is unknown what would happen in the even of a
transition, democratic or otherwise. The nature of the Peruvian system
gives credence to Mahon's belief that international capital flows, from
which Peru has clearly benefitted in an economic sense, often has a very
limited influence on strengthening democracy. A related difference
that may become more important in the future is the manner in which both
governments handle relations with the private sector, and especially the
grupos. Under the first dozen years of the Pinochet regime, as well as
pre-Fujimori administrations, the grupos relied on informal, high level
access to government policy makers. Unlike the post-1985 Pinochet years
(and continuing through today), during which a more regular dialogue
with the private sector broadly has continued to take place, in Peru
this formal relationship does not appear to be as institutionalized.
Instead, the decision making structure is highly centralized. Although
the business community has generally supported Fujimori policies,
including the autogolpe, and private interests have been represented by
the placements of top businessmen to cabinet posts, the apparent absence
of more a more formal dialogue could prove to be problematic should a
president less to the liking of the private sector assume power.
When examining the financial sector, one also finds many similarities.
Using Zysman's construct, both banking systems went through periods
during which they had been primarily directed by the state along the
lines of the French model. More recently, however, the model has
shifted to more along the lines of the German system with a small number
of large banks dominating the sector. It should be reemphasized that
the increase in consolidation, the expansion into other financial
services, and the still prominent stake that grupos have maintained in
many of these banks will test the regulatory systems in the coming
years. At the same time, however, there has been a dramatic increase in
the size of the stock market, although from a small base. The next
several years will determine whether the system becomes more like the
Anglo-Saxon model in which there are many competitive banks and a "deep"
stock market, or if a more open and competitive banking system in the
short-term fosters increased consolidation in the sector, coupled with a
"thin" stock market. In the short and even medium term it is likely
that while the stock market will continue to grow in importance, the
main provider of capital in the country will be a more concentrated
commercial banking sector.
Lastly, both countries have been negatively affected by the recent
global turmoil, but as of yet have not been at risk of collapsing like
Thailand, Indonesia, or even Brazil. The economic performance over the
next year or so will have important implications for upcoming
presidential elections which will subsequently determine how the country
responds to globalization pressures in the 21st century. On December 6,
1998, Hugo Chavez, a populist who campaigned on such issues as declaring
a moratorium on the country's foreign debt, as well as promoting more
protectionist economic policies, won Venezuela's election in a
landslide. Chavez, whose victory clearly reflects the voice of the
discontent of that country's poorest, should at a minimum serve as a
warning to Chile, and especially Peru, that a crucial need exists to
balance market-oriented reforms with the concerns of those who feel
increasingly disenfranchised with the current system.
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End Notes