Top 5
Business leaders may be excused if they failed to ‘go global’ in recent years, or they appeared hesitant to increase their cross-border trade push. As economic optimism goes back and forth between developed and developing markets – including recently dampened enthusiasm for BRIC nations – it’s little wonder that some companies are less confident about international trade potential, particularly with emerging markets. With such uncertainty, it might be tempting to sequester your business within safe and familiar home markets.
While I understand business reticence about wading into new overseas risk, our experience as a Canadian-based international bank demonstrates that considerable success can be attained on the international stage. However, it takes a disciplined and very focused approach to chart the right cross-border course.
During a keynote address at Toronto’s National Club, Brian Porter, Scotiabank’s President and CEO, noted that, “Continued international growth is an important part of our strategy. In fact, many people don’t realise that, although we are a Canadian-headquartered bank, we have almost twice as many branches outside Canada as within, 50,000 of our 83,000 employees are located outside Canada, and about half of our earnings are generated internationally.”
While we see attractive growth opportunities across the bank, many of them relate to the Pacific Alliance, since we recognise that not all emerging markets are equal. With this mindset, we are focused on deploying our shareholder capital accordingly.
Success from precise focus
Our rationale for concentrating more of our international business within Latin America – specifically among the Pacific Alliance countries of Peru, Colombia, Mexico and Chile – is based on a careful, strategic review of the region. We encourage our own clients to perform this same kind of critical assessment of international markets in preparation for their own overseas ventures.
Taken together, the Pacific Alliance bloc forms the world’s sixth largest economy – when measured by purchasing power parity – and is the seventh largest exporter
Individually each of the Pacific Alliance countries has attractive economic fundamentals and growth prospects (see Fig. 1). Mexico has size, with a GDP of $1.2trn, exports of $371bn and a population of 112 million. Peru has a strong fiscal position. Its sovereign debt to GDP ratio is 16 percent, and its foreign exchange reserves have grown to $66bn. Peru and Colombia are also sizable markets with GDP of more than $200bn and $360bn respectively. Finally, Chile has a proven track record of economic growth and a $270bn dollar economy.
Taken together, the Pacific Alliance bloc forms the world’s sixth largest economy – when measured by purchasing power parity – and is the seventh largest exporter. Within Latin America, the Alliance has 208m people, and accounts for almost 40 per cent of GDP of the region, and 50 per cent of trade. Historically, some trade blocs and alliances in Latin America have taken a defensive and protectionist stance. By contrast, the strategic purpose of the Pacific Alliance is to fully leverage opportunities for increased global trade. Members of the Pacific Alliance are committed to high levels of trade liberalisation. They already have bilateral agreements with one another and they each have trade agreements with major partners such as the US, the EU, Canada and a number of Asian countries.
Many positive steps have reinforced the strength of this four-country alliance. The integration of their stock exchanges and the development of deeper capital markets and stronger central banks have resulted in a more efficient and effective economic system, which is translating into greater investor confidence. The members of the Pacific Alliance have also undergone important structural and legal reforms, which represent the general shift to a more open, free-market approach. These changes have transformed the Pacific Alliance into a very attractive place to do business.
In light of these factors, Scotiabank’s customers have an increasing commercial interest in the region, with many companies already active there, or contemplating how they can grow their business within the Pacific Alliance bloc. As a customer-centric organisation, we respond to the needs of our customers by building our network, expertise and capabilities within this high-potential market.
Focus on LatAm leaders
We have looked beyond broad investor enthusiasm for Latin America and are focusing our own strategy within those specific Pacific Alliance nations that stand above the crowd. For example, Alliance members have average GDP growth forecasts of 3.8 percent in 2014 and roughly the same in 2015. By contrast, GDP growth in Argentina, Brazil, Paraguay, Uruguay and Venezuela is expected to average just 1.5 percent this year and next.
To put a sharper point on this difference, Pacific Alliance countries are growing twice as fast as their neighbours. Even the Brazilian economy is forecasted to grow relatively modestly this year and next. As further evidence of this stability, Peru, Colombia, Mexico and Chile all have investment grade sovereign debt ratings. Brazil is the only other Latin American country with such a rating.
So our underlying message could be, ‘dig deep before you dive in,’ since not all markets are created equal, nor are all countries within a single region cut from the same cloth. While investor sentiment can shift quickly – sometimes causing them to treat emerging markets as a single asset class – it is important not to paint all countries with the same brush, whether the tone be bullish or bearish.
For Scotiabank, the economic, social, demographic and political facts have illuminated our path towards the Pacific Alliance nations. They may hold promise for other sectors too, since the factors that attract international banks like Scotiabank also create access to credit and other financial services that form the lifeblood of business and trade.
This snapshot of Scotiabank’s own international market strategy offers some useful insights for any organisation considering overseas expansion. First, regardless of solid, high promise numbers resonating from any market, it is critical to understand that investing in emerging markets is not without its risks. As a bank that has been immersed in overseas trade since 1832, we have learned that lesson first hand. We can say with certainty that any company doing business in an emerging economy should have a sound and comprehensive strategy for managing risk.
Upon review of Scotiabank’s own international playbook, there are a number of recommendations that are relevant to any company pondering a greater cross-border presence. They are:
- Develop a deep understanding of – and respect for – cultural and historical nuances in each country;
- Seek out trusted partners with local expertise and engage with the full range of stakeholders;
- Put in place a strong risk management framework and develop an understanding of the local judicial system;
- Ensure strong leadership by putting your best talent in place;
- Enforce the highest standards of business ethics and conduct;
- Make sure your control functions are effectively governed by mirroring corporate standards and regulatory requirements that are local and those that span across regions;
- Finally, don’t invest everything in one country – diversify your exposure.
Managing risk
The bottom line is that companies must ensure they are being adequately compensated for the incremental risk that comes with emerging markets exposure. At Scotiabank, our long history of operating internationally, together with our disciplined approach to risk management, has provided us with the confidence to continue investing beyond our home borders.
Speaking for our clients, including those who depend on the cross-border services of our Global Transaction Banking group, they would certainly emphasise the importance of seeking trusted partners with local expertise. That is how we deliver value to our customers, whether they are transacting within the Americas, Europe, Central or Southeast Asia.
Without a doubt, there is vast divergence in the economic prospects, monetary and fiscal policy, and social issues among the emerging markets. Each country is at a unique point in its economic development, political evolution and regulatory maturity. In light of this reality, success depends on realising that not all markets are equal, and it takes a critical eye, a carefully crafted strategy, and dedicated partners to reap the rewards of going global in uncertain times.
