Latin America Bank Retreat Raises Integration Need, Says IMF

Global banks’ withdrawal from Latin America since the global financial crisis could undermine domestic banking systems just as the region requires substantial funding to ignite economic growth, according to a report from the International Monetary Fund.

Brazil’s Banco Bradesco SA in July announced the $5.2 billion purchase of HSBC Holdings Plc’s local retail unit, raising concern in the local antitrust regulator of reduced competition. Citigroup Inc. is seeking buyers for its retail banking operations in Brazil, Argentina and Colombia, and Deutsche Bank is retreating from several nations in the region. Departing banks should be replaced by crossborder institutions to maintain competition and efficiency, according to the IMF report.

Latin America’s economy is heading toward a second straight year of recession, dragged down by Brazil, Argentina and Venezuela particularly as commodity prices remain near record lows. Consumption in Brazil, the region’s largest economy, is sputtering and the nation is seeking to offset the downturn with investment. As such the nation -- like the region as a whole -- needs major lending to fuel its turnaround, according to the report.

“The next phase of growth in Latin America is likely to involve projects with large financing needs, for instance for infrastructure, and it will be challenging to finance these solely through domestic markets,” the report said. “Countries’ domestic pension and insurance funds, which are generally subject to concentration limits, may provide an insufficient pool for financing on the required scale.”

Whereas Chile, Colombia, Mexico and Peru are actively engaged in an integration strategy, Brazil remains “somewhat separated” from other Latin American nations due to both geography and language, the IMF said. It recommends Brazil permit sales of Latin American bonds, reduce fragmentation of the public bond market by eliminating need for separate legislation for each issuance, and remove the requirement for institutional investors to invest abroad only through Brazilian asset management vehicles.

Latin America will contract 1 percent in 2016, according to the median estimate from economists surveyed by Bloomberg, following a 0.7 percent recession last year. Brazil will shrink 3.6 percent after a 3.8 percent plunge.

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