Banco Latinoamericano de Comercio Exterior, S.A (NYSE:BLX) Q2 2019 Earnings Conference Call Transcript

Jul 19, 2019 • 11:00 am ET

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Banco Latinoamericano de Comercio Exterior, S.A (NYSE:BLX) Q2 2019 Earnings Conference Call Transcript

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Executive
Gabriel Tolchinsky

thereby inverting the US dollar yield curve. An inverted yield curve is usually a harbinger of an economic slowdown, which usually weakens the US dollar.

Nevertheless, further economic deceleration in Europe and China continued to make the US dollar attractive, reducing fund flows to emerging markets in general, and Latin America, in particular. With lower fund flows to Latin America, sagging investment in key countries has become a drag on the Region's economic growth.

Today, our growth estimates for the Brazilian economy, for example, are below 1%. These estimates are down from expectations of 2% in the first quarter and from above 2.5% at the end of 2018. Mexico is now expected to grow at 1.2%, down from estimates of 1.6% in the first quarter and close to 2% at the end of 2018. Argentina, the third largest economy in Latin America, is still in the midst of a recession that's exacerbated by restrictive fiscal guidelines under their IMF agreement and the impact of low growth from its neighbor, Brazil.

Overall, our adjustments to economic growth are driven by lower investment; the prospect of diminishing trade volumes; the weight of lower growth rates from developed markets, but also importantly by the uncertainty over the capacity of the current leadership in these countries to either survive politically, as in the case of Argentina, follow through with a free market agenda, as in the case of Mexico, or enact the necessary fiscal reforms in sufficient magnitude to reverse structural deficit, as in the case of Brazil.

The prospect of passage of the pension reform plan in Brazil have improved after it was approved by the first reading in the lower house. There was a second vote in the lower house of Congress before it moved to the Senate or there -- there's also two votes in that House of Congress. Nevertheless, the president's waning popularity may dilute the bill and therefore the magnitude of fiscal savings.

On the economic front as we mentioned in the previous call, we see the engines of growth for the Brazilian economy tied to internal demand and investment, not to export industries, primarily because prices for some key export soft commodities; such as sugar and soybeans are still depressed. Passage of fiscal reform is key to restoring confidence and growth for a pickup in both internal demand and in investment.

In Argentina, we are adjusting our exposure down as we get closer to the August primary and the October election. Although both candidates appear to be a 1,000 free market positions. The uncertainty of a popular backlash against fiscally restrictive policies from the IMF program and high levels of debt could sway the new administration to restructure an existing obligations, always a messy outcome.

We continue to believe that the macro-economic and regional context offers no room for complacency. Furthermore, the combination of low growth and risk conversion is exacerbating liquidity for the top names in the region, compressing their margins, not always compensating for the risk