Banking Reform Unlikely To Substantially Bolster Private Consumption In Short Term
BMI View : We believe Guatemala's recently passed banking reforms could help to strengthen the financial sector's weak regulatory framework, bolstering domestic and foreign confidence in the country's financial institutions. However, in the short term the impact on Guatemala's domestic demand story is likely to be modest at best given the still-limited access to banking services by the country's lower and middle income brackets.
After numerous delays, Guatemala's congress approved a long-awaited amendment to the country's 2002 banking law in late August. We believe this reform could serve as an important step in improving the financial sector's weak legal framework - a continued concern given the sector's highly concentrated nature and past history of crisis. That said, in order to substantially bolster Guatemala's weak private consumption in the near term - something we have long highlighted as an obstacle to stronger growth - we believe more needs to be done to ensure greater access to loans by the country's lower-and-middle income brackets.
Guatemala's banking sector has historically been fairly weak, with limited legislation governing offshore banking (representing just over one-tenth of the sector), an ineffectual regulator, and substantial red-tape deterring foreign banks from setting up shop in the country. Indeed, the lack of effective risk protections have previously seen two major banks forced to suspend operations over the last decade, with one struggling to support its faltering offshore arm after a series of risky investments, and the other faced with massive fraud perpetrated by one of its branches. Since then, with the banking sector having become significantly more concentrated (see chart below), we believe this situation has become even more precarious, as a crisis at one of the larger banks could have even greater ramifications for the entire sector.
|Sector Has Grown Far More Concentrated|
|Guatemala - Herfindahl-Hirschman Index|
The recent reform could help to comprehensively address some of these problems - improving the sector's risk management standards and increasing protections for depositors in case of banks declaring insolvency. Provisions include measures to bolster the central bank's ability to act as a lender of last resort, expand funding for the country's savings protection fund, tighten the regulations governing offshore entities and a requirement that banks submit to foreign audits. The reforms also make it simpler for foreign banks to enter the country, easing requirements that owners of banks must submit personal identification to operate in the country.
These reforms could encourage greater access to banking sector services over the long term. At present, lower and middle income Guatemalans have limited access to credit - priced out by the banking sector's tendency to issue floating rate mortgages for short periods of time. However, if these reforms are able to boost domestic confidence in the sector and encourage greater deposit growth, as well as increase competition within the sector from foreign banks entering the market, this may see banks willing to grant more favourable loan conditions. That said, this is likely to be a slow process. Moreover, we note that in coming years, a rapid expansion in deposits is likely to be stemmed by slow remittance growth on the back of a weak US economy. As such, while offering some long-term benefits, we believe these reforms are unlikely to dramatically improve the country's private consumer story in the near future.