JUST A FEW years ago, many investors might have sneered at the kind of grand business plans now being discussed in the boardrooms of central America: Panama as the Singapore of the Americas? A Nicaraguan trans-oceanic canal? Honduras as an international textiles hub? Scorn at such proposals is outdated, reckon those bullish about the region. "That’s the old mindset," says Costa Rican businessman Daniel Carillo, whose canned fruit export company has doubled its sales to the US over the past three years. "Central America isn’t about civil wars and poverty any more. It’s a rapidly integrating market of 40 million people," he adds.
Enter global banks HSBC and Citigroup. As central Americans grow more prosperous, open bank accounts, and look to save and seek credit, both banks want a piece of the central American boom-town action and are preparing to fight each other for supremacy. "We’re going to see a battle over the best assets in Latin America’s last big banking opportunity," says a US banker. "HSBC and Citigroup are realizing that central America won’t be virgin territory for much longer." Indeed, the conquest has already started. Bank mergers and acquisitions in central America have totalled more than $5 billion since May 2005, as international and regional players look to gain scale and stake a claim.
In July 2006 HSBC made the boldest move, paying $1.77 billion for Panama’s Grupo Banistmo, giving it a presence in five central American nations, as well as Colombia. Citigroup, which considers central America to be a "priority region", replied in October with its purchase of Grupo Financiero Uno, Latin America’s largest credit card issuer, with $2.1 billion in assets. Citi followed up with a $1.5 billion cash and stock deal for central American commercial and retail bank Grupo Cuscatlán in December, part of its new focus on fast-growing emerging markets. But that might have been the easy part for both foreign banks, as Cuscatlán, with $5.4 billion in assets, was the last big, independent financial group with a strong footprint in central America up for grabs. Although the market is ripe for consolidation, its fragmentation means that acquisitions will now be targeted at smaller, often family-held operations. Competition from these is likely to come from other international banks already present in Latin America, especially Mexico.
Working hard to grow
Still, central America’s promise as a nascent marketplace close to the US and the reality that there are no easy purchases in big markets such as Mexico or Brazil mean that HSBC and Citigroup are willing to work hard to grow. "Target acquisitions are absolutely what we want to do and these are perfect examples of what we have done [in 2006]," says Citigroup chairman and chief executive Chuck Prince. "We’ve done that with Grupo Uno, we’ve done that with Banco Cuscatlán," he adds. HSBC is equally keen. "This region presents one of the most exciting development and growth opportunities in the world," says Sandy Flockhart, HSBC’s president and group managing director of Latin American and the Caribbean. "Growing family incomes in many of these countries will create viable new customers for the banking system, increasing the demand for more competitive financial products and services," he adds. That is a point not lost on other niche players, such as fund manager Darby Overseas Investment, which is developing its portfolio in central America and is opening a new private equity fund of up to $45 million in financial services for the region.
What makes central America so attractive is its growing harmonization. With the Cafta free trade accord with the US, as well as Panama’s pending trade pact with the world’s biggest economy, come plans for a regional telecoms and energy market, shared infrastructure and the potential for integrated capital markets and freer flows of funds and workers between the seven countries. The central American electricity interconnection system (Siepac), for instance, should create a wholesale electricity market and regional grid from 2009 or 2010. Remittances from the 7 million central Americans living abroad, mostly in the US, generate almost $10 billion a year for the region and industries from shipping and tourism to the assembly of computer processors underpin impressive economic growth, in turn increasing banks’ assets and the lending possibilities.
High growth rates
Costa Rica’s economy grew 8% in 2006, almost double the previous year’s rate. The country’s GDP is expected to expand 5% this year and inflation is expected to be drastically reduced. Honduras, once heavily dependent on coffee exports but now a major clothing manufacturer and the beneficiary of investments from companies such as brewery SABMiller, saw its economy grow 6% last year. "We expect El Salvador’s GDP to grow by about 4% in 2006 and 4.4% in 2007," says Standard & Poor’s analyst Roberto Sifon, citing the country’s average economic growth rate of 2.2% between 2000 and 2005 as a comparison. Guatemala’s exports to the rest of central America are increasing at a 10% annual rate and in 2006 the country had its best economic performance in almost a decade.
"Central America is becoming a very dynamic market which we should all pay more attention to," says Fanny de Estrada, executive director at Guatemalan exporter Agexport. Even in lowly Nicaragua, the second-poorest Latin American nation after Haiti, the financial system reported a 12% rise in net profits for the first nine months of 2006, the latest figures available. The recent re-election of Nicaragua’s 1979-90 Marxist ruler, Daniel Ortega, a long-time ally of Cuban leader Fidel Castro, has failed to dampen the optimism as Ortega promises to respect the Cafta agreement and to follow through with plans to build an $18 billion canal to rival Panama’s $5 billion expansion of its own waterway and soak up the huge trade flows from Asia to Europe and the US.