Building institutiostrength
‘Werking’ is a very modern mixture of working space and café, taking up a large expanse of the ground floor of Asunción’s Paseo La Galeria towers complex – the Paraguayan capital’s emerging financial centre.
Wooden tables are scattered throughout the open design, there are meeting spaces that companies can hire, and a larger configuration is possible for events (such as lectures given by Koga, a Paraguayan business-orientated version of TED talks).
One of the aims of Werking is to help entrepreneurs and startups meet with other like-minded businesses.
Use of the space is free – just the automated registration of biometrics is required – and it’s busy as Euromoney meets William Kent, director of Credicentro, the company that last year created the Werking concept.
We order lunch – naturally by swiping and jabbing at one of the large interactive screens that act as cashier. As we head to our meeting space we pass other screens, the functions of which are closer to the main business of the company that has been operating as a “casa de crédito” in Paraguay since 1984.
Once registered, users can apply for loans here – typically small amounts over a maximum of a couple of months – they can receive the cash from these loans from these machines, and use them to pay instalments and get cash advances on cheques. It’s the full credit lending business, just re-imagined for the 2020s with glass and wood, plants and coffee.
Kent says Credicentro is planning to franchise out the Werking concept (the company also intends to convert part of its existing three ‘branches’ into Werking operations), and it has its credit-extending machines in 23 casas de cambios and six at its own branches.
It plans to roll out around 600 more self-service points in petrol stations, supermarkets and pharmacies around the country within the next three years. These physical points of sale will combine with the online strategy of Credicorp to reduce costs – the physical sales force has already been reduced to 13 from 500 just a few years ago – and Kent says the move to technology-based approvals and disbursements has also improved security.
Bankerization
The casa de crédito sector has always played an important role in a Paraguayan economy with a low level of bankerization. According to data from Credicentro, of the 4.5 million adults of economically active age, only 1.6 million have bank accounts, with just 41% having an official payroll within the formal sector.
The rest don’t have a salary, and when seeking credit either use either a casa de crédito or other unofficial sources.
Now the casa de crédito business is undergoing rapid changes – and not just the stylistic approach brought to the market by Credicentro – the central bank has, arguably belatedly, decided to begin supervision of the sector, previously a completely unregulated area of activity in Paraguay.
Kent says Credicentro saw this as an opportunity: the inevitable consolidation as companies sold up in the face of increased compliance costs and behavioural scrutiny – or simply ceased operations – has led Credicentro to conduct three acquisitions in recent years.
José Cantero Sienra, governor of the Central Bank of Paraguay since September 2018, notes that the move to regulate the casa de crédito sector, which starts with requirements for these companies to register with the central bank before it issues proposed regulations for the sector, expected in June, has “already resulted in increased prudence”.
Cantero says the move to regulate this sector – though small, at around 1% of total lending – is part of the country’s push to improve its institutional strength.
“The biggest challenge we have is to improve our institutions, to be more transparent, and we are on this track,” says Cantero. “When we talk with the credit rating institutions, they always say that Paraguay needs to further adopt institutional reforms, and there is a big commitment to do that.”
Sovereign rating
Fitch was the latest ratings agency to increase the sovereign rating. In December 2019 the agency assigned a BB+ rating – just one notch below investment grade and in line with Moody’s (S&P remain two notches below).
“Paraguay’s structural features are weak compared to peers,” it said. “However, its governance indicators have improved over the last three years, especially in the areas of government effectiveness, voice and accountability and regulatory quality.”
One of the key reforms referenced by Fitch was the raft of anti-money laundering (AML) laws passed by Congress in 2019. This year there has already been legislation to bring limits and transparency into the funding of political parties and there are proposals to address the independence of the country’s judiciary, as well as reforms aimed at improving the transparency and efficiency of the country’s public sector.
Cantero is keen that the central bank plays its part in this push for institutional strength and transparency. As well as extending its supervision into the casa de crédito sector, the central bank is also proposing to regulate other areas that are (surprisingly) still completely unregulated, such as the pensions industry.
It is also implementing a 2016 banking law that brings in Basel II standards.
“With the support of the IMF we are in the process of introducing a system of risk-based supervision,” Cantero says. “We are also doing the same with superintendency of insurance.
“I think we are at a turning point in our history,” says Cantero, who adds that the country is still weighed down by an all-too-common negative perception among international investors. “Our narrative has been that we have always been a very stable economy – a cheap economy – but in the coming months and years that narrative will start to be complemented by these institutional reforms. That will completely change how we see ourselves – and hopefully how other countries see Paraguay.”
Cantero admits that all these new regulations and extensions of supervisory responsibilities are demanding: “We have a lot of projects – for example, we are also working to make the country’s payment system 24 hours, seven days a week so that the market will have a much broader and more efficient system. We are also in the process of broadening the legislative capacity [following the multiple AML laws], and that will be the main challenge for the central bank and the country this year – but I think we are prepared.”
Day jobs
Meanwhile, Cantero also needs to keep the central bank’s staff on their day jobs. Inflation is within its target range of 4% plus or minus 2 percentage points, and closed 2019 towards the lower bound, at 2.8%, due to the economic slowdown. The currency has been moving in line with emerging markets and Latin American currencies, weakening against the dollar.
Cantero disputes some views in the country that the bank tends to track the Brazilian real to disincentivize smuggling (which becomes more lucrative if the guarani strengthens against the real).
“The only target is the inflation target [which was legislated in 2011],” says Cantero. “We don’t have any forex target. Obviously we need to take into consideration what is going on in the region, and if there is a tendency we have to go with that tendency, but we are not going to intervene with an objective of a foreign exchange price.”
Cantero says the central bank’s limited net intervention in the exchange markets, at just $130 million, is proof that the bank isn’t managing valuations but acting strategically: “The [guarani] forex market is quite narrow. Any type of excess demand or supply has a very strong impact on the markets and [at those times] we need to have some presence.”
He also rejects suggestions from certain sectors of Paraguay’s private sector that the country’s banking sector is too uncompetitive – that it generates 20%-plus return on equities (ROE) without needing to take risk, either by extending credit or working to bring new segments of the population into the system.
“The main ingredient in [banks’ ROE results] is efficiency – through the use of technology – which allows us to think that profitability is in line with sustainability,” he says. “There is also a high level of competition.”
But does he think the incumbent banks will reach out to the unbanked sector or will that come through fintechs?
“Fintech is something that is new to Paraguay and we still don’t know how it will evolve,” replies Cantero. “We don’t know what growth velocity it will have in the future. Up until now most of the bankerization of the country has been through the banking sector. There has been a huge transformation in bankerization in the past 10 years and most banks are in all the states and districts of the country. And now with the implementation of mobile phone technology, their coverage is even greater.”
Cantero says that the bank’s measurement of the level of indebtedness in the private sector is “low and sustainable”, which is backed up by the reported level of the country’s banks’ loan portfolios – both the total size and the non-performing loans.
A constant critique of the country’s banking sector from the rating agencies is the high level of dollarization, but with this point Cantero is less in agreement than when discussing the need for improved institutional strength.
“In the last few years the level of dollarization has declined in the banking sector,” he says. “It’s now at around 44%, but the management practice of the banks is to only lend in dollars to those who produce dollars. If you analyze the balance sheet of the banking sector, they are hedged in terms of their balance sheet.”
The other perennial weakness of the Paraguayan banks – to a greater or lesser extent depending on the specific entity – is a high exposure to the agricultural sector. Cantero sees this as a related point to the dollarization – that is, a function of matching the financial realities of the economy.
“Agriculture remains the main sector of our economy and it’s still a very profitable sector,” he says. “And it’s the sector that will probably lead the economy this year.”
Cantero argues that as the Paraguayan economy continues to diversify, so, too, will the loan portfolios of the country’s banks.
He adds: “We are in a very important process of diversification and that is the strategy we need for the near future. We estimate that in 2020 the export of manufacturing of an industrial origin will surpass that from an agricultural origin. It will surpass that of meat – which is $1.2 billion. That’s something very new for our economy and this diversification is going to accelerate even faster.”
