Argentina’s Peso-Hedging Market Crushed by Exchange Rate Dispute, Uber’s Latin American Stronghold Pursued by SoftBank-Funded Rivals, and More from the Region

LATAM Business Weekly
Argentina’s Peso-Hedging Market Crushed by Exchange Rate Dispute, Uber’s Latin American Stronghold Pursued by SoftBank-Funded Rivals, and More from the Region
By dataPlor • Issue #44 • View online
Other featured stories include: Pemex Faces Payment Problems After Cyber Attack Shut System, Mastercard Revolutionizes Paradigm of Instant Transfers in Latin America, Caterpillar Takes a Hit as Chile Riots Add to Global Uncertainty, and more….

Argentina’s Peso-Hedging Market Crushed by Exchange Rate Dispute
Just three years after its inception, the market for hedging currency risk in Argentina has effectively closed, after the reinstatement of capital controls in September. 
Financial Times reported that the implementation of capital controls have led to “a severe disruption in derivatives contracts used by foreign investors”. 
“In the months since departing president Mauricio Macri restricted the amount of pesos that could be converted to dollars, activity in the non-deliverable forwards (NDF) market, which foreign investors use to protect against fluctuations in the peso, has evaporated” (Financial Times). 
According to Credit Suisse, Argentina’s NDF market, which emerged in 2016 after the removal of capital controls, sees daily volume of just $30m. Just two months ago, the daily volumes ranged from $150m-$400m. 
The fundamental issue is that the true value of Argentina’s currency has become a point of debate. Following the imposition of capital controls in September, an unofficial exchange rate emerged, reflecting the exchange rate at which certain bonds can be purchased with pesos and sold abroad for dollars. 
Using that parallel rate, the peso is valued 30 percent below the official rate. The Emerging Markets Traders Association was forced to suspend NDF contracts in September after “the divergence between the exchange rates was noted by its members, including bond investment house Pimco and investment bank Goldman Sachs” (Financial Times). 
Photo Courtesy of Financial Times
Photo Courtesy of Financial Times
Two weeks later, the EMTA stipulated that contracts should be settled at the official exchange rate, which has upset some investors who argue that the move effectively killed the young market. 
According to Financial Times, in a recent JPMorgan survey, 80 percent of respondents said they would prefer to use the unofficial exchange rate. 
Uber’s Latin American Stronghold Pursued by SoftBank-Funded Rivals
Latin America, long a “safe haven” for Uber, was the biggest weak spot in the company’s latest financial results, representing  only 2% growth: the worst of any region. Uber’s main competitor in the region is Chinese ride-hailing Didi Chuxing
Uber and Didi are backed by the same investor, SoftBank Group, demonstrating that the group’s investments sometimes clash, particularly in Latin America, where SoftBank has pledged to invest billions in a booming tech sector.
The New York Times reports that,
“The infighting is nowhere more pronounced than in Mexico, where Uber is facing its first serious competitor in Didi, which has grabbed about 30% market share in the cities where it operates since launching in the country last year, according to former Didi employees. Market share fluctuates, and Didi’s falls above and below that mark in some cities.”
Competition, aside from taxis, has been a new phenomenon for Uber in the Mexican market. Prior to Didi’s arrival, Uber held 87% of the Mexican ride-hailing market, according to an August 2017 study from Dalia Research. According to a former employee, Uber’s market share exceeded 90% in some cities (The New York Times). 
James Cordwell, a London-based analyst with Atlantic Equities, said that in Mexico, investors see a key test of Didi’s ability to build an international operation from the ground up and Uber’s ability to defend its turf. 
“What happens in Mexico has global significance,” he said.
In a statement, Did expressed that it sees “tremendous opportunity for growth” in Latin America.
“Currently, less than three in 10 Mexicans use ride-hailing, and barely one in 10 are using food delivery… We’re really excited about where we are at after just 18 months here,” Didi said. 
Didi also has a substantial presence in the Braziian market. Last year, the company acquired local ride-hailing company 99, and now operates under that brand. 
The competition among SoftBank’s portfolio companies also extends to the food delivery business. Uber’s company’s food delivery service, Uber Eats, is faced with tough competition from Colombian startup Rappi, which SoftBank invested $1 billion into earlier this year. Didi is also launching a service in Mexico. 
Despite the presence of both Uber and Rappi, the market has reached just 14% of Mexicans, said Daniel Serra, a city manager for Didi Food (The New York Times). 
Pemex Faces Payment Problems After Cyber Attack Shut System
A ransomware attack that hit Mexico’s Petroleos Mexicanos is disrupting the company’s billing systems. 
According to people familiar with the situation, Pemex is relying on manual billing that could affect payment of personnel and suppliers and hinder supply chain operations. On Tuesday, invoices for fuel to be delivered from the company’s storage terminals to gasoline stations were being done manually.
As reported by Bloomberg,
“At the company’s refining arm, some employees couldn’t access emails or the internet on Tuesday and computers were operating more slowly. If the situation isn’t resolved by Wednesday, it could affect Pemex’s ability to to pay personnel and some suppliers.”
Late Monday, the company made a statement on its website, confirming that operations were normal after it was subjected to cyber attacks November 10 that affected less than 5% of personal computing devices. 
There are indications that that the malware deployed against Pemex may be DoppelPaymer, according to cybersecurity firm Crowdstrike Inc.
In a Twitter post Tuesday, Pemex said that fuel storage terminals were operating regularly, and gasoline supply was “guaranteed.”
Mastercard Revolutionizes Paradigm of Instant Transfers in Latin America
In Costa Rica, Mastercard- in its role as a leader in the space- has introduced its most recent innovation: Mastercard Send and NuDetect. 
Mastercard Send allows clients to make instant transfers 24/7 via debit cards: between people, companies or governments and customers. 
“It goes beyond a product, they are our solutions to enable instant payments. The main benefit we have is to carry these transfers anywhere with the presence of the brand, ”said David Goldschmidt, vice president of Push Payments at MasterCard for Latin America and the Caribbean (La Republica). 
The platform is available under a single integration of APIs that monitor programs, establish controls, and conduct transaction research.
“Beyond moving funds, we need the user to have confidence. Therefore, this artificial intelligence solution arises in which Costa Rica is at the forefront in the region,” said David Mora, Cybersecurity Product Manager for Mastercard Central America (La Republica).
Brazilian Startup Car10’s Implementation of Azure AI System is Making Car Repairs Easier
Brazilian startup Car10 has found the solution to figuring out how to get your car repaired after getting into a minor car accident. 
Car10’s app allows customers to take a picture, submit a photo of the damage, and get three to five estimates from nearby car repair shops, which are pre-screened for quality and reliability. The startup guarantees it will make the repair for free if you aren’t satisfied.
“We take the fear out of the process, the worry that you’ll be taken advantage of,” said Jose Tafner, Car10’s chief financial officer (Microsoft AI Blog). 
The current system allows users to get a quote within 30 minutes to an hour. With the adoption of new AI tools, Tafner said they can get a general sense of how much the repair will cost within about 30 seconds. The AI system uses a machine learning model to compare the damage to the customer’s car with other examples of similar damage to come up with an estimate. Then, the company works with car repair shops to get more accurate bids.
“It goes back to the customer need. When you have a small accident or crash, the thing you want to know is how much it’s going to cost… The first need is speed and some level of accuracy,” Tafner said.
Tafner told The AI Blog that Car10 works with customers every step of the way: from providing the estimate to scheduling the visit and even paying through Car10’s digital platform. 
“Car10 has about 100,000 customers and works with about 4,000 auto body shops throughout Brazil, ranging from big businesses to small mom-and-pop shops. Tafner said the company initially focused only on larger shops, thinking that was what the customer would prefer. But they found that customers didn’t care whether the shop was being run out of someone’s garage or a fancy office.”
Since the company was founded in 2014, the company’s four-person leadership team has been highly reliant on technology and data. The platform, which runs on Microsoft’s Azure cloud service, uses Power BI dashboards and built the app on the .NET framework.
“Car10, which has received startup investment funds from Microsoft, first started building the AI solution when the company participated in an industry hackfest. Although it has an IT staff, none of the people who work for Car10 have a particular expertise in AI. Azure Cognitive Services are designed so that even people without any formal AI training can use them.”
Colombia Bucks Dismal Trend for Latin American Economies
Last month, the IMF decided it needed to be far less bullish about growth forecasts for Latin America’s biggest economies — besides Colombia.
The IMF said that Colombia is on track to grow 3.4 percent in 2019: the highest estimate of the region’s big six economies. 
While the fund made big cuts to forecasts from Brazil to Mexico for 2020, it only cut its estimate for Colombia by one-tenth of a percentage point to 3.6 per cent, which would still be Colombia’s best growth rate since 2014.
As reported by Financial Times
“The relatively sanguine prognosis emphasises that while other Latin American economies have succumbed to popular protests, fallout from the US-China trade war and political turbulence, Colombia has remained remarkably resilient, driven mostly by domestic demand.”
In recent months, Colombia’s retail sales and consumer loans have grown at double-digit rates, inflation is at a manageable 4 percent, and foreign direct investment is thriving. 
“It’s a unique puzzle in Latin America but it’s a good puzzle to have… Growth looks good — and exceptional compared to the rest of the region — inflation is fine, interest rates are fine, and even last year’s tax reform, while it wasn’t as successful as we might have liked, was a step in the right direction,” said Ernesto Revilla, head of Latin American economics at Citibank (Financial Times).
Photo Courtesy of Financial Times
Photo Courtesy of Financial Times
Financial Times reports that some economists say Colombia is finally yielding a peace dividend following the 2016 signing of the historic deal between the government and Marxist guerrillas from the Farc.
Optimism was made apparent at an investment summit in Bogotá last week, where the government announced new foreign ventures worth more than $1 billion.
British construction company John Laing Group unveiled its first foray into Latin America, buying a 30 percent stake in a road-building project in the north-east of the country. Peru’s Camposol confirmed it would put $150m into avocado production. Additionally, a Chinese consortium secured a $4.3bn contract to build the first line of Bogotá’s long-overdue metro system.
Economists have expressed some concerns, however. The weakness of the peso- which depreciated 8 percent against the dollar in the third quarter and has been on a downward trajectory all year-  is one threat to Colombia’s growth. 
The second is the current account deficit, which at more than 4 percent, is higher than that of every other major Latin American economy. The Colombian government has insisted that this deficit is fully financed by “robust foreign direct investment, which jumped 24 percent in the first half of this year, but not everyone is convinced” (Financial Times).
Photo Courtesy of Financial Times
Photo Courtesy of Financial Times
Caterpillar Takes a Hit as Chile Riots Add to Global Uncertainty
On Wednesday, Caterpillar Inc., the world’s largest maker of mining and construction equipment, reported that its three-month rolling average sales growth in Latin America slowed to 4% in October, matching the January data that was the weakest since mid-2017. 
Latin America accounted for about 9% of the company’s revenue in 2018, according to data compiled by Bloomberg
“Weakness in the region accelerated the slowdown in the company’s worldwide sales growth to 3%, the worst since April 2017.”
The shares fell 1.3% to $144.49 on Wednesday, extending this week’s decline. 
Photo Courtesy of Bloomberg
Photo Courtesy of Bloomberg
“There’s the social unrest in Chile, which is an important mining market… Argentina has a difficult political situation and Brazil hasn’t really improved the way people hoped it would improve,” Larry de Maria,  an analyst at William Blair, said in a telephone interview. 
In Chile, the world’s largest copper producer, security forces struggled to control riots across the capital Tuesday evening. In response, President Sebastian Piñera called for a national agreement on peace and a new constitution. 
Meanwhile in Argentina, leftist candidate Alberto Fernandez’s surprise victory in a primary vote shocked the nation. In Brazil, the largest-ever auction of oil deposits flopped, therefore signaling the region’s biggest economy will struggle to rely on investments to jump start weak growth.
“There’s the social unrest in Chile, which is an important mining market… Argentina has a difficult political situation and Brazil hasn’t really improved the way people hoped it would improve,” Larry de Maria,  an analyst at William Blair, said in a telephone interview. 
In Chile, the world’s largest copper producer, security forces struggled to control riots across the capital Tuesday evening. In response, President Sebastian Piñera called for a national agreement on peace and a new constitution. 
Meanwhile in Argentina, leftist candidate Alberto Fernandez’s surprise victory in a primary vote shocked the nation. In Brazil, the largest-ever auction of oil deposits flopped, therefore signaling the region’s biggest economy will struggle to rely on investments to jump start weak growth.
Digitalization is Essential to Latin America’s Blossoming Wealth Management Sector
After more than a decade of growth following the 2008 recession, the wealth management industry is poised to enter a period of transformation as the market responds to shifts towards digitalization and personalization.
PwC expects that by 2020, the global asset management industry will reach $111.2 trillion in assets under management (AUM), topping previous forecasts of $101.7 trillion.
As reported by World Finance
“In Latin America, the Boston Consulting Group found that regional AUM grew at a faster rate from 2016 to 2017 than it had on average over the entire previous decade. It came as the region’s ultra-wealthy population expanded: in 2017, the number of high-net-worth individuals (HNWIs) living in Latin America was 4,220, estate agency Knight Frank found in its Wealth Report 2018. By 2022, the number of HNWIs is expected to grow by 30 percent to 5,470.”
Wealth management firm Puente has provided expertise in the capital markets of Latin America since 1915. World Finance spoke with managing director, Marcos Wentzel, about what the future holds for the region’s wealth management industry.
How is the wealth management industry in Latin America faring at present?
Since recovering from the global financial crisis, the Latin American wealth management industry has shown robust growth. Social progress and a rebound in commodity prices have helped foster an environment where educated and innovative professionals are ensuring continued economic growth.
Latin America’s HNWIs are, on average, far wealthier than the affluent populations of other regions, and in recent years, their numbers have also rebounded from an earlier decline. Over the past 10 years, Puente has capitalised on this growth, achieving an average AUM growth rate of 35 percent per year.
How has the industry changed in recent years? What have been the most significant developments?
Aside from the growth in AUM and HNWIs, the needs and desires that clients require are changing. Personalisation has become more important as clients look for localised services. Moreover, transparency is now of utmost importance, driven by pressure from both regulators and investors.
To cater for these new demands, the standards of the wealth management market are rising. Today, the industry prioritises accessibility and sophistication. Local players have been the big winners in the wealth management industry over the past decade as investors seek out firms with a local presence. Large wealth managers that can compete internationally without compromising their local presence could secure the greatest number of new AUM.
At Puente, we aim to meet these demands by using our strength as the largest wealth management player in Latin America’s Southern Cone, which is home to countries including Argentina, Uruguay and Paraguay.
What further changes do you see on the horizon, and how will these come about?
The wheels of change are turning in our industry. New technologies, such as analytics, big data, robotics and cloud systems, have become critical and could reshape the sector. Other elements that are causing disruption in the wealth management sector include rising costs, tightening regulations and a challenging macroeconomic environment. As the sector itself transforms at a rapid rate, investor behaviour is also shifting; clients are adopting a stronger appetite for risk and seeking more diversified portfolios.
Over the next 10 years, the industry is set for even more growth. Wealth managers must keep a watchful eye for new trends and developments in order to stay ahead of the coming changes.
Although Puente has more than 100 years of experience in the market, we consider ourselves revolutionaries. Our company culture is hands-on, and we are prepared for constant change due to our strong relationships with our clients.
Can you talk us through business profitability trends in Latin America?
The importance of achieving both a strong operational efficiency and scale has grown in the wealth management industry as the sector deals with increasingly squeezed margins. Concurrently, more stringent regulations are being introduced around the world, with rising levels of competition caused by new entrants looking to disrupt the wealth management industry, resulting in a reduction in fees. Bigger companies will benefit from economies of scale as the availability of low-cost products widens. This is expected to cause further consolidation in the industry.
Businesses will have to develop clear strategies to ensure their future success. At Puente, we have focused on our advisors’ productivity and developing new technology to create a truly scalable wealth management platform to meet the demands of investors.
How has new technology impacted the industry in recent years?
Technology is already having a measurable effect on the sector. The degree to which wealth management firms embrace technology’s potential will influence which companies find success in the years to come.
Further advances will fuel changes throughout the wealth management value chain, including the means of sourcing new clients and enabling investment advice to be personalised. Furthermore, we can also expect the transformation of portfolio management alongside middle and back-office services.
We see three dimensions to the future of employment: the work, the workforce and the workplace. With the introduction of automated artificial intelligence technologies, we must continue to assess our talent needs and work to redesign our workforce in line with the coming changes.
How has technology improved levels of productivity within the sector?
Productivity in the wealth management industry has remained at around the same level since the end of the 20th century. However, this will change significantly over the next decade.
In the coming years, the development of technology will bring changes to fees, products, distribution, regulation and more. As the sector continues to embrace the full potential of digitalisation, productivity will only improve.
Puente is focused on building a new economic model through which we can empower advisors to create step changes in their productivity levels and then distribute these productivity gains among clients.
What is the difference between transactional and relational businesses?
Today’s clients are sophisticated. They look to wealth managers to cater to specific needs, rather than to offer generic products. Now, active, passive and alternative strategies make up the building blocks for multi-asset solutions.
Firms either need to achieve a scale that allows them to provide multi-asset solutions on a transactional basis, or operate on a high-service solution standard for a long-term relational business. Puente, for instance, is based on a long-term link relational business model. We have more than 35,000 clients and aim to continue growing consistently and sustainably. While demand for both passive and alternative strategies is expected to grow in the short term, the growth of active management will be slower.
What are the benefits of linking businesses?
Transactional businesses must constantly scale their growth amid lower costs and higher competition, meaning linked businesses are more stable over the long term.
Managers must fully understand their clients’ needs in order to shape personalised solutions. They should also prioritise optimising the company’s distribution channels. Additionally, it is important to focus on core differentiating capabilities and look to outsource any non-core functions. As investors have plenty of choice, they will not hesitate to move to whichever company provides optimal solutions.
Staffing and compensation are important aspects to maintaining and growing long-term relational businesses like Puente. We are also committed to using our tools and experience to inform our decisions about how we want to grow and evolve. 
Where do you see the wealth management industry in Latin America heading?
During the coming years, AUM will continue to grow in Latin America. Over the next 10 years, AUM in Latin America will double to more than $7trn. The strong economic forecast and likelihood for new wealth to be created in the region over the next few years will give Latin America a good opportunity to thrive.
With more than 100 years of experience in the Latin American wealth management sector, Puente’s knowledge of the market is enviable. Our business has reinvented itself with the changing market and will continue to do so. Over the decades, Puente has achieved one of the highest and most consistent rates of growth in the region. In the years to come, we will continue to build on this strength as we adapt to the sector’s latest transformations.
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By dataPlor

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