Monday, January 08, 2007

Local Control Diminishing in El Salvador, Elsewhere

Sources: Inter Press Service News Agency, Multinational Capital on the Offensive; MarketWatch, S & P Sees Further Central American Bank Mergers, Buys in 2007; International Herald Tribune, Colombia's Bancolombia Announces Takeover of El Salvador's Biggest Bank.

When the Colombian financial institution Bancolombia purchased fifty-three percent of the largest El Salvadorian bank, Banco Agrícola, the last financial institution in the country owned by local shareholders disappeared. The deal between Bancolombia and Banco Agrícola is a two-stage takeover that is expected to be completed in April 2007 at a cost of $900 million. It was the latest in a number of sales of local bank shares in El Salvador to transnational corporations, including Scotiabank of Canada and Citigroup of the United States.

The December 2006 takeover of Banco Agrícola was not a surprise, but rather evidence of an increasing trend in Central America, and particularly El Salvador, where local shareholders are relinquishing their ownership in banks, insurance companies, credit card operations, and pension fund administration companies to foreign corporations. As a consequence, local shareholders gain international partners and are able to reinvest their capital in other more profitable enterprises such as car imports and the construction of shopping malls. Furthermore, political scientists see the sell-off of local shares as a way to limit the government’s control of a particular sector. This is because the free trade agreement that El Salvador signed with the United States (CAFTA-DR) puts significant limitations on state action against foreign firms, making the banking sector essentially untouchable once it becomes foreign-owned.

In late December, Standard and Poor’s, a financial services corporation, predicted that 2007 will be another year of heavy mergers and acquisitions in financial services, continuing the trend of the past couple of years. Since May 2005, bank mergers and acquisitions in the region have totaled over $5 billion, greatly increasing the presence of foreign capital in Central America and the Caribbean.


(1) What are some of the benefits of foreign ownership of the El Salvadorian banking system?

(2) One economist has said that complete foreign ownership will place the country in a position of being dependent on multinational economic powers and essentially turn the country into a “banana republic.” Is this a legitimate criticism?

(3) What are some of the potential negative repercussions that could be associated with having financial institutions owned by entities with few or no ties to the region? Could such ownership compromise development by redirecting national profits elsewhere?

1 comment:

Anonymous said...

I will try briefly to share my opinions about the questions you pose:

1. Yes, there are benefits but it might take a while for customers (either people or companies) to enjoy them. They will likely be related to improvements in products, levels of service, etc. It will be gradual and subtle.

2. Any opinion must be respected but I think that criticism is plain wrong. "Banana republics" came from almost exclusive dependence on one company (typically, the banana grower that also owned the rails, the ports, roads, employed many people and so forth - and usually this company depended A LOT on the earnings coming from the "banana republic"). In true, many other industries have seen sales to international shareholders(cement, retail, telecom, soda bottling, beer, etc.). The multinationals that are arriving to Central America see it as a natural BUT MINOR expansion. In true, local owners could have been more tempted to be "manipulative" since they usually had interests in many industries in the same country.

3. I dont think development will be compromised. In terms of profits, part of them is always kept in the banks to keep them capitalized and allow them to grow. Now, the dividends (the other portion of profits) will be sent abroad to HQ (it will be after all the return for the investment done in acquiring the banks). The big question pertains to what will the sellers do with the sale proceeds (equivalent to many years of profits). I sense that they will do what they would do had they stayed: keep some money locally and invest it in new local business and real estate, and send some abroad for diversification purposes. No big change probably.

Hope this helps.