Santander recognised in two categories at the 2022 Best Banks Awards

Amid the whirlwind of economic and geopolitical uncertainties, Latin American markets were resilient in 2022, with Santander Corporate & Investment Banking (Santander CIB) expecting active FX trading across the region to resume and continue throughout 2023

The resilience of Latin American markets throughout 2022 is notable within the context of the economic and geopolitical pandemonium that unfolded over the course of the year. This is particularly the case for a region where, historically, market meltdowns have occurred when international market participants turn tail as conditions worsen. But, in 2022, the perfect storm of rising inflation, increasing interest rates, and worldwide and local geopolitical uncertainties, did not cause such an expected breakdown. On the contrary, Latin American markets remained resilient.

 “If we look back in history and recall how those markets would normally react when global central banks hike rates, it is worth pointing out that, in 2022, at no point were these markets stressed,” explains Rafal Foltynowicz, global head of FX at Santander CIB. “What used to be certain financial and economic meltdown resulted in volatile, but still totally tradable, market conditions.”

Volatility and the risk-off sentiment put pressure on liquidity in the region, but never to the point where markets became untradable. As worldwide and local inflation, and rising world interest rates, began to bite, all Latin American countries were undoubtedly affected by the ensuing deterioration of liquidity conditions. 

Financial flows to Latin America fell during the year, particularly from worldwide institutional accounts, which reduced their overall exposure to the region in anticipation of local events, such as the Brazilian presidential election in October. Those that maintained a local presence were more idiosyncratic in their emphasis, preferring to focus on countries with large deficits or those with more stable market conditions.
 

Signs of maturing electronic markets

The resilience experienced by Latin American markets in 2022 is, in large part, because of the commitment by a certain number of central banks in the region to simplify and modernise FX and capital regulation, and encourage better settlement practices. These changes have significantly accelerated the automation of FX flows and boosted the electronification of Latin American markets on the whole.

Brazil is at the forefront of this drive. A new law, liberalising the country’s FX markets, came into force at the end of 2022, easing some of the bureaucratic procedures that existed in the old legal framework dating from more than 50 years ago. Even though the law does not make the Brazilian real a convertible currency, it is a move in that direction, simplifying the opening of USD accounts by non-residents and reducing the documentation burden required. 

“The biggest change is from a compliance perspective, where institutions are no longer required to analyse trades individually, and can now look to have a client risk approach,” says Luiz Masagão, head of markets for Santander CIB Brazil. This is an ongoing process, and additional legislation will be published in 2023, specifically governing foreign investors’ accounts, where changes are expected to come from the same direction, with the aim of reducing bureaucracy.

 In the years running up to the new law, Brazil’s FX market made substantial strides to become one of the most active and most electronic in the region – only behind that of Mexico. Increasingly, more clients are moving to the electronic space on both the corporate and institutional sides. As the leading FX bank in Brazil by volumes for the ninth year running, as published by the Brazilian central bank, Santander is leading this transition, offering solutions to cover its clients’ needs. 

“Brazil is a very important FX hub for Santander in Latin America,” says Foltynowicz. “We constantly explore market trends and upscale our capabilities to provide the best liquidity across our FX franchise, including local and offshore institutions, as well as large local corporates.” 

Across the wider Latin American region, the electronification of FX markets has made great progress in the deliverable currency space, but has also spilled over into other types of instruments, such as non-deliverable forwards (NDFs). However, given its absolute size and continually growing volumes, electronic trades in the spot market greatly outweigh those seen across other instruments. Consequently, spot FX transactions over voice have been on the wane as a whole, but remain prevalent for larger trades as liquidity conditions in certain FX markets in the region remain constrained. 
 

International investors to return

As the inflation outlook improves worldwide, and major central banks take their feet off of the rates throttle as we move further into 2023, Santander expects the return of trading activity across FX markets in the Latin America region, with global investors flocking back into local markets to take advantage of the large interest rate differential between local and international currencies.

As such, Santander sees the rates of inflation in the major world economies, and how their respective central banks will react, as the key determinant of how FX markets will behave in Latin America throughout 2023. If the US Federal Reserve maintains high interest rates, the dollar will remain at historically high levels and the more limited carry potential will diminish the upside possibilities of local Latin American currencies. Should US rates decrease and the dollar weaken, flows into the region’s currencies would be expected to substantially increase, barring unexpected local geopolitical developments.

While the conflict between Russia and Ukraine will continue to affect regional markets, the Argentinian presidential and parliamentary elections, due to be held in October 2023, alongside the post-election ramifications in Brazil and general uncertainty in Peru, have the potential to dampen investor sentiment for the Latin America region. But opportunities do exist.

“Among emerging countries, Brazil has some positive points that investors should strongly consider and explore, especially when fiscal policy is properly addressed and presented to investors. As such, we expect greater FX flows into Brazil in 2023,” says Foltynowicz. “Given Santander’s meaningful presence in Argentina, Brazil, Chile, Colombia, Mexico, Peru and Uruguay, we are well positioned to support all clients across our franchise, be they large local or international banks, global corporates, investors or institutional firms.”

Santander CIB was voted Best regional spot dealer (Americas) and Best NDFs dealer at the 2022 FX Markets Best Bank Awards.

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