An address by Rick Waugh
President and CEO
Montreal Board of Trade
January 20, 2004
There is a need to rebalance our priorities. Making this even more pressing, Canada, once an important international voice, seems to have lost much of its influence, most importantly, in our own hemisphere. Therefore, particularly in the wake of last week's seemingly successful Summit of the America's, Canada should redouble its efforts to promote hemispheric trade with a clear focus on bilateral and more regionally based development and trade agreements, such as NAFTA. These agreements and the opportunities that stem from them will be of growing importance for Canada and for Canadian business.
Check Against Delivery
Thank you, Patrick, and good afternoon ladies and gentlemen. It's a great pleasure to be here with you today and to have this opportunity to speak to the Board of Trade, which offers a tremendous platform to discuss key economic and international issues and ways to enhance business competitiveness.
And it's a pleasure to be here in Montreal. Scotiabank, Banque Scotia, has a long and proud history in Quebec and in meeting the financial needs of the people and businesses in this great province. In fact, it's been our great pleasure to serve this province for more than 116 years. When we opened our first branch in Montreal in 1888 on Rue St. Jacques it was, at the time, the Bank's only Canadian office outside the Maritimes.
So, I'd like to thank the Board for inviting me to discuss the challenges and opportunities we all face in finding sustainable growth in today's world.
Now you might be asking, what does a humble banker from The Bank of Nova Scotia, originally from Winnipeg, know about the global economy?
Well, as I said, I worked in New York for eight years and ran our international operations, travelling to about 40 countries several times over. So, I have been on something of a global journey for most of my career.
Today, Scotiabank is Canada's second largest bank and second largest company by market capitalization. We were founded in 1832 in Halifax, Nova Scotia. But we're also Canada's most international bank with more than 1,800 branches and offices in some 50 countries. In these countries we operate as a local bank, offering full services to our customers generally operating under the great Scotiabank banner. A true Canadian based, international bank.
Our bank has always seen international markets as tremendous growth opportunities. Close to one-third of our earnings coming from our International Banking and about 40% of our 48,000 people are employed in our international operations, many here in Canada.
Our interests run deep, particularly in the Caribbean and Latin American regions. We are the oldest bank in the Dominican Republic, with over 30 years in Haiti and 114 years in Jamaica. We are the only large international bank in four of the seven countries in Central America, namely Panama, Costa Rica, El Salvador and Belize. Even in Asia, we've been in Malaysia for 30 years and in India for about 20 years. All these markets not only play a critical role in our current success, but a critical role in our future plans. So, it is not surprising that we follow closely the strength and economic prospects of these regions.
With that declaration of self-interest, I'd like to talk this afternoon about some of these regions we operate in and, more specifically, the opportunities that I truly believe exist in Mexico and the Caribbean and Central America for Canada and for Canadian firms. Finally, I'll wrap up with a few very broad observations about the need for Canada to re-establish its influence in this hemisphere, particularly in relation to these same high-potential regions.
Let me turn first briefly to the economy as backdrop to this discussion. My overall sense going forward is one of cautious optimism for the year ahead. I'm optimistic because of the growth we're seeing in the global economy and cautious due to a number of outstanding issues related to exchange rates and the growing trade and payments imbalances, in particular, in the US and broader concerns about recent trends in global trade.
For the first time in many years, a synchronized global economic recovery is taking hold, led by the U.S., the perennial growth locomotive, but followed by some traditional slow movers, Japan and Europe, and supported by the emerging regional economic engines of China and India.
In 2004, the U.S. is set to grow by at least 4.5%, thanks in large part to overwhelming fiscal and monetary stimulus and a weaker dollar supporting the export economy. The soft employment numbers, high debt and low savings of the average consumer will raise questions about how far and fast the economy can go, but clearly any recovery in the U.S. bodes well for all the countries in this hemisphere and especially Canada.
The key, however, is that we need to see the corporate sector pick up to maintain economic momentum in the second half. This means capital investment and inventory building.
I continue to believe Canada is in a strong position, notwithstanding some short-term challenges, in particular the rapid rise of the Canadian dollar and the impact on our export sector.
Over the long-term, a strong dollar is a good thing. It's a symbol of a strong economy, and a strong country. I believe Canadian industry can rise to the challenge of an appreciating currency by continually enhancing productivity to meet import competition and to sell abroad. Montreal's high-tech industries, such as the pharmaceutical sector, are certainly world class.
The speed at which the dollar is rising, however, can cause business significant problems. The rapid compression of export related earnings requires fundamental adjustments to our productivity performance, changes that cannot be accomplished overnight. This is something of which our governments and the Bank of Canada now seem to be very cognizant.
Our economy remains fundamentally strong. Fiscal discipline by most governments, Canadian households that continue to want to consume and a housing sector that continues to grow thanks to tremendously low mortgage rates are all contributing. Employment is also solid. Here in Montreal, for example, employment has surged, with 270,000 positions created in the past seven years. The boost to household income growth and confidence has been key to the strong upswing in housing activity in Montreal.
So, as I said, I continue to be cautiously optimistic about Canada and the global economy.
At the same time, I do believe that the global economy has recently undergone significant change, largely driven by the tragic events of 9/11 and the fact that security issues have now become a central focus for the U.S. In the face of uncertainty, many of the world's leading economies, but particularly the U.S., are increasingly focused on their own agendas which is resulting in effectively putting up barriers to global trade and investment, often at the expense of their trading partners, including countries that can least afford it.
The failure of the WTO talks in Cancun, Mexico, highlights the reality that global scale trade agreements are becoming increasingly difficult to achieve. While I fully support the WTO, and I encourage staying with the negotiations, the reality is that the U.S. has already demonstrated it's ready to take a more bilateral approach to achieve its own more narrowly based objectives in the absence of progress in multilateral discussions, with recently completed agreements with Chile and Singapore.
As unfortunate as this is, for Canada, it means there is a need to rebalance our priorities. Making this even more pressing, Canada, once an important international voice, seems to have lost much of its influence, most importantly, in our own hemisphere. Therefore, particularly in the wake of last week's seemingly successful Summit of the America's, Canada should redouble its efforts to promote hemispheric trade with a clear focus on bilateral and more regionally based development and trade agreements, such as NAFTA. These agreements and the opportunities that stem from them will be of growing importance for Canada and for Canadian business.
Let me begin with Mexico and the importance of NAFTA.
NAFTA is now in its eleventh year and helped to ignite an explosion in trade and direct investment growth in North America. Since the deal was signed, exports within the NAFTA countries have more than doubled to over US$600 billion annually. Direct investment has also more than doubled to US$350 billion during this same period.
Obviously the U.S. was the most important focus in this trilateral agreement, with 85% of Canada's exports, and 84% Quebec's exports for that matter, and 88% of Mexico's exports destined for the United States. For Canada, beyond a doubt, our economy has strengthened as a result of the increased economic integration.
Yet what I think is equally interesting is the untold and growing story of the relationship between Canada and Mexico, an emerging market, but one that is now integrated into the North American economic space.
Canada-Mexico trade has increased by more than 300% in the past 10 years. Canada is now Mexico's second most important export market behind the U.S. Mexico is Canada's sixth most important export market, half of those exports are manufactured products. And Canada has become the third-largest foreign investor in Mexico, behind the U.S. and the Netherlands. By comparison, in 1993 Canada ranked as the ninth-largest investor in Mexico, behind a number of European countries. That investment has gone into many sectors, mining, manufacturing and financial services to name a few.
Mexico and Canada have important common interests not the least of which is in the development of a continental energy plan. Mexico is actively looking for investment by Canadian-based energy companies. Agri-foods is another important growth area, as is telecommunications, transportation, education, financial services and on and on. Mexico is a special place of opportunity for Canada and for Quebec, since this province ships less than 1% of its international merchandise exports there.
At Scotiabank, we now own over 90% of Scotiabank Inverlat, an important bank in Mexico. We have almost 400 branches, 7,000 employees and a million customers. La Reforma, Mexico's leading newspaper, ranked us number one in customer service last year. In total, we've invested about C$1 billion in Inverlat, and will invest more. We believe we have a terrific franchise and a great growth platform for the future.
So, what drove our interest in investing in there?
The simple answer is that we long ago recognized Mexico as a country with tremendous potential, having had an office there since the 1960s. Today, Mexico is a growing, increasingly developed market of close to 100 million people. Importantly, about two-thirds of the population is under the age of 25. Of course, young people, as they enter the economy, consume. They want cars and homes, and they need banking products and services.
In terms of financial services specifically, retail-banking markets are growing rapidly, at about three times the pace of economic growth. This is especially true in mortgages and personal loans. It is a country that is under-banked. Loans are only 20% of GDP, versus more than 70% for the U.S. and almost 90% in Canada.
Mexico is working to build, reform and liberalize its economy. Yes, there have been political setbacks, but the direction is clear. They have an economy that not only is open for business, they encourage it, not to mention its strategic geographic location as a gateway to Central and South America. So we see a great future for Scotiabank in Mexico and a great future for other Canadian businesses that are not afraid to tackle foreign markets.
Going forward, Canada and Mexico will continue to have many common political, security and economic interests which, admittedly, stem from the fact that we share the North American continent with the world's only superpower.
In my view, the importance of our North American partners to Canada cannot be overstated. As a businessman and a banker, I also believe that our relationships with the U.S. and Mexico should continue to be, through NAFTA and all means possible, the central trade-related priority for the Canadian government.
All of this is why Canadian businesses and government should more fully realize the opportunities that exist in Mexico.
On that note, let me now move to another area where Canada and Canadian business has a special opportunity, although the context is different, the Caribbean and Central America.
Let me explain. The Caribbean and Central America is a very dynamic and diversified region made up of 34 countries and territories, with a population of about 77 million and five core languages, English, Spanish, French, Creole and Dutch. In terms of wealth, it includes one of the world's least developed countries, Haiti, as well as much more prosperous ones, such as the Bahamas, Barbados and, increasingly, Trinidad and Tobago and Costa Rica.
Scotiabank has been part of the region since 1889 when we opened our first office in Kingston, Jamaica to support the North/South trade of rum, sugar and fish and wheat.
More than a century later, Scotiabank stands as the leading bank in the Caribbean and Central America with operations in 25 countries, at least twice the size of any other bank in the region.
We have close to 8,000 employees, who serve more than two million customers, and more than 270 branches. I mentioned Haiti where we have three branches, successful, profitable, with few operating problems. We offer good jobs for local people and have great employees, many of whom have been Scotiabankers for over 20 years. And despite the country's serious challenges, we are planning to open a fourth branch soon. The region on the whole has produced solid annual earnings for more than a decade, including net income of C$253 million in 2003.
We also have tremendous success serving Caribbean and Central American communities across Canada. Here in Montreal, in particular, so many have roots in the region. So, it has been a great success story for our bank, which is why we see the region as extremely important.
And for the U.S., the region is becoming an increasingly important focus, not only because of trade, but for security reasons as well. Similar to the United States' security concerns, which led it to scrutinize the borders with Canada and Mexico, it has identified a third border: the Caribbean.
To address this, the U.S. administration has developed the Third Border initiative, a package of programs focused on economic growth, health, education, law enforcement and cooperation in the Caribbean. It includes funds, for example, for HIV/AIDs, a critical health care issue for the region, which has the second highest rate of infection in the world behind Africa.
As I see it, the Third Border initiative is important because it shows that the U.S. recognizes the need for more development and stability of the Caribbean, not only as a clear priority in the context of the critical challenges of safety and security, but also as part of the growing economic integration throughout North, Central and South America. All of which underscores the long-term growth potential in the region. A potential Canada and Canadian businesses must seize and not ignore.
One last point I want to leave with you: the opportunities for Canada relate not only to specific investments, but also to increasing our overall sphere of influence in this hemisphere through longer-term economic, institutional and social support across this region. Canada can and should play a true leadership role in this.
It's easy to forget that, after the United States, ours is the largest economy in both North and South America. Many countries want to see Canada play a greater part as a natural counterbalance to the dominance of the U.S.
Large developed countries, such as ours, have a clear responsibility to support developing markets, financially as well as in helping organize and build the right legal and institutional frameworks to support economic growth, social improvements and wealth creation.
To this end, I am very encouraged by Prime Minister Martin's statement last week to take an active role in coming to Haiti's aid.
The fact is wealthy countries represent two-thirds of world trade and three-quarters of global GDP. So our decisions have a disproportionate impact on other markets, even more so for the small countries of the Caribbean and Central America.
At the same time, governments and the private sector must understand the limitations of emerging countries. They must recognize that it is not possible to achieve goals, such as full transparency, overnight. It will take time and changes need to be managed carefully.
While good progress has been achieved over the years throughout the Caribbean and Central America, much more can be done. Governments and international organizations, while confirming their various priorities, including security and transparency, must also make a realistic appraisal of what progress is possible in these markets, at least in the short term, towards achieving these goals. They need time and they need help.
I believe now is the time for greater commitment and leadership from leading nations and, in particular, Canada. We lost some of that initiative in recent years, and now with a new government and new leadership, there is an opportunity to regain it. Prime Minister Martin's work in Monterrey, his offer to help solve the crisis in Haiti, bodes very well for the future on this count.
Clearly, there is a need to address these issues. Wealthy countries such as Canada have a responsibility to show leadership in supporting economic and social development, and moving trade forward as a catalyst to growth. At the same time as we work towards these objectives, it will also be good business for us.
With the latest global trade talks in retreat, now is the time for Canada to take this on as a clear priority. Of course, we, and the government, must realize we cannot be all things to all people. We as a country, and indeed as a Bank, need to focus, which is why I see Mexico, the Caribbean and Central America as clear regional priorities.
In this hemisphere, Canada can make a real difference and assume an important role that would be difficult to duplicate elsewhere, such as Africa and Asia, which is why I believe the Prime Minister should also be congratulated for his work in Monterrey on achieving agreement among the 34 countries to promote freer hemispheric trade, which will help build on the opportunities created by NAFTA and the Third Border initiative.
In closing, I believe that there are strong growth opportunities for Canada and Canadian businesses in Mexico, the Caribbean and Central America. In Mexico, these opportunities are rooted in NAFTA, given the success of the deal these past 10 years, and given the potential the agreement still holds. In the Caribbean and Central America, through bi-lateral agreements, institutional support and investment and trade, the potential rests in the increasing strategic importance of the region, in part supported by the stability offered by the U.S. Third Border initiative.
At the same time, we as business leaders and as entrepreneurs can play an important role. The economic growth in Canada and the maturity of our market place require all of us to reach out and find additional growth, and I believe a great place to look is in Mexico, the Caribbean and Central America.
Ladies and gentlemen, thank you.