Major Issues for Debt Collection in Four Latin American Markets

Collecting a foreign debt in Latin America can be challenging. Periodically, one is faced with major issues which complicate debt collection.

Below are four of Latin America’s biggest markets and major issues that may arise attempting to collect a debt on behalf of a foreign creditor.

Debt Collection in Argentina: Currency Issues

Argentina debt collectionArgentina’s economy has gone through several cycles the last few decades and the country has faced a deep economic crisis. Two of the major issues creditors and debtor have had to deal with are currency devaluation – the value of the Argentinean Peso dropping substantially as against the US Dollar – and foreign currency exchange restrictions as imposed by federal government. These two issues are interrelated and have negatively affected each other, resulting in considerable payment issues for debtors in Argentina, uncollectible claims for foreign creditors, and red flags for global creditor insurers because of negative credit rates.

Debt Collection in Brazil: the Challenge of the Economic Crisis

Brazil debt collectionConsidered one of the most influential emerging markets and part of the so called BRIC nations, Brazil experienced impressive economic growth and a rise in overall prosperity at the beginning of the 21st century. However, it fell into a severe economic crisis in 2014, from which it is currently still recovering. The Brazilian currency, the Real, devaluated as against the US Dollar and several businesses went bankrupt or otherwise have had difficulties paying outstanding invoices to foreign creditors.

Debt Collection in Mexico: Informality and Challenging Legal System

Mexico debt recoveryOne of the most open economies of Latin America, Mexico has passed through the global financial crisis that started in 2008, relatively unharmed. In fact, its economy has been growing for the last few decades and is considered an emerging market with great opportunities for foreign investors and traders. However, the challenges for foreign creditors in Mexico are the level of informality in daily business, as well as it’s malfunctioning legal system. These factors make debt collection in Mexico a challenge from time to time, and legally enforcing a foreign claim impractical and virtually impossible.

Debt Collection in Venezuela: Hyperinflation and Currency Exchange Controls

Venezuela debt collectionVenezuela has unfortunately been hit by one of the most severe economic and monetary crises of the century. Hyperinflation has lead to a collapse of the local currency, the Bolivar. Foreign currency exchange restrictions have made it almost impossible for local businesses to buy US Dollars, Euros or other foreign currencies. In combination with the collapse of the Bolivar, this has made it virtually impossible for local debtors to pay foreign creditors. Venezuela is one of the most difficult nations on earth for debt collection and a foreign debt can in most of the cases, by default and as a rule of thumb, be considered uncollectible and a certain write off.

Looking at respectively Argentina, Brazil, Mexico and Venezuela, we notice that the following are some of the major issues debt collection faces: currency devaluation, foreign currency exchange restrictions, economic crisis, informality, malfunctioning legal system, and hyperinflation. Most of these major issues, through the last decades, have manifested, to a lesser or larger extent, in all the countries mentioned and many other countries in Latin America and will likely continue to affect debt collection in the future.

David Zannoni

If you are a foreign creditor and interested in learning more major issues for debt collection in Latin America, please reach out to Cobroamericas, on Linked-In or follow us on Twitter.

To participate in conversations about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.

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Collecting Bad Debt in Latin America

Circumstances Affecting Collections Beyond Creditor’s Control

Collecting bad debt in Latin America often represents a challenge for foreign businesses.

There are several reasons to mention why businesses stop paying, which may be considered universal: bad economic circumstances, a company having liquidity issues, bad luck in business, mismanagement, and even bad intentions can be reasons causing bad debt anywhere one goes and does business.

However, there are a couple of circumstances which, maybe not exclusive to Latin America, do periodically characterize Latin American societies and economies, and therefore, affect businesses and ultimately also the collection of bad debt.

We will briefly discuss four of such circumstances.

Political Instability Causing Economic & Monetary Issues

Although this may vary substantially from country to country, and even within countries from region to region, political instability has been a common phenomenon in Latin America. Political instability may be visible through weakness of institutions, corruption, and policies imposed by the State contrary to the interests of the population, resulting in amongst others a lack of diversity in economy, underdevelopment in rural regions and impoverished urban areas, insufficient infrastructure, currency exchange controls and import / export tariffs in an attempt to protect the own economy. Political instability generally tempers economic growth and development and foreign investment. All these elements ultimately negatively affect the position of businesses, whether these are big corporations or small enterprises. Payment behavior may deteriorate and collecting bad debt may become more difficult. Countries like Argentina, Brazil, Venezuela, Mexico, Colombia, Ecuador, amongst others, have all been faced with some of these or similar issues.

Malfunctioning Judicial Systems Limiting Recovery of Bad Debt

Apart from a few exceptions, the legal systems in Latin America can in general be considered little accessible to foreign creditors.

From a foreign creditor’s point of view, judicial systems in Latin America can be perceived as complex, inefficient, closed minded, and incompatible. Often, there are no treaties in place between countries. This means that cross boarder issues are subject to local law in Latin America and the debtor’s jurisdiction applies if a foreign creditor wants to enforce payment of bad debt legally. In practice however, foreign claims are tough to enforce reducing the likelihood for collection and leaving the creditor with high, often unrecoverable legal expenses.

Infrastructure Missing Key Elements for Doing Business Globally

In several regions of Latin America, businesses are faced with a lack of infrastructure. This may include proper roads or airports, but also limited banking services and payment options, undeveloped educational institutions and professional support services, weak or absent authorities and limited or no access to the internet. Such business may be perceived as remote and difficult to reach for foreign creditors. Collecting bad debt can become a real challenge if debtors in more remote areas do not cooperate.

(Semi-)Informal Character of Business Preventing Sustainable Growth

The nature of doing business in Latin America can be very informal. This may allow a business to function locally but can cause issues when business is done internationally. For foreign creditors, the shadow side of the level of informality of businesses in Latin America can include: questionable financial management on the side of the debtor, limited options for local businesses to pay internationally, limited or no access for debtors to credit, and the fact that many business with a high level of informality are run based on a day to day strategy, without a long term vision. Because of this, the debtor lacks sustainable growth, which ultimately affect the creditor’s likelihood to collect bad debt.

In this post I mentioned four circumstances that may negatively affect collection of bad debts and which are typical for doing business in Latin America: economic downfall caused by political instability, malfunctioning of the judicial system, a lack of infrastructure, and the often (semi-)informal character of businesses in Latin America.

David Zannoni

 

If you are interested in learning more about typical circumstances that may negatively affect collecting bad debt in Latin America, please reach out to Cobroamericas, on Linked-In or follow us on Twitter.

To participate in conversations about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.

Debt Collection Contributes To Latin American Economies

Professional debt collection services can contribute to the economies of Latin America. It is true, the overall quality of debt collection services will need to improve, and fair practices need to be determined and honored, and there may still be quite a long way to go. But there is definitely an opportunity for growth and professionalization of debt collection services and with that, the possibilities to contribute to improvements to Latin American economies.

Below eight reasons how debt collection contributes to improvement of the economies in Latin America.

Debt collection improves payment behavior in Latin America

A professional debt collection industry improves payment behavior among individuals and business. And so would a professional debt collection industry do in Latin America. Exceptions notwithstanding, payment behavior is in general poor in Latin America, both considering domestic and foreign debt. This is partly due to the absence of professional collection procedures within companies, the absence of debt collection regulations and laws and the hassle that legal proceedings mean in the majority of the countries of Latin America (click here for more info on legal proceedings in Latin America): all elements required by properly functioning professional debt collection services.

Debt collection reduces Latin American bad debt

latin america debt collectionA professional debt collection industry would mean more collections on overdue invoices for companies in Latin America and hence it would imply a reduction in bad debt, consumer debt and company debt alike. This would improve cash flow for businesses substantially and contribute to production, investment and repayment of debt for Latin American businesses.

Debt collection professionalizes procedures within Latin American businesses

A professional debt collection industry would contribute to professionalizing collection procedures within Latin American businesses. This results would not only be increasing collections on due and overdue invoices, reducing the average days sales outstanding (DSO) it would also boost general professionalization of business operations and procedures and create a healthy balance between deal making / sales / relationship management and credit management / account receivables management.  

Debt collection generate income for Latin American businesses

Debt collection means generating income for Latin American businesses. Debt Collection increases collections on overdue invoice and generates direct additional cash flow, hence an increase in income.

Professional debt collection services create business and jobs in Latin America

latin america debt collection jobsA professional debt collection industry creates jobs in Latin America. A growing debt collection industry means more companies dedicating to debt collection and more people that will need to be hired to fulfill the job.

Professional debt collection services contribute to formalizing collection rules

Debt Collection often shows the upsides and the downsides of collecting on overdue invoices. Generally, once the debt collection industry professionalizes, it will contribute to formalizing collection rules. On the other hand, collections rules will help regulating the debt collection business in Latin America. In short, to create fair debt collection practices.

Debt collection services help determine consumer rights and obligations

latin america debt collection consumer rightsDebt Collection, whether that is amicable debt collection or legal deb collection, will push for determining what consumer rights and obligations are. Bad behavior by unprofessional debt collection agencies will eventually set the terms for consumer rights. Protection of creditors rights, in an economy with professional debt collection services often represented by debt collection agencies, will set the consumer obligations.

Debt collection improves international credibility of Latin American businesses

The presence of a professional and reliable debt collection industry, debt collection regulations, creditors rights and obligations, consumer rights and obligations, functioning legal systems to enforce payment of bad debt: it will all improve the credibility and prestige of Latin American economies and businesses, and hence positively affect Latin America’s international trade, credit ratings and business opportunities for credit insurances and credit lines.

How does debt collection contribute to Latin American economies?

Debt collection can contribute to economic growth in Latin America as it potentially improves payment behavior, reduces bad debt, it professionalizes collection procedures for businesses, it generates income for businesses, a mature debt collection industry creates business and jobs, it helps formalizing national collection rules, a responsible and mature debt collection industry helps improving consumer rights and obligations, it improves credibility and prestige of national industry and therewith contributes to transnational trade.

If you are interested in learning more on the subject of debt collection in Latin America please connect with Cobroamericas on Linked-In or follow us on Twitter.

To participate in the conversation about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.

Chile: The Most Debt Collection Friendly Country Of Latin America?

Chile is in several aspects an exception in Latin America. Chile has been politically and economically stable for decades. It is perhaps also the only Latin American country which has truly successfully countered extreme poverty. Its capital, Santiago de Chile, is a start-up hub and is considered one of the most investor friendly cities in Latin America.

From experience it also seems to be the most debt collection friendly country in Latin America. What are the reasons behind this?

The first reason is that the country has a truly open economy for foreign trade and investment. Economics politics are focused on attracting foreign businesses and investors and Chilean businesses are used to international commercial relationships. Reputation and prestige in that respect contribute to creating a climate of positive payment behavior.

150906 Chile 5A next reason is that Chile has liberal monetary politics. The country doesn’t have foreign exchange controls like for example Argentina and Brazil, or for that matter, the most notorious country in South America, Venezuela. International payments are not subject to extraordinary foreign currency exchange restrictions which favorite debt collection success for foreign creditors considerably.

The next reason might be somewhat subjective, but Chilean businesses do seem to have a culture of a more positive payment behavior compared to neighboring countries like Brazil or other large Latin American economies like Mexico. This generally makes it easier to negotiate payment of debt or overdue invoices.

Chile’s middle class has grown substantially in the last few decades. And its poverty level has diminished. Because of that, the average salaries and thus purchase power of the population have improved and hence financial sources to pay foreign consumer debt or business debt have been increasing. This is obviously positive for foreign creditors who are looking to collect in Chile.

150906 Chile 2Unlike the majority of other countries in Latin America, Chile is relatively well accessible. It has a decent infrastructure and it doesn’t have politically troubled areas and hence distinguishes itself from amongst others Mexico, Brazil, Argentina, Colombia and several countries in Central America.

The next reason might be subject to personal opinion and may heavily depend on one’s point of view, but Chile’s judicial system is relatively understandable for foreign businesses and is certainly more accessible for foreign creditors than the judicial systems of the majority of the other countries in Latin America, like Brazil, Argentina, Colombia, Mexico, Venezuela, to just mention the most notorious. This gives foreign creditor the necessary leverage to indeed go legal if extrajudicial debt collection is not successful, and Chilean businesses or individuals realizing that might push them to pay amicably or settle.

Chile is in several ways an exception which also seems to be the case with respect to debt collection on behalf of foreign creditors. Reasons include the fact that Chile is an open economy, it does not have extraordinary foreign currency controls, Chile has a culture of more positive payment behavior than other countries in Latin America, the purchase power of the population has increased, the country is relatively well accessible, and Chile’s judicial system is quite understandable for foreign creditors.

If you are interested in learning more on the subject of debt collection in Chile or Latin America please connect on Linked-In or follow me on Twitter.

To participate in the conversation about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.