Presentation to the Conference Board of Canada

An address by Richard E. Waugh
President and Chief Executive Officer,
Scotiabank

October 13, 2004
Toronto, Ontario

Check Against Delivery

Thank you, James [Frank, Conference Chair], and good afternoon, ladies and gentlemen. It's a great pleasure to be here with you today - and to have this opportunity to speak at the Conference Board's Business Outlook Conference - to have a chance to discuss the challenges and opportunities we all face in finding sustainable growth in today's world.

What I want to discuss today is how the fundamentals for Canada and Canadian business have changed and will continue to change - and what that means for Canadian businesses going forward. In particular, I want to talk briefly about two challenges we face and the need to change these challenges into opportunities - opportunities for Canadians and Canadian companies. The first challenge is the need for all of us to look outside Canada for growth and opportunity - and the second challenge is to do this in an uncertain global trade environment.

Following this, I want to talk about what I see as a key response - the need for Canada and Canadian business to redouble efforts to promote trade here in this hemisphere, with a clear focus on bilateral and more regionally based development and trade agreements, such as the successful NAFTA. These agreements and the opportunities that stem from them - in particular the great and largely untapped potential of markets in the region such as Mexico, Central America and other developing countries - will be of growing importance for Canada and for Canadian business.

Despite being one of Canada's smaller banks, we're Canada's second-largest bank by market capitalization, due to in no small part the fact that Scotiabank is Canada's most international bank. We have more than 1,800 branches and offices in some 50 countries. In most of these countries we operate as both a global bank but also as a local bank, offering full services to our customers, generally under the Scotiabank banner.

Our bank has always seen international markets as tremendous growth opportunities. Our interests run deep - particularly in the Caribbean and Latin American regions. We are the oldest bank in the Dominican Republic - over 30 years in Haiti - and 115 years in Jamaica. We are the only large international bank in four of the seven countries in Central America - Panama, Costa Rica, El Salvador and Belize. We're a leading bank in Mexico - a point I'll come back to. And in Asia, we've been in Malaysia for 30 years - and India for about 20 years - and China for more than 20 years. All these markets not only play a fundamental role in our current success, but a significant role in our future plans.

At the same time, we are very much a Canadian bank. Canada is and will remain our core market - where our bank continues to have great success - and we constantly reinvest in operations to maintain our competitive position. This approach has helped to make us leaders in customer satisfaction - and has made it possible for us to export our strengths to win in other markets. So Canada is very much our foundation - a market we will cultivate to stay strong by focusing on customer service and better products.

But Canada is also a challenge for us - and for many businesses looking for strong growth. Canada is a mature, highly competitive market - faced with slower population growth. We're a small, mature market when measured on a global scale.

In fact, throughout our history, Canada by necessity has had to look to international markets to generate wealth. Consider that exports represent close to 40% of our GDP - compared to only 15% for the United States.

Clearly, the livelihood of many Canadians depends on trade and investment outside Canada. At the same time, the significance of trade to our well-being and the relative openness of our market mean we are more vulnerable to shifts in the global economy - and in particular the U.S. - where the majority of our exports flow and from where imports and competition stem.

And I do believe that the global economy has undergone significant change - first, with the ending of the Cold War, then largely driven by the tragic events of 9/11 and now the fact that security issues have become the central focus for the U.S. in much of what it does, including how it looks at its economic policies, such as free trade and investments.

In the face of global uncertainty, many of the world's leading economies, and 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. In their move away from multilateralism to more bilateral and even unilateral issues, we're seeing somewhat of a reversal of the trend toward liberalization that has dominated over the past two decades.

As the most trade-dependent country in the G7, Canada cannot afford to be complacent in our approach to trade or international growth opportunities. We cannot rely on the U.S., the European Union and others to continue to lower trade barriers in increasing one-off agreements. Nor can we assume a weak Canadian dollar will make our goods and services more competitive. Canada and Canadian companies, under a positive Canadian government framework, must take charge of their futures - the status quo is not an option.

One option for the future should be based on leveraging our relationship with the U.S. and Mexico - through NAFTA - and building strong bilateral relationships with other key markets in this hemisphere, particularly the many Latin American countries.

With that as background, let me turn to 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$650 billion annually. Cumulative foreign direct investment in our three countries has increased by more than $1.4 trillion.

Obviously the U.S. was the most important focus in this trilateral agreement, with 85% of Canada's exports 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. It's a tremendous achievement that 40 U.S. states count Canada as their largest trading partner. The importance of the partnership is undeniable.

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 200% 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, with the U.S. the largest. 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. Looking at Ontario, Mexico is the province's third largest export market after the U.S. and the U.K - with motor vehicles and automotive parts a major portion of this. And the province represents almost half of Canada's exports to Mexico.

It wasn't that long ago that scheduled flights from Toronto to Mexico went only once or twice a week. Now, they're twice a day - and invariably fully booked. Also, these are flights to Mexico City - the second largest city in the world - not the Mexican beaches - as great as they are!

Mexico and Canada have important common interests, not the least of which is in the development of a continental energy plan. Mexico needs to actively look for investments and Canadian-based energy companies make especially good partners. Agri-foods is another important growth area, as is telecommunications, transportation, education and financial services. Mexico is a special place of opportunity for Canada.

At Scotiabank, we now own 97% of Scotiabank Inverlat - an important bank in Mexico. We have over 400 branches, close to 7,000 employees and a million customers. In total over the last few years, we've invested about C$1 billion in Inverlat and are now earning over 20% return on this invested capital - and, we will invest more. We believe we have a terrific franchise, a great team of people, and a great growth platform for our future.

Given our extensive involvement as a Canadian-based bank in Mexico, it is not surprising that we see the North American Free Trade Agreement, and the special place it gives us in our economic dealings with Mexico, as a pivotal force for economic progress in all three of the countries that are party to it - one that other Canadian companies should take advantage of.

One of the most important reasons for optimism about Mexico that truly sets it apart is the country's demographics. Mexico has by far the most youthful population in North America, with a median age of just 24, compared with 36 in the United States and 38 in Canada. Almost 60% of Mexicans are under 30 years old.

Consider the potential this has for the future.

Over the next several decades, Mexico's labour force expansion and potential growth rate are forecast to remain well above both Canada and the U.S.

Young people entering the economic market consume -they buy toasters, then cars, and then houses. This spending - properly managed - fuels growth, producing more jobs, more projects, more prosperity, more profits. And from Scotiabank's perspective, they need banking services, lots of them.

As I mentioned, our bank has experienced directly the growth potential Mexico offers in the financial services sector. Retail banking markets are growing rapidly, at about three times the pace of economic growth. This is especially true in mortgages and personal loans. Scotiabank, a Canadian bank operating locally, did one in three of all residential mortgages and car loans by banks last year in Mexico. And there is potential for even more growth.

This is a country that is under-banked. Loans represent only 20 per cent of GDP, compared to more than 70 per cent for the United States and almost 90 per cent in Canada.

Mexico's importance to the North American auto market has also been growing, both as a provider and a consumer. The Mexican auto market has doubled since 1990. In four years, it is expected to match Canada's peak production of 1.7 million units. In fact, it should exceed 2 million units in the next few years.

Mexico now accounts for 10 per cent of total North American vehicle output. That is up from 7 per cent at the time NAFTA was introduced. Both DaimlerChrysler and Volkswagen recently announced major expansions of their operations in Mexico, citing market opportunity and high Mexican production as the rationale. Our Canadian companies are also responding - Magna now has a very important Mexican presence.

Mexicans are working hard to build, reform and liberalize the economy. They have an economy that not only is open for business - they encourage it - not to mention Mexico's strategic geographic location as a gateway to Central and South America.

That leads me to move now 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, Costa Rica and El Salvador.

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.

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 7,500 employees, who serve more than two million customers, and close to 300 branches. We also have tremendous success serving Caribbean and Central American communities across Canada. Here in Toronto, 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 to us and to our Canadian companies.

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 its borders with Canada and Mexico, it has identified a 'third border': the Caribbean.

To address this, the current U.S. administration developed the Third Border initiative, a package of programs focused on economic growth, health, education, law enforcement and co-operation in the Caribbean.

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.

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, the maturity of our marketplace, and the globalization of our world require all of us to reach out and find additional growth. I personally recommend that Canadian business leaders look to this hemisphere - Mexico, the Caribbean and Central America. It is close, we are welcome as Canadians, and we have the products and skills they need.