OVERVIEW OF CAPITAL MARKET OVERVIEW OF CAPITAL MARKET DEVELOPMENT IN THE LAC REGIONDEVELOPMENT IN THE LAC REGION

Carolin A. CrabbeCarolin A. Crabbe

Infrastructure and Financial Markets DivisionInfrastructure and Financial Markets Division

INTER-AMERICAN DEVELOPMENT BANKINTER-AMERICAN DEVELOPMENT BANK

June 2, 2004June 2, 2004

Washington, D.C Washington, D.C

INTRODUCTIONINTRODUCTION

Capital markets a powerful force in the development of many countries:

Finance corporate growth Promote the mobilization and allocation savings Enable development of institutional investors such

as pension funds, insurance companies, and mutual funds

Provide the framework for growth of a mortgage market

Facilitate government debt management The conduct of monetary policy and Above all create wealth

Over the past decade, the Over the past decade, the IDB has taken an active role IDB has taken an active role

in the Reform and in the Reform and Development of Capital Development of Capital

MarketsMarkets 38 Sector Reform operations covering capital market reform

28 sector reform operations covering the insurance industry

17 sector operations covering pension reform Countless operations indirectly affecting the

investment environment Promote dialogue/Disseminate best practices: e.g.,

Workshop on Government Bond Markets, Capital Markets Conference, etc.

Source: Financial Market Development, February 2003

First Generation Reforms First Generation Reforms Supported by IDB and Supported by IDB and

others, 1980-1990others, 1980-1990 These reforms have supported efforts to

improve the Capital Markets in LAC region: Enhanced supervision and regulation, focus on

risk based supervision for pension and insurance industries

Focus on market infrastructure: exchanges, clearing and settlement, broker training

Pension reform. Creation of funded pillar creates powerful institutional investors in many countries (Argentina, Bolivia, Chile)

Privatization of financial institutions Liberalization of interest rates

Despite First generation Reforms and financial support from local, foreign and international agencies, LAC capital markets are still underdeveloped

The size of the LAC market in US Dollars is only a fraction of the European Union, the US, Japan or even Asia

In LAC region capital markets have In LAC region capital markets have not yet played an important rolenot yet played an important role

Size of Capital MarketsSize of Capital MarketsSelected IndicatorsSelected Indicators

(2002 - Billions of US Dollars)(2002 - Billions of US Dollars)

Stock Market Capitalization Debt Securities*EU-15 6763 11843.4

United States 13826.6 18504.3

Japan 2293.8 6925.1

Asia 1310.4 1270

Latin America 412 693.7

Africa 84.3 60.3Source: Global Financial Stability Report 2004, International Monetary Fund.

Equity Capitalization in the Equity Capitalization in the WorldWorld

LAC 1.9%

World

5.5%Emerging countries

0

5

10

15

20

25

30

35

40

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Tri

llio

ns

of

US

do

llars

STOCK MARKET STOCK MARKET CAPITALIZATION OVER CAPITALIZATION OVER

GDP IS LOWGDP IS LOW

LAC region ranking behind the developed countries, the Middle East and North Africa, and South and East Asia

Developing Capital MarketsDeveloping Capital Markets

Indicators Latin America Middle East and North

Africa

South and East Asia

Sub-Saharan Africa

Transition Economies

Stock Market Capitalization over GDP

17.20% 36.00% 81.60% 16.30% 14.30%

Stock Market Value

Traded over GDP

3.81% 12.70% 46.00% 1.66% 25.90%

Source: the Latin American Competivness Report 2001-2002, World Economic Forum and Harvard Center for International Development

Some reasons why LAC markets Some reasons why LAC markets have not flourished have not flourished

Macroeconomic instability of region Lack of Corporate Governance

Unwillingness to open company Accounting and auditing do not follow

international best practices Lack of sound and transparent governance

(officers and Board members) Inability to enforce and perfect contracts

guarantees and other commercial instruments Judicial complexity and lack of clarity

Absence of tax incentive vs. issues of tax burden

WHAT IS THE WHAT IS THE IDB DOING?IDB DOING?

Traditional projectsNon-traditional projectsStrategy and policy: In process of consolidating and updatingDissemination of best practices (conferences, seminars, publications)

Ingredients for Capital Ingredients for Capital Market Development Market Development

Continue with traditional areas of reforms

begun in the 1980 and 1990s:

Building Effective Legal and Regulatory Framework

Institutional and Regulatory Infrastructure Enhanced supervision and move toward risk

based supervision Harmonization of Regulatory Framework Enforcement

Ingredients for Capital Ingredients for Capital Market DevelopmentMarket Development

Strengthening Capital Market Infrastructure

Clearing and settlement Depositories Training of broker dealers

Non-traditional areas:

Corporate Governance - Issuers and Investors Participated in development of OECD Guidelines Improve disclosure requirements for private sector Protect rights of shareholders (minority),

bondholders and creditors Expand investor education Bankruptcy Codes, administrative and juridical

procedures, contract enforcement

Ingredients for Ingredients for Capital Capital Market Market DevelopmentDevelopmentThe Bank has also increased The Bank has also increased work inwork in

Development of Institutional Investors and the Mobilization of Domestic Savings

Support the development of Pension Funds Facilitate the growth of Insurance Markets,

which are generally underdeveloped Support the expanding importance of the

Mutual Funds industry Transition to Global Accounting and

Auditing Standards Participated in development of accounting

standards (IFAD) Focus on standards at the firm level: Issuers

and Non-issuers 

Enhanced Information EnvironmentsInvestor information (pension affiliates and insurance clients)

Innovation and Capital Market Instruments

Foster development of long-term government securities markets

Strengthen mortgage market. Securitization for mortgages, bank loans, physical inventories and cash flows

Development of Rating Agencies and Credit Bureau Strengthen debt markets