Benchmarking the Development of NBFIs in Latin America

Michael PomerleanoThe World Bank

Regional Seminar on NBFIs in Latin America

December 4 – 6, 2002

Santiago, Chile

Financial Sector Structure and Conditions• The region suffers from low public and private savings. • Long term financing is lacking, and certain sectors do not

have access to finance.• Banking sector lending is low relative to GDP, and

concentrated in short-term financing. Credit to the private sector is among the lowest in the world.

• Banking sector structure has changed significantly: market share of state banks declined, while foreign banks have increased their presence ( e.g., Mexico).

• The region’s securities markets are small and illiquid; both size and volume have mostly shrunk in recent years.

• Institutional investors do not play a major role in domestic markets (with the exception of Chilean pension funds and Brazilian mutual funds).

Bank and Non-Bank Assets

0% 50% 100% 150% 200% 250% 300% 350%

JapanUS

GermanyChile

BoliviaBrazil

EcuadorArgentina

MexicoPeru

Venezuela

Financial Assets, % of GDPBank Assets to GDP Non-Bank Assets to GDP

Source: World Bank, Financial Structure and Economic Development Database, created by Beck, Demirguç-Kunt, and Levine.

73%, 144%

138%, 6%

10%, 1%

20%, 1%

14%, 9%

24%, 0%

28%, 6%

39%, 6%

50%, 1%55%, 15%

128%, 162%

Domestic Credit Provided by Banking Sector, 2001

Source: World Bank, GDF & WDI Central Database

0

50

100

150

200

250

300

350

% o

f G

DP

Domestic Credit to the Private Sector, 2001

0

50

100

150

200

% o

f G

DP

Source: World Bank. Domestic credit to private sector refers to financial resources provided to the private sector, such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises.

Composition of Domestic Credit, 2001

0%10%20%30%40%50%60%70%80%90%

100%%

of

Do

me

sti

c C

red

it

Source: International Financial Statistics (IMF)Note: Other credit includes credit to central and local governments, non-financial public enterprises and non-bank financial institutions

Private Sector

Public Sector

Market CapitalizationComparison as % of GDP, 2001

020406080

100120140

% o

f G

DP

Source: World Bank

Market Capitalization, USD Billion, 2001

Source: World Bank Note: Market caps. as of beginning of November 2002 are: Argentina- $101 Billion, Brazil- $114 Billion, Mexico- $97 Billion (Source: Bloomberg)

1,072

232 192 186 127 110 88 57 13 10 6

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

13,984 3,910

Bill

ion

, US

D

Market Capitalization in Latin America, 1996-2001

0

20

40

60

80

100

120

Mar

ket

Cap

., %

of

GD

P

1996 2001

Source: World Bank

Turnover Ratio, 2001

39.1

186

.9

37.3

8

34.5

31.5

5

7.86

7.49

5.49

3.17

2.33

020406080

100120

Unite

d Sta

tes

Russia

South

Afri

ca

Brazil

Mex

ico

Peru

Chile

Venez

uela

Colom

bia

Argen

tina

Tra

din

g,

% o

f m

arke

t ca

pit

al

Source: Emerging Markets Database and FIBV (for US). Note: US figure is NYSE

Turnover Ratio in Latin America, 1996-2001

010203040506070

Tu

rno

ver,

%

1996 2001

Source: Emerging Markets Database

Market Concentration, 2001

0%

10%

20%

30%

40%

50%

60%

70%

80%

% o

f mar

ket c

ap.,

top

10 d

omes

tic c

ompa

nies

Source: FIBV

Total Number of New Firms Listed, Sample Stock Exchanges, 1996-2001

117 113 110

62 6132

020406080

100120140

1996 1997 1998 1999 2000 2001

Source: FIBVNote: Sample includes exchanges of Mexico, Buenos Aires, Lima, Santiago, Sao Paulo, Bogota and Caracas.

Gross New Capital Raised by Domestic Companies, Average, 1997-2001

Source: FIBVNote: US figure is for NYSE. Figures for newly admitted companies unavailable for Argentina.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

% of market

cap.

Already listed Newly admitted

Return on a US dollar basis over the five-year period ended December 31, 2001.

Argentina -5.30%Brazil -1.10%Chile -2.90%Colombia -8.80% Mexico 11.70%Peru -4.80%Venezuela -7.10%

Source: Wilshire Associates

Return/Risk Ratio, 1997-2001

-0.3-0.2-0.1

00.10.20.30.4

Mex

ico

Bra

zil

Chi

leA

rgen

tina

Ven

ezue

la

Per

uC

olom

bia

Source: Wilshire Associates

Note: Risk is measured by standard deviation of return on a US dollar basis over the period.

Transaction Costs

Source: Brinson Partners, Inc.

* Transactions in the stock exchange have recently been exempted for all investors

  Capital Gains Tax

Dividend Tax

Stamp Duty

Other Charges

Argentina 0% 0% 0% 0.24% exchange levy; 0.005% year end tax

Brazil 0% 0% 0% 0.2% tax on cash in/out of country*

Chile 10%-42% 10%-42% 0% 3% central bank tax (buyer); 18% VAT; 0.44% exchange tax

Colombia 0% 0% 1% 16% VAT on FX purchases (Seller)

México 0% 0% 0% 20% withholding on off-exchange trades

Peru 0% 0% 0% 0.18% stock exchange; levy

Venezuela 1% VAT 0% 0% 0.75% FX tax (buyer); 1% government tax (seller)

Settlement Proficiency 

Trading technology

Days to settle trades (T+_)

DvP method Scri-less settlement

Argentina Partially automated

3 Yes Yes

Brazil Partially automated

3 Yes Yes

ChilePartially

automated2

Yes, for shares. For OTC, fixed income & money market transactions at the exchanges funds are not Central Bank funds, so transfers are not final.

Yes

Source: International Securities Services Association, Wilshire Associates

Settlement Proficiency- continued  Trading

TechnologyDays to Settle Trades (T+_)

DvPScrip-less Settlement

Colombia

Partially automated

3 to 6Only at DCV, the central depository for government securities.

Yes

MéxicoFully automated

2Yes

No, equities are held in physical form and immobilized, and represented by book entry.

PeruPartially automated

2 (buyer); 3 (seller)

Yes Yes

VenezuelaFully automated

0 to 90 No

No - share certificates are never printed, however a transfer slip is necessary.

  

Source: International Securities Services Association, Wilshire Associates

Ratings for Settlement  Wilshire Score for Settlement

Proficiency, end 2001 (Best: 3)

 

GSCS Settlement Index Score (Q1-02) (Best: 100)

 

Argentina 2 89.54

Brazil 2 85.81

Chile 2 NA

Colombia 1 NA

Korea 3 98.50

Malaysia 2 94.14

México 3 89.96

Peru 2

1

93.08

Venezuela 64.81

Source: GSCS Benchmarks provides the international securities industry with measures of operational performance in over 20 major markets, 20 emerging markets see www.gscsbenchmarks.com/

Stock Markets• Local stock markets are “hallowing” due to migration to global

financial markets, resulting in lower capitalization and volume.• Primary issuance has decreased in Argentina, Brazil, Chile and

Mexico between 1996-2001. • In 2000, the market capitalization of Latin America’s stock

exchanges represented only 32 percent of GDP, compared with 114 percent in Southeast Asia, 115 percent in Europe, and 164 percent in the U.S.*

• Market liquidity is also low: 33 percent in LAC, compared with 105 percent in Europe, 106 percent in the U.S., and 133 percent in Southeast Asia*.

• Markets have suffered from volatile capital flows, transaction taxes, and a lack of transparency and protection of minority shareholders’ rights.

• In a majority of countries (especially less developed ones) family based ownership predominates, and in some cases is growing.

* Source: The McKinsey Quarterly, 2001(4)

Tradable Debt in Latin America, end 2001

0%10%20%30%40%50%60%70%80%

% o

f GD

P

External debtDomestic debt

Source: Merrill Lynch, IMF

Composition of Outstanding Domestic Securities, September 2001

0%

20%

40%

60%

80%

100%%

of d

omes

tic

secu

ritie

s

UK

Per

u

US

Chi

leF

ranc

eJa

pan

Mex

ico

Bra

zil

Arg

entin

a

Corporate securities Government securities

Source: BIS

Bond Markets• Some countries (Mexico, Brazil, Chile, Argentina and Colombia)

have made considerable progress in developing bond markets while others are in pre-developmental stages.

• Developmental differences are attributable to diversity in the size of regional economies.

• In some countries, governments have been able to extend bond maturities and issue fixed rate instruments, however inflation indexed bonds are still common (e.g., Brazil).

• The more developed markets are using primary dealers and many countries have regular issuance calendars.

• The majority of Latin American countries still require (directly or indirectly) that banking reserves be met exclusively by government securities. Additionally, countries like Colombia, Costa Rica, Jamaica and others rely heavily on public sector investments in government securities.

• Bond markets are currently faced with a serious threat following Argentina’s default, and the risks confronting Brazilian government bonds.

Assets of Open-end Mutual Funds, 2001

0%

5%

10%

15%

20%

25%

30%

35%

% o

f G

DP

Source: Investment Company Institute , IMF

Mutual Fund Assets, 1998

0

5

10

15

20

% of GDP

Source: OECD

Mutual Funds• Brazil’s mutual fund industry is the most developed in the region

(emerged from the high-inflation period of the late 80’s and offered inflation-indexed accounts).

• Around 90% of assets are in fixed income instruments; composition of portfolios by asset classes similar across the region.

• Most mutual funds in the region are owned and administered by private banks, and there is a high degree of functional and administrative integration between the institutions.

• Most Latin American countries separate mutual funds oriented to domestic investors from those oriented towards foreign investors.

• The mutual fund industry is less concentrated than the pension fund and insurance industries.

• Commission level are comparable with those for mutual funds in OECD countries.

Insurance Penetration, 2000

02468

10121416

Pre

miu

ms

, %

of

GD

P

UK

US

Ger

man

y

Chi

leJa

mai

caA

rgen

tina

Col

ombi

a

Bra

zil

Ven

ezue

la

Mex

ico

Per

u

Life Non-life

Source: Swiss Re, World Bank

Insurance Industry• Latin America is a small and yet promising insurance market.• LAC premium volume in 2000 was 1.6% of all premiums worldwide, while

GDP was 6% of the global product.• Over 90% of premium income comes from Argentina, Brazil, Chile,

Colombia, Mexico and Venezuela. • Penetration is lower than in other emerging markets, however on a per

capita basis the people of the region spend more than those in ECA, Africa or emerging Asia.

• Since 1990, the insurance markets have been liberalized, and foreign insurers play an important role in all major markets.

• Life insurance premiums have grown at double digit rates (except for Brazil and Venezuela, where social insurance schemes are state-run) from 1995-2000, as a result of reforms in pensions’ systems in the region.

• Non-life insurance has enjoyed high growth rates between 1995-2000, rising in line with GDP.

• In many markets, new distribution channels designed to reach the lower-and middle-income target group are being tried.

Pension Fund Assets, 2000

0%

20%

40%

60%

% of GDP

Source: IADB

Pension Funds• In 8 countries (starting with Chile in 1981), PAYG systems have been

replaced, to varying degrees, by fully funded defined contribution systems, with individual pension accounts managed by pension fund administrators.

• Another 5 countries, including Brazil, are in the process of considering pension reform.

• Ownership of administrators usually in the hands of large banks and financial conglomerates; Foreign participation is extensive.

• Brazil, Chile account for approximately 80% of regional pension assets.• Investment is concentrated in domestic markets, which are at a low level of

development.• Investment regulation are rigid and inflexible, thus increasing costs.• Historical pension fund real returns have been high, yet difficult to assess

future performance. Volatile returns reduced by international instruments.• Pension fund coverage low.• Operational costs decreased in reformed systems, yet are still high. In part

attributable to an incentive structure that encourages marketing (has increased costs) and leads to a high switching rate.

Recent Developments in Corporate Governance

• Mexico- in June 2001 a new Capital Markets Law came into effect; – It grants explicit authority to the CNBV to regulate tender offers in order

to prevent minority shareholder exclusion; – The law restricts the issuance of non-common shares to 25%, requires

independent members on the board and allows minority shareholders to appoint board members;

– The law turns insider trading and market manipulation into criminal offenses punishable with incarceration.

• Argentina- A capital markets reform law passed in June 2001;– It imposes mandatory tender offers for control once 35% has been

acquired; – Minority shareholders were given a ‘fair price’ protection for their

holdings; – Public companies are required to create audit committees;– Shareholders’ access to information and participation in shareholder

meetings have been eased.

Recent Developments in Corporate Governance- cont.

• Brazil- in October 2001 the new Corporate Law was passed; – It strengthens the protection of minority shareholders by

providing more power to the CVM,– adding 80% tag-along rights for common shareholders, – Board of directors representation for all shareholders,– improved voting conditions and more.– In 2001 BOVESPA launched the Novo Mercado, which

aspires to int’l corporate governance standards. Companies listed there are prohibited from issuing non-voting shares, have to abide by US or int’l accounting standards, and have a minimum 25% free float. Only 4 listings.