Benchmarking the Development of NBFIs in Latin America

1
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

2
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 regions 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).

3
Bank and Non-Bank Assets
10, 1
20, 1
14, 9
24, 0
28, 6
39, 6
50, 1
55, 15
138, 6
73, 144
128, 162
Source World Bank, Financial Structure and
Economic Development Database, created by Beck,
Demirguç-Kunt, and Levine.
4
Domestic Credit Provided by Banking Sector, 2001
Source World Bank, GDF WDI Central Database
5
Domestic Credit to the Private Sector, 2001
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.
6
Composition of Domestic Credit, 2001
Private Sector
Public Sector
Source International Financial Statistics
(IMF)Note Other credit includes credit to
central and local governments, non-financial
public enterprises and non-bank financial
institutions
7
Market CapitalizationComparison as of GDP, 2001
Source World Bank
8
Market Capitalization, USD Billion, 2001
13,984
3,910
Billion, USD
Source World Bank Note Market caps. as of
beginning of November 2002 are Argentina- 101
Billion, Brazil- 114 Billion, Mexico- 97
Billion (Source Bloomberg)
9
Market Capitalization in Latin America, 1996-2001
Source World Bank
10
Turnover Ratio, 2001
Source Emerging Markets Database and FIBV (for
US). Note US figure is NYSE
11
Turnover Ratio in Latin America, 1996-2001
Source Emerging Markets Database
12
Market Concentration, 2001
Source FIBV
13
Total Number of New Firms Listed, Sample Stock
Exchanges, 1996-2001
Source FIBVNote Sample includes exchanges of
Mexico, Buenos Aires, Lima, Santiago, Sao Paulo,
Bogota and Caracas.
14
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.
15
Return on a US dollar basis over the five-year
period ended December 31, 2001.
Source Wilshire Associates
16
Return/Risk Ratio, 1997-2001
Source Wilshire Associates Note Risk is
measured by standard deviation of return on a US
dollar basis over the period.
17
Transaction Costs
Source Brinson Partners, Inc. Transactions in
the stock exchange have recently been exempted
for all investors
18
Settlement Proficiency
Source International Securities Services
Association, Wilshire Associates
19
Settlement Proficiency- continued
Source International Securities Services
Association, Wilshire Associates
   
20
Ratings for Settlement
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/
21
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
  Americas 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)
22
Tradable Debt in Latin America, end 2001
Source Merrill Lynch, IMF
23
Composition of Outstanding Domestic Securities,
September 2001
Source BIS
24
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 Argentinas default, and the
  risks confronting Brazilian government bonds.

25
Assets of Open-end Mutual Funds, 2001
Source Investment Company Institute , IMF
26
Mutual Fund Assets, 1998
Source OECD
27
Mutual Funds

• Brazils mutual fund industry is the most
  developed in the region (emerged from the
  high-inflation period of the late 80s 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.

28
Insurance Penetration, 2000
Source Swiss Re, World Bank
29
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.

30
Pension Fund Assets, 2000
Source IADB
31
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.

32
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.

33
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 intl corporate governance standards.
  Companies listed there are prohibited from
  issuing non-voting shares, have to abide by US or
  intl accounting standards, and have a minimum
  25 free float. Only 4 listings.