WB/IMF/Brookings Institution 5th Annual Financial Markets and Development Conference: The Future of Domestic Capital Markets in Developing Countries April 14

1
WB/IMF/Brookings Institution5th Annual Financial
Markets and Development ConferenceThe Future of
Domestic Capital Markets in Developing
CountriesApril 14 16, 2003

• Dieter Linneberg
• Superintedencia de Valores y Seguros- SVS
• CHILE

2
Fundamentals of the Chilean Economy
Macroeconomic and Financial Stability
3
Macroeconomic Stability
4
Chile GDP, 1960-2002(billions of 1996 Chilean
pesos)
5
Chile Inflation and Targets(annual )
6
Chile Monetary Policy Interest Rate ()
Before June 1995 PRBC 90 days rate
7
Fiscal Strength
8
Fiscal Balance Average 1992-2001 ( GDP)
9
Financial System Strength
10
Ranking of Banking Strength(Source Moodys,
july 2002)
11
Chile Financial Savings by Institutional
Investors ( GDP)
12
Chile Domestic Corporate Bond Market (USD
billions)
13
Microeconomic Institutional Strength
14
Competitiviness Ranking 2002(Source
International Institute for Management
Development)
15
Economic Freedom Index 2001 (Source The
Heritage Foundation)
16
Corruption Index (June 2001 Source
Transparency International)
17
Recent Structural Reforms
18
Further Trade Integration
Bilateral and Multilateral Negotiations

• Free trade agreement with EU, US, EFTA.

• Currently negotiations are taking place with
  Corea for a FTA.

• WTO, FTAA

19
Capital Markets Reforms Central Bank

• Elimination of all remaning foreign exhange
  restrictions

• Substitution of nominal MPR for CPI-adjusted MPR

• Streamlining of debt issued by the Central Bank

20
Capital Markets Reforms legal changes

• New corporate governance and tender offer
  regulation

• Elimination of capital gains tax on liquid stocks
  and reduction of withholding tax on interest from
  35 to 4 on local bonds for foreign investors

• Increased flexibility for allocation of personal
  savings

21
CAPITAL MARKET
22
Chilean Market Overview
GDP
70 billion US / year
Stock Exchanges
Santiago Stock Exchange (80) Electronic Stock
Exchange (18) Valparaiso Stock Exchange (2)
Listed Sock
280 Listed Stocks
Individual Shareholders
600.000 (4 of population)
23
Capital Market Main Reforms
Capital Market Reform II Law
Tender Offer and Corporate Governance Law
Securities Law
2001
2003
2000
1986
1981
Banks Reform
Capital Market Reform I Law
1982 Debt Crisis
24
Investment Valuation
Results from McKinsey Interviews

Fuente McKinsey Global Investor Survey on
Corporate Governance, 2002
25
Corporate Governance Results
Santander Central Hispano Investment
Latin American Equity Research Agosto 2001
ShareholdersRights, Slowly Moving in the right
direction,
26
Cases that Hurt Confidence

• Financial Scandals in USA Enron, Worldcom, Tyco.
  And in Europa Ahold
• Political and Social Situation in the Region
• Potential insider Trading in Chile (Inverlink
  case)

27
Business Model of and Informal Broker Inverlink
Chilean Central Bank
Corredora Inverlink entrega certificado donde se
detallan valores y se mantiene la custodia en la
corredora.
Linkage of Information
Dinero Valores
Inverlink Informal
Corredora Inverlink
Las operaciones no son registradas en la
contabilidad de la corredora. Los dineros son
enviados a entidades no registradas.
Los clientes entregan dinero a corredora
Inverlink para celebración de pacto con
retrocompra.
Clientes
28
Business Model of and Informal Broker Inverlink
Inverlink Consultores vende documentos a Fondos
Inverlink y éste a las corredoras
Fondos Mutuos y otras instituciones adquieren los
depósitos
Fondos Inverlink
Moya recibe pagos personales por los instrumentos
endosados
Dinero
Inverlink Consultores
Corredores
Valores
Inverlink vende depósitos a corredores
Moya endosa los depósitos a Inverlink consultores
Moya
29
How to recover market confidence?

30
Issues

• General Corporate Governance mechanisms
• Ownership identity and structure
• Board practices
• Disclosure practices
• Institutional investors
• Market for control
• Strong regulations for Intermediaries
• Restriction for Public Institutions
• Enforcement
• Specialize tribunals

31
Issues

• Latin American specific issues
• Conglomerates
• Financial market development
• Macroeconomic and political instability
• Legal reforms

32
Concluding Remarks

• The fundamentals of the Chilean economy are
  solid enough in order to consolidate the capital
  market.
• Confidence is a main challenge for emerging
  markets during the last years environment.
• The out layers misbehavior should not provide
  the idea of a generalized problem in the market.
  But the regulator must assure rapid solution and
  punishment for undesirable market participants.
• Corporate governance is one of the main issues
  to improve in a coordinate way in the Latino
  American region.