Download Benchmarking the Development of NBFIs in Latin America

Benchmarking the Development
of NBFIs in Latin America
Michael Pomerleano
The 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
Venezuela
Peru
Mexico
Argentina
Ecuador
Brazil
Bolivia
Chile
Germany
US
Japan
0%
10%, 1%
20%, 1%
14%, 9%
24%, 0%
28%, 6%
39%, 6%
50%, 1%
55%, 15%
138%, 6%
73%, 144%
128%, 162%
50%
100%
150%
200%
250%
300%
% of GDP
Bank AssetsFinancial
to GDPAssets,
Non-Bank
Assets to GDP
Source: World Bank, Financial Structure and Economic Development
Database, created by Beck, Demirguç-Kunt, and Levine.
350%
Ja
ni
te pan
d
St
a
G te s
er
Ko m a
n
re
a, y
So
Re
ut
p.
h
Af
ric
a
C
hi
le
Br
az
il
I
Ar ndi
ge a
nt
C i na
ol
om
bi
a
Pe
r
Ve
M u
n e ex
zu ic o
el
a,
R
B
Source: World Bank, GDF & WDI Central Database
U
% of GDP
Domestic Credit Provided by
Banking Sector, 2001
350
300
250
200
150
100
50
0
Domestic Credit to the Private
Sector, 2001
% of GDP
200
150
100
50
Ch
i le
Br
az
il
Ind
ia
Co
l om
bia
Pe
ru
Ar
ge
nti
Ve
na
ne
zu
el a
,R
B
Me
x ic
o
Ja
pa
Un
n
i te
dS
tat
es
Ge
rm
an
Ko
y
rea
,R
ep
So
.
u th
Afr
ic a
0
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.
Br
az
il
Ar
ge
nti
na
Me
xic
o
Afr
i ca
ed
St
ate
s
Ve
ne
zu
el a
Co
lom
bi a
Ja
pa
n
th
Un
it
Public Sector
So
u
Private Sector
Ch
ile
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Pe
ru
% of Domestic Credit
Composition of Domestic Credit, 2001
Source: International Financial Statistics (IMF)
Note: Other credit includes credit to central and local governments, nonfinancial public enterprises and non-bank financial institutions
Un
i te
dS
tat
es
Ja
pa
n
Ch
So
i le
u th
Afr
ic a
Arg
en
ti n
a
Ge
rm
an
Ko
y
rea
,R
ep
.
Bra
z il
Ind
ia
Me
x ic
o
Pe
ru
Co
l om
Ve
ne
zue bia
l a,
RB
% of GDP
Market Capitalization
Comparison as % of GDP, 2001
140
120
100
80
60
40
20
0
Source: World Bank
Market Capitalization, USD Billion,
2001
13,984 3,910
4,000
Billion, USD
3,500
3,000
2,500
2,000
1,500
1,000
500
1,072
232
192
186
127
110
88
57
13
10
6
Ve
Pe
ne
ru
zu
el
a,
RB
Co
lo
m
bia
Ch
i le
In
di
So
a
ut
h
Af
ric
a
o
M
ex
ic
Br
az
il
Ja
pa
n
G
er
m
an
Ko
y
re
a,
Re
p.
Ar
ge
nt
in
a
Un
i te
d
St
at
es
0
Source: World Bank
Note: Market caps. as of beginning of November 2002 are: Argentina- $101 Billion,
Brazil- $114 Billion, Mexico- $97 Billion (Source: Bloomberg)
120
100
80
60
40
20
1996
2001
Source: World Bank
Ar
ge
nt
in
Ve
a
ne
zu
el
a,
R
B
ol
om
bi
a
C
Pe
ru
Br
az
il
C
M
ex
ic
o
0
hi
le
Market Cap., % of GDP
Market Capitalization in Latin
America, 1996-2001
ni
te
d
Ve hi le
ne
zu
el
a
C
ol
om
bi
Ar
a
ge
nt
in
a
C
Pe
ru
Source: Emerging Markets Database and FIBV (for US).
Note: US figure is NYSE
2.
33
3.
17
5.
49
7.
49
7.
86
39
.1
1
37
.3
8
34
.5
31
.5
5
86
.9
120
100
80
60
40
20
0
Br
az
il
M
ex
ic
o
St
at
es
R
So us s
ia
ut
h
Af
ric
a
U
Trading,
% of market capital
Turnover Ratio, 2001
1996
2001
Source: Emerging Markets Database
Co
lo
m
bia
Ar
ge
nt
in
a
Ch
i le
a
Ve
ne
zu
el
Pe
ru
M
ex
ic
o
70
60
50
40
30
20
10
0
Br
az
il
Turnover, %
Turnover Ratio in Latin
America, 1996-2001
Market Concentration, 2001
Source: FIBV
Total Number of New Firms Listed,
Sample Stock Exchanges, 1996-2001
140
120
100
80
60
40
20
0
117
113
110
62
61
32
1996
1997
1998
1999
2000
2001
Source: FIBV
Note: Sample includes exchanges of Mexico, Buenos Aires, Lima, Santiago,
Sao Paulo, Bogota and Caracas.
Gross New Capital Raised by Domestic
Companies, Average, 1997-2001
5.0%
4.0%
% of
3.0%
market
2.0%
cap.
1.0%
Already listed
UK
Ar
ge
nti
na
US
Ch
ile
Pe
ru
Br
az
il
0.0%
Newly admitted
Source: FIBV
Note: US figure is for NYSE. Figures for newly admitted companies
unavailable for Argentina.
Return on a US dollar basis over the fiveyear period ended December 31, 2001.
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Venezuela
Source: Wilshire Associates
-5.30%
-1.10%
-2.90%
-8.80%
11.70%
-4.80%
-7.10%
Return/Risk Ratio, 1997-2001
bia
ru
Pe
ue
la
Co
lom
Source: Wilshire Associates
Ve
ne
z
na
Ar
ge
nti
Ch
ile
il
az
Br
Me
xic
o
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
Note: Risk is measured by standard deviation of return on a US dollar
basis over the period.
Transaction Costs
Argentina
Capital Gains
Tax
0%
Dividend
Tax
0%
Stamp
Duty
0%
Other Charges
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)
0.24% exchange levy;
0.005% year end tax
Source: Brinson Partners, Inc.
* Transactions in the stock exchange have recently been exempted for all investors
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
Chile
Partially
automated
2
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
Technology
Days to Settle
Trades (T+_)
Colombia
Partially
automated
México
Fully
automated
2
Peru
Partially
automated
2 (buyer);
3 (seller)
Venezuela
Fully
automated
3 to 6
0 to 90
DvP
Scrip-less
Settlement
Only at DCV, the
central depository
for government
securities.
Yes
Yes
No, equities are held
in physical form and
immobilized, and
represented by book
entry.
Yes
Yes
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
93.08
Venezuela
1
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)
Source: Merrill Lynch, IMF
Ve
ne
zue
la
o
Me
x ic
Ch
i le
Bra
z
External debt
Domestic debt
Co
l om
bia
Arg
en
ti n
a
80%
70%
60%
50%
40%
30%
20%
10%
0%
il
% of GDP
Tradable Debt in Latin America, end 2001
Composition of Outstanding Domestic
Securities, September 2001
% of domestic
securities
100%
80%
60%
40%
20%
Corporate securities
Source: BIS
Ch
i le
Fra
nce
Ja
pa
n
Me
x ic
o
Bra
z il
Arg
en
ti n
a
US
Pe
ru
UK
0%
Government securities
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
35%
30%
20%
15%
10%
5%
Source: Investment Company Institute , IMF
a
Ar
ge
nt
in
o
ex
ic
M
le
Ch
i
Ja
pa
n
an
y
G
er
m
UK
l
0%
Br
az
i
% of GDP
25%
Br
az
il
C
hi
le
M
ex
ic
o
Bo
l iv
ia
Ar
ge
nt
in
a
U
ru
gu
ay
Pe
ru
C
ol
um
Ve
bi
ne a
zu
el
a
Mutual Fund Assets, 1998
20
15
10
5
0
% 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.
Life
any
Source: Swiss Re, World Bank
16
14
12
10
8
6
4
2
0
Peru
Mexi
co
uel a
Vene
z
Braz
il
Arge
ntina
Colo
mbi a
Non-life
Jama
ica
Chile
Germ
US
UK
Premiums, % of GDP
Insurance Penetration, 2000
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
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.