Comments on: “Innovative Experiences in Access to Finance: Market Friendly Roles for the Visible Hand?” Liliana Rojas-Suárez Center For Global Development World Bank, March 2007 A very Timely Paper Good times allow for innovative proposals since attention (and resources) can be devoted to long-run issues (rather than the need to deal with crises resolution) Recent consolidation of democracy in a number of developing countries has resulted in an increased demand by large segments of the population— traditionally excluded from the benefits of modernization– for access to such benefits, including access to financial services The Paper’s Two Main Contributions Systematic classification and well-balanced assessment of the alternative approaches taken by governments to improve financial access: – “Interventionist view” : 1950s and 1960s – “Laissez-faire view” : 1990s – “Pro-market activist view” : new century Technical discussion of recent market-friendly initiatives promoted by Latin American governments. These discussions can guide and inspire policymakers from other developing countries When can an Intervention be Truly Considered Market-Friendly? When it satisfies the four conditions stated in the paper: Governments need to be selective in their interventions: always working with the markets, never against them. 2. Interventions need to be relatively small 3. Interventions need to be temporary 4. Mechanisms should be in place to prevent political capture of the interventions 1. Does FIRA CLO Transaction to Provide Finance to shrimp producers satisfy the conditions for Market-Friendly Interventions? Condition 1 is satisfied as FIRA “works with the market” since the structured finance arranged by FIRA solves a principal-agent problem by creating the right incentives for Ocean Garden to effectively screening and monitoring shrimp producers Condition 2 is satisfied since FIRA provides the “marginal guarantee” and charges a fee as an arranger and the provider of a guarantee Satisfaction of Condition 3 remains to be proven Although it is likely that Condition 4 is satisfied, the paper does not provide sufficient information in this area . An Example of Another Market-Friendly Initiative (that Remains to be Implemented): Putting Pension Funds to Work (for Increased Financial Access) The Facts: Assets of Pension Funds (as % of GDP) ARGENTINA BOLIVIA CHILE COLOMBIA COSTA RICA EL SALVADOR MEXICO PANAMA PERU URUGUAY 1997 3.0 1.2 36.9 1.3 1998 3.9 3.9 38.8 2.1 1999 5.9 6.4 47.3 3.3 2000 7.2 10.0 47.7 4.3 0.0 0.2 0.4 1.4 1.7 2.4 3.7 2.9 2001 7.7 11.5 51.7 6.0 0.1 5.8 4.4 2.6 0.9 3.1 1.7 4.7 2.8 5.2 4.0 6.7 5.6 2002 11.7 14.4 52.8 6.8 0.8 7.7 4.9 3.7 7.9 7.4 2003 12.5 18.3 67.4 9.2 1.7 10.4 5.6 3.6 10.3 11.0 2004 12.0 19.6 64.0 11.4 2.6 13.6 6.3 3.5 11.3 12.6 2005 12.3 22.0 64.8 13.1 3.6 17.1 7.2 3.3 12.0 12.8 Source: Federación Internacional de Administradoras de Fondos de Pensiones (FIAP), IMF It is estimated that, by 2015, in many countries in Latin America, the accumulation of assets by pension funds will reach over 30% of GDP (the current average ratio of deposits to GDP in the region) An Example of Another Market-Friendly Initiative (that Remains to be Implemented): Putting Pension Funds to Work (for Increased Financial Access) The Facts: But, regulatory restrictions combined with shallow capital markets have resulted in pension funds’ portfolios tilted towards public sector debt (with the exception of Chile and Peru) Composition of Assets under Management by Pension Funds ( June 2006) Public Sector Corporate Sector Financial Sector Foreign Sector Liquid Assets 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% ARGENTINA BOLIVIA COLOMBIA COSTA RICA CHILE EL SALVADOR MEXICO PERU URUGUAY Source: Federación Internacional de Administradoras de Fondos de Pensiones In some cases, like Mexico and Uruguay, government bonds reach over 80 percent of pension funds’ assets An Example of Another Market-Friendly Initiative (that Remains to be Implemented): Putting Pension Funds to Work (for Increased Financial Access) The Recommendations: – Pension funds need to be allowed to hold more diversified portfolios. However, concerns from local policymakers are understandable. For example, allowing free investment in foreign assets in countries that have not reached macro stability might exacerbate capital outflows – If macro stability is achieved, pension funds should be allowed to invest in instruments which in some cases may not be publicly offered or traded in exchanges, provided that adequate disclosure and operational transparency allow for appropriate external auditing. (see = www.claaf.org) The reality of corporate structure in Latin America is quite different from that in industrial countries. Firms in Latin America are mostly small, privately-held, family-owned. Thus, issuing securities is subject to higher fixed costs (relative to bank loans). An Example of Another Market-Friendly Initiative (that Remains to be Implemented): Putting Pension Funds to Work (for Increased Financial Access) The Recommendations: – To cater the investment needs of Latin America in a way compatible with the pension funds’ return and safety goals demanded by citizens, the development of the following asset classes is recommended (which exists only in some countries to a very limited extent): – Securitized bonds based on the pooling of receivables such as farm crops, livestock breeding, future flows of university tuitions, etc. – Infrastructure finance bonds, with long-term duration and local currency denomination (attractive for pension funds). Ex: Chile. – Collateralized Loan Obligations (CLOs), which effectively transform risky loans (say, to SMEs) into a combination of investment grade assets well suited for pension funds and high risk assets suited for other investors. An Example of Another Market-Friendly Initiative (that Remains to be Implemented): Putting Pension Funds to Work (for Increased Financial Access) The Recommendations: To create markets for CLOs with tranches suitable for pension fund investment, government guarantees might be initially necessary. It is therefore essential that the four conditions for “market-friendly” interventions be considered in the design phase.