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Transcript
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.