Why the crisis has prevented the development of Latin American Financial System?

Why the crisis has prevented the development of Latin American financial system? Buenos Aires, February 2, 2009

The international financial crisis has taken Latin America in a time of strong economic growth. But not only the Latin American countries were enjoying a historic period of growth, but also their governments (at least in most countries of the region), were carrying out important reforms and promoting measures to achieve economic development region and sustained growth in the long term.

One of the key sectors that focused on the reforms undertaken by Latin American governments was the financial system. The financial system in Latin America has been on several occasions the originating source of the crises that had afflicted the region. But in this new stage, the Latin American financial systems are much stronger than in the past and to better support the growth prospects of the economies of the region, thus transforming into elements that increase the strength of economies and not in destabilizing elements as they used in the past.

Linked to the above, I found it of great interest a recent article on the site "American Economy?, Written by Edward Thomson, recalling the many reform initiatives in the financial systems in Latin America that have had to be stopped because of the international financial crisis impacting end the economies of the region.

For example, in the case of Colombia, Thomson recalled the important financial reform, which would introduce the possibility that pension funds may offer "multi-funds? customers so as to adapt the supply of funds to the customers' preference for risk. Thus, according to the level of risk funds have different exposure to the markets of fixed income and variable.

Although the proposed implementation of a multi-funds has been suspended, it is considered a lucky by Pedro Flecha, president of the AFP from Peru, who was indicated as the tail of the lower impact of the crisis on the profitability of pension funds in Colombia: "By having a single fund with lower exposure to equities, and both accumulated a six percent return?.

In Chile, for its part, has been working on a project called MK3 (the third reform on capital market) project announced in August 2008 by the Minister of Finance, Andrés Velasco, aimed at facilitating foreign institutional investors to invest in the country, increasing market liquidity and depth through the creation of Exchange Traded Funds (ETF), the extension of the exemption from tax on capital gains over foreign institutional investors and a greater number of instruments (as currently allows tax exemption to certain actions). Beyond that the crisis may delay or avoid the project's approval by Congress (opinions that have emerged so indicated), it will delay the benefits that it will generate the Chilean financial system.

In the case of Brazil, has been working on an initiative that unites efforts of private and public sector to generate reforms to deepen the capital markets. Already in 2002 it has implemented a far-reaching series of reforms to boost the development of Brazilian capital markets making it a leader in the region, with the creation of the Novo Mercado, revolutionizing the application of good corporate governance practices in companies that have increased transparency which has caused them to them a greater and cheaper access to finance. With these reforms achieved significant and consistent increase in the readiness of companies in the stock market reaching 64 the number of companies enrolled in 2007, and increasing by more than six times the market capitalization of over five years going from 2002 to 2007.

Several times I have spoken of the progress we are seeing in the Peruvian economy. In the Peruvian financial system have also been promoted initiatives aimed at deepening. Towards the end of 2008, the Superintendency of Banking and Insurance extended the possibilities of investment by allowing them to invest in AFP funds, mutual funds, swaps and forwards, while studying release the equity investment restrictions as currently local The AFPs can invest in less than 10% of the shares listed on the stock (total shares of listed companies is 330).

But in addition to reforms in the financial markets in Latin America was making progress in regional integration of markets. A first attempt that had failed to reach fruition in the equity markets staged in Mexico and Brazil that sought to integrate their operative (not to agree to unify accounting standards).

For the month of August last year, one of my articles "The Alliance Can Benefit to Peru and Colombia? they said the initiative between Peru and Colombia to integrate at an early stage equity markets before moving on to a later stage of integration of bond markets.

But both the goal of integration in the securities markets of Brazil and Mexico as well as the integration agreement between Peru and Colombia, was more ambitious, including the subsequent integration of stock markets in other Latin American countries within the agreement integration.

It is clear that circumstance beyond the temporary suspension of some of the reform initiatives, the Latin American financial system is moving toward a radical change that gives depth to support sustainable growth in the region. This reform process has started, will continue with strength once the crisis.

The development of the financial system for the countries of the region appears as a necessary condition for proper economic development of the area, enhance its growth and to make them more resilient to external shocks. Is evidence of the existence of a round trip between economic growth and financial development.

So no surprise that after the crisis, Latin American stock markets to advance in their integration and achieve growth and development that puts up with the more developed stock markets.

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