Whither Latin American Capital Markets?

Back in the early 1990s, economists and policy makers had high expectations about the prospects for domestic capital market development in emerging economies, particularly in Latin America. Unfortunately, they are now faced with disheartening results.

Capital markets in Latin America look underdeveloped when considering the many efforts undertaken to improve the macroeconomic environment and to reform the institutions believed to foster market development. Capital markets in Latin America also look poor when compared with those in Asia, let alone developed countries. As Latin America improved its fundamentals, firms went to raise capital and list in New York and London, and local markets did not flourish as many predicted. To the contrary, many domestic markets became more illiquid. The disappointing performance has made conventional policy recommendations questionable, at best. We analyze all these trends on capital market development in a recent book with Augusto de la Torre, Emerging Capital Markets and Globalization.

Some of the comments received after publishing the book pointed to new developments in recent years. Some people have argued that local markets are picking up after all. While we certainly agree that there are some recent encouraging signs in bond and equity markets, it is useful to put things in perspective by comparing Latin America with other regions and over the long run.

One example often mentioned is the recent surge in IPO activity in Brazil. The following chart illustrates well both the point we make in the book as well as the comments received. It shows the number of listed companies at Brazil’s Bovespa. That number was at the highest level in the late 1980s. As Brazil stabilized its economy and introduced many reforms in the 1990s and early 2000s, the number of listed companies dropped sharply, instead of increasing. As we argue in the book, this coincided with a period of high internationalization of stock market activity in Latin America, with companies migrating abroad. Since 2004, one indeed observes an increase in the number of listed companies, capturing the recent IPOs. But after three years of recovering, the number of listed companies in 2007 stands at 407, while the number of listed companies in 1989 was 592. We are eager to see if these recent positive signs will be sustained over time and can be replicated elsewhere.

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2 Responses to "Whither Latin American Capital Markets?"

  1. Vitoria Saddi   October 22, 2007 at 8:41 am

    Sergio, I always thought that the dataset for the companies with shares at Bovespa in the early 80s and mid-90s were not comparable with the ones after the ‘Novo Mercado’ was established. In other words, before the Novo mercado, the rules were blurry and usually stocks were not marked to market. Shares enable people to decrease their income taxes and there was plenty of problems in the valuation models used. In turn, except for the ‘blue chips’ i always thought that the number of ‘credible’ companies was smaller than what the chart shows. Can you explain?

  2. Guest   October 22, 2007 at 9:29 am

    Vitoria,

    It depends how you’d like to define the number of companies. We use all the companies listed at Bovespa, it would be difficult to do it in another way.

    If your point is that the introduction of Novo Mercado, presents a regime shift, then the time series variation should at least be useful before the introduction of Novo Mercado in December 2000. That shows the point we stress in our book, that the institutional and macroeconomic reforms did not foster domestic capital market development.

    I agree with you that it would be interesting to analyze in more depth the consequences of the changes introduced by Novo Mercado. We need to do more work on that.

    Thanks very much for your comment.

    Sergio