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Financial System Latinwatch

Thu, Aug 28 2008, 09:28 GMT
by BBVA Bancomer Team

BBVA Bancomer

Subjects

• · Rising uncertainties in the global economy
• · Latin America enters a phase of cyclical deceleration, including credit growth
• · Potential risks to the banking system are curtailed by a sound regulatory framework and lower dependence of external financing
• · Recent regulatory changes are helping to fulfil the potential of the financial sector in the region
• · Pending challenges of Latin American Pension Systems

Editorial

This is the first number of a new biyearly publication on the Latin American financial systems by BBVA Research Department. It is centered on the financial system structural characteristics, recent trends and outlook of the seven largest Latin American countries. The report adopts a crosscountry focus, despite the obvious lack of homogeneity in Latin America financial markets. To that end, we look into the banking sector and capital markets (fixed income and equity) as well as the role of institutional investors.

While the degree of financial deepening lags behind that found in advanced economies and most of emerging Asia, the banking sector, which is the most important intermediary of savings in the region, has become much sounder and better functioning. Strong growth in credit during the last few years, common to all countries and credit segments, responds to the expansionary cycle the region is currently experiencing. Within a longer time frame, it is also a symptom of the convergence towards greater financial development that generally accompanies periods of sustained improvements in per capita income.

Institutional savings, managed by pension funds, are another important factor behind the fast development of financial systems in some Latin American countries. There are several reasons for this. First, the volume of administered funds is sizable, ranging between approximately 10% of GDP in Mexico to as high as 60% in Chile. Second, domestic savings tend to be fostered by pension reform and, thereby, the amount of resources which can be intermediated domestically. This should alleviate the region's dependence on external financing. Third, pension reform has also helped develop new financial instruments and new markets. All things considered, the regular coverage of both types of institutions - banks and pension funds- will be a key attribute of this publication. Finally, the capitalization of stock markets and the issuance of public and private bonds markets have been growing significantly, but they still remain shallow and less liquid than those in developed countries and Emerging East Asia. The number of companies listed in Latin American stocks has not progressed in line with capitalization, so the inclusion of more companies, specially the small and medium ones, is a common challenge for the countries in the region. With respect to bond markets, there is a stark contrast between public and private debt. While the former has grown remarkably in recent times, private debt remains underdeveloped.

Both the recent evolution and outlook of Latin American financial markets are determined by a mix of external and domestic factors. In the past, the region has sometimes faced difficulties to secure external sources of finance, resulting into financial crises. Today, Latin America is less vulnerable to problems derived from reliance on external financing, mainly due to the public sector's higher solvency. Still, a stable access to international capital markets continues to be necessary in the region

The release of this first edition of the Financial System Latinwatch coincides with a global scenario defined by the intensification of the financial crisis that began a year ago, and a marked economic slowdown in most areas of the world. Such environment is being translated into greater financing costs in international markets, a decline in debt issuance, and more recently in a downward adjustment of stock prices. Although we find several supporting elements that are buffering the impact of the crisis, its persistence, along with the current inflationary tensions, have brought a downward bias to our economic outlook for the region. Against this background, monetary policy has reacted by increasing interest rates and reserve requirements. These measures are already fostering milder growth in credit variables, a trend that should continue during the following quarters. Thus, recent improvements in financial solvency and prudential regulation, and a level of private debt that remains within reasonable limits, should allow the banking sector to confront this negative environment with more assurance than in the past.

• Download full report with charts

Published on  Thu, Aug 28 2008, 09:34 GMT