Latin American Capital Markets

THE IMPACT OF THE MACROECONOMIC ENVIRONMENT ON CAPITAL MARKETS 97process. In addition, trade reforms that were meant to strengthen commercial relationswith Mercosur countries, particularly Brazil, exposed domestic firms to unevencompetition.Another lesson from the Argentine episode relates to the deleterious influenceon capital markets of the combination of systematic fiscal imbalances, financingthrough debt issuing, and lack of strong private sector growth supported by significantimprovements in productivity. Firms were impaired because they were not able tocompete beyond Mercosur's markets, to generate a sustainable flow of funds to supportfurther investment, or to demand resources through financial and capital markets.Even during the exuberant period of the currency board and the substantialstrengthening of the banking system, the Argentine stock exchange languished. Thenumber of listed instruments declined steadily from 178 in 1989 to 129 in 1999 (IMF200l).The number of listing companies also decreased.The pension reform providedfunds that were mainly used for government debt and bank deposits. The strongercompanies relocated and chose to list in foreign stock exchanges, resulting in a reductionin liquidity.The decline of the Buenos Aires Stock Exchange (BASE) during the 1990scan be directly related to the government's debt finance overcrowding of the privatesector and the lack of a long-term strategy for capital market development. During1996-2000, on average, 86 percent of net primary issues dealt through BASE werefixed-income instruments and, of those, 76 percent were government issues. Theoverwhelming presence of the government is more dramatic in relation to liquidity.More than 90 percent of trade was done on the treasury's fixed-income products,and there was no strategy to reduce the government deficit and create more roomfor private sector funding in the capital marketNegative Externalities Derived from Tax Schemes and Financial PoliciesThere is a tendency for the share of equity markets to increase relative to bankingmarkets as per capita income increases.This relation also holds in cross-section analysis.However, there is no causal relationship in this trend. In mature markets, such asthe United States, bank debt and equity financing are roughly 50 percent; in other developedcountry markets, such as Germany, debt takes the bulk of financing.This trendhas not occurred in most of the countries in Latin America and the Caribbean becausethey have developed debt markets related to bank financing without realizingthat, at the same time, they have been imposing strong negative externalities on theequity market.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub