Latin American Capital Markets

THE IMPACT OF THE MACROECONOMIC ENVIRONMENT ON CAPITAL MARKETS 107savings. Moreover; if this takeover of retirement funds by the government occurs, all thearguments relative to the growth impact of contractual savings may not hold.For example, in the case of the 1994 pension reform in Argentina, regulatorsestablished that pension funds could invest up to 50 percent in government bonds.That ceiling was always reached. By the end of 2001, the Argentine treasury was incrisis and increased the investment ceiling to 100 percent. In fact, the reform forcedpension administrations to hold almost all their assets in government bonds. Moreoventhe government also required pensions to accept a government debt swap.In order to allow for higher diversification of risk, Mercosur shares (basicallyBrazilian shares) were eligible for investment on the same footing as local shares. Experiencehas shown that country risk in Argentina and Brazil is highly correlated, and,consequently, the diversification effect was almost nil.Assuming that contractual savings increase the national savings rate and areallowed to invest abroad up to 100 percent, could pension reform help develop domesticcapital markets? There is in fact an increment in domestic savings, and contractualsavings do not pump up local government expenditures; pension funds investedin foreign markets can have a positive, but indirect, effect on domestic capitalmarkets.The wealth effect that may be generated by the discounted expected returnon the foreign investment would probably have a beneficial impact on growth and,consequently, on the domestic business environment and capital markets.In contrast to recent reforms in the Latin American and Eastern Europeanpension systems, some developed countries with highly developed capital marketsare characterized by thousands of employer-based funds. In the United States alone,there are more than 700,000 funds; in the United Kingdom more than 200,000; andin Australia, more than 100,000.Institutional Setup: Where Are We Heading?A safe and sound macroeconomic environment is a necessary, but not sufficient, conditionfor capital market development. An adequate institutional setup is another importantfeature for such development to occur This institutional architecture shouldbalance the need for strict regulations to strengthen corporate governance and lowtransaction costs.Businesses looking to tap resources from the public should be subject tostrict regulation to protect investors. In this line of thought, regulations should, amongCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub