Latin American Capital Markets

8 KENROY DOWERS, FELIPE GOMEZ-ACEBO, AND PIETRO MASCIDecline in Local Capital MarketsThe improving macroeconomic situation has not grown in tandem with activity in theregion's financial and capital markets, which have been marked by numerous marketcrises, weaknesses, and volatility. We use size and liquidity indicators to measure thedevelopment of stock markets. Market capitalization equals the total value of all listedshares in the market at market prices. It is assumed that the size of the stock marketis positively correlated with its ability to mobilize capital and diversify risk.Secondary market liquidity shows roughly the capacity of the market to fulfillthe roles of attracting capital inflows and providing allocation efficiency, risk diversification,information, and price discovery. Without liquidity, the markets lose thetransformation function, lessening the interest of potential investors who might notbe able to access their funds quickly. In addition, without liquidity, primary markets donot develop efficiently.The diversity of the instruments used also represents an indicatorof market development.Emerging financial markets are small relative to mature markets and generallysmall relative to GDR In the year 2000, around half of the $2.7 trillion in emerging marketcapitalization was in Asian markets; the Latin American share was about 20 percent.As figures I -1 to 1-5 show, relative to other countries, domestic capital markets in LatinAmerica and the Caribbean are underdeveloped with respect to market depth, quality,and ability to attract domestic and external resources. 2 Box I -1 compares traded activityfor selected countries in Latin America and the Caribbean with countries withmore advanced capital markets. After the emerging market crises of the late 1990s,Latin American exchange problems have tended to worsen rather than improve.A number of factors have caused the decline of local markets in Latin America.The cost of operating in the stock market (for example, measured by fee levelsor time for liquidation) is proportionately higher in Latin America and the Caribbeanthan in other regions. The region's stock exchanges do not substantially affect largecompanies that are able to raise funds abroad. However, small and medium-size startupcompanies, which generate new employment, are not able to obtain financing. Evenwhen money is available locally, taking a company public in Latin America is often notconsidered worth the effort because local exchanges lack capital, liquidity, and risktolerantinvestors.This is especially true for new economy or Internet companies, whichdo not become profitable for several years.These factors have led a growing numberof Latin American blue chip firms to delist their shares on local stock exchanges.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub2 On the size and scope of financial markets in developing countries, see Levich (2001).