ability to attract capital and facilitate growth.
Following the crisis, the breadth of such growth
may be a more relevant determinant of capital markets activity in Latin America than its depth. The
emergence of a much-touted new middle class across
the region in recent years has expanded a historically
narrow investor base and increased demand for local
securities. According to Banco Santander, approximately 15 million people entered this burgeoning
middle class between 2002 and 2006. During the
same period, official unemployment fell from 11 percent to under 8 percent.
Though the proportion of retail investors remains
low in Latin America, much of this new middle class
is participating in the formal sector for the first time,
buoying institutional demand for domestic securities through pension contributions. Particularly in
Brazil, Chile, Colombia, Mexico, and Peru, these new
consumers have increased demand for improved
infrastructure, credit card and banking services, private education services, and retail goods, reducing
reliance on external demand to generate growth.
Though such progress has already begun to recede
in the downturn, based on current economic forecasts, it is not likely to erode entirely. In other words,
in the leading economies of the region, the new middle class will not fall back into poverty en masse—
as happened in prior crises—and the corresponding
newfound domestic demand will remain.
Though Latin America is hardly a refuge from the
current global economic turmoil, the old axiom “if
the U.S. sneezes, Latin America catches a cold” has
not applied to this crisis. Decoupling may have been
overstated by some, but after two decades of reform,
Latin America as a whole has become more fully integrated with the global economy and less dependent
on the United States. Relative to the anemic state of
global growth, the leading markets in the region still
offer attractive investment opportunities.
Latin American capital markets were hit hard
by the financial crisis, despite these financial developments. Across the region, economic growth has
slowed considerably and stock markets have fallen
precipitously. The issuance of new securities has
slowed to a trickle.
Ironically, some of the strongest capital markets
in the region were hit hardest, principally because of
their increased integration into the global economy.
But in the wake of the crisis, markets that were well
managed during the boom years—particularly Chile,
but also Brazil, Colombia and Mexico—are able to
implement policies to stimulate their economies.
They are cutting interest rates, cutting taxes and
increasing spending on infrastructure.
In addition, they can cover any shortfall by issuing sovereign debt in international capital markets, while still
maintaining very low ratios of debt to
GDP. As a result, better positioned markets are still able to attract foreign capital and maintain domestic demand for
Weaker markets, on the other hand,
are languishing. Among the region’s large economies,
Argentina and Venezuela are at particular risk. In Venezuela, inflation is above 30 percent and the economy
is wholly dependent on oil prices. In Argentina, the
recent nationalization of private pensions further
diminished already wavering investor confidence.
Amidst the downturn, it is unlikely that these struggling economies will transform their capital markets.
Instead, policies should be aimed at mitigating damage and stabilizing markets by focusing on basics:
controlling inflation, increasing transparency, diversifying growth and encouraging domestic savings.
The continued development of all capital markets
in Latin America is contingent upon external factors such as commodities prices and global liquidity.
But it is the economies that have fostered broad and
diverse growth that are likely to benefit as the post-crisis landscape takes shape. Those that fail to do so
are at risk of falling further behind.