Capital markets in Latin America face challenges, but benefits are worth the effort
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Page 78
Following are edited excerpts of an address delivered by IMF Deputy Managing Director Eduardo Aninat at the Inter-American Development Bank Conference on Capital Market Development in Washington, DC, on February 5.
The full text is available on the IMF's website (www.imf.org).
Over the past decade, Latin America has made great strides in the area of capital market development. Even so, the region still has a long way to go. The potential benefits of further mobilizing capital markets are big; but so, too, are the challenges.
We are cautiously optimistic about the near-term outlook for emerging markets for a number of reasons. First, the 1990s financial crises brought home the importance of strong macroeconomic policies and sound financial systems.
Second, we are "cautiously realistic" about the external environment. At this point, world growth now seems likely to be positive, but lower, at about 31/2 percent this year, down from its 12-year high in 2000 of 43/4 percent-a steeper drop than had been expected only some months ago. Even in this context, Latin American could well maintain output growth at a respectable 4 percent this year, with inflation declining further to 5-6 percent on average for the region.
Third, we are cautiously optimistic about emerging markets because most global funds now increasingly follow some global benchmark index that has fixed allocations to emerging markets.
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On the downside, however,we must acknowledge that the external environment continues to pose three risks. First, the outcome of several external factors, such as U.S. economic growth, interest rates, oil prices, mature market equity prices, and major exchange rates,will heavily influence flows and spreads, as mentioned earlier. Second, emerging markets, being small relative to global capital markets, are affected significantly in the event of a reweighting of benchmark indices. Third, the investor base in emerging markets at times has been quite unstable.
The overall cautiously optimistic outlook for emerging markets provides a valuable opportunity to tackle many of the persisting obstacles to capital market development in Latin America and the Caribbean.
In domestic bond markets, Latin America is relatively advanced, owing to the traditionally high financing needs of...
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