FINANCIAL TIMES/THE BANKER. Emerging Latin Financial Centres

Latin American financial centres are finding a golden opportunity in the years of crisis. A global investing tilt towards emerging markets and the rush by developed market companies to diversify their business into high-growth markets is breathing life into the major financial centres of the region.

“Traditionally each Latin centre related individually to New York and London and that sapped energy across the region. Today markets are growing fast and integrating together. The integration of Latin America will boost the opportunities for trade and arbitrage with New York and London,” says Paulo Oliveira, ex-chief business officer of Brazilian stock market Bovespa and today head of the initiative BRAiN – Brazil Investments & Business - which aims to attract businesses to Brazil.

Indeed, for 10 years São Paulo has been replacing Miami as the city of preference for many companies’ Latin headquarters. The rise of São Paulo to its current dominant position today looks hard to shake.

“As a financial market, São Paulo dwarfs all the others in the region on a wide range of indicators from bank assets through stock market capitalization. That makes for a lot larger profit pool and attracts in new businesses,” says Paul Gruppo, head of the financial services advisory practice at Ernst & Young Terco in São Paulo. Brazil represents 40% of Latin America’s GDP; 80% of equity market volume compared to just 10% in Mexico; and 90% of exchange-traded derivatives, adds Mr Oliveira.

Even non-Brazilians stand in some awe of the market’s growth and prowess. “I have to praise Brazilians; they have done a wonderful job at institution building and cooperation. São Paulo deserves to be the largest and dominant financial centre of the region,” says Guillermo Larraín, chairman at the Center for Regulation and Macrofinancial Stability in the department of economics at the University of Chile in Santiago.

There are, however, grumbles about recent government meddling in markets. Although Mr Gruppo sees reasonable confidence from investors in the long-term direction of Brazil, recent and abrupt increases in tax on foreign investments in the equity market, such as a 6% financial operations tax, have revived fears of a return to an unstable regulatory regime. That could hamper growth. “Taxation, shutting down whole markets and managing FX rates could move business offshore. The government has to be careful that in the heat of the moment, they do not make decisions that are to the detriment of long-term interests,” he says.

If the growth of São Paulo as a financial centre is well underway, smaller centres too are becoming pro-active in building capital markets. A frenzied period of growth over the last three years in Bogotá has driven a very rapid development of capital markets. The country’s public debt market is the 5th largest electronically-traded such one in the world and Colombia is fast developing a corporate bond markets with $7bn of local currency, long-term issuance in 2009-10, says Juan Pablo Cordoba, president of the Colombia Stock Exchange in Bogotá.

That has created a pool of financial professionals who are branching out into new fields such as private equity and asset management. A promising, if still tiddly, derivatives market with trading of some $250m in nominal value per day, is also a sign of growing sophistication and confidence. Colombian corporates are spreading their wings as multilatinas and banks are in optimistic mood and have been expanding into Central America.

Indeed, rowdy Bogotá threatens to eclipse the more sophisticated and established Santiago as the Spanish-speaking South American champion. Mr Larraín senses that his home city is losing ground: “Chile would like to become a financial centre for Latin America but has never had a as clear a strategy as Brazil and particular efforts to create an offshore segment have been hampered by poorly defined tax incentives,” he notes.

Nevertheless, the Chilean capital’s depth of markets and talent pool is still the greatest in Spanish-speaking Latin America and it is likely to prove top dog in key niches. A well-regulated fund management industry and rich base of pension funds means the city is becoming a Latin centre in asset management. 

Mexico City remains aloof in all this. It should be a big financial markets player, but banks and capital market continue to puzzle for their lack of fizz despite the size of the economy, its well-developed industrial base and close links to the US.

Mr Larraín says this subject was highlighted at a recent conference and delegates were at a loss to pinpoint specific reasons. Areas discussed included a conservative stance by companies and reluctance to raise capital via the exchange; and the perception that while Mexican regulators have modernized the financial framework, they have failed to keep pace with São Paulo and Santiago.

Mexico’s loss is São Paulo’s gain and it is likely that the rambunctious city will continue to consolidate as the Latin hub. Other centres will specialize: in addition to Santiago’s wealth management, Panama has proved highly successful in building an offshore banking industry that challenges Miami, for example.

 

Exchanges

Over the last 10 years, Latin exchanges have modernized their infrastructure and stakeholders from owners and managers have successfully co-opted governments to develop markets. Today, these exchanges are fighting to bring back liquidity drained out to New York, whose American Depository Receipt programmes have picked up blue chips from across the region and joining forces. But just how far will that process go?

São Paulo’s Bovespa has already arrived. It is already the fifth largest exchange by market capitalization and has daily trading volumes of some US$3.5 billion. It is looking at opportunities to cooperate with other markets in the region.

A new exchange is rising that should help further staunch the flow of liquidity to the US. Close cooperation between the more liberal Andean nations has resulted in the creation of the Integrated Latin American Market (MILA), which connects the stock exchanges of Bogotá, Lima and Santiago. Mr Cordoba believes the virtually integrated exchange will create
critical mass and liquidity, promote trading between markets, and encourage more companies to IPO, knowing they can tap investors in three countries.

MILA got off to a rocky start with low volumes of trading in the first three months through August and a spat over tax harmonization between the three countries. Mr Cordoba admits volumes were low but says this was expected and believes that as investors and intermediaries obtain more information on the other two markets, volumes will take off. Already, asset managers are creating MILA funds. Increasingly, companies will raise funds across the three markets, he predicts. 

If MILA is successful, it could encourage further cooperation between Latin exchanges. Juan Antonio Ketterer, financial markets specialist at the Inter-American Development Bank in Washington DC, points to the Nordic model where exchanges provide equal access to each others’ markets.

Mr Oliveira is pushing hard for just such a model for Latin America. BRAiN has been working on a detailed study, which it will finish by year end, mapping out capital markets in the region. It plans to push an agenda of fast track access for investors to other markets so that Brazilian investors can get access to Colombian stocks, for example, without having to resort to the US. “We want to see coordinated and harmonized models where Latin exchanges and brokers work together. This is win-win situation for us all,” he believes.

Is this just another doomed and over-ambitious attempt at Latin integration? Mr Larraín is optimistic. He points out that for the first time it is the private sector and not the government that is pushing for integration. Multilatinas, Latin
companies that have spread their wings abroad, have been blazing the trail and capital market organizations are now following.

If that cooperation does come, the extra liquidity will allow larger companies to raise funds locally and allow Latin financial centres to challenge New York. Mr Ketterer believes an alternative scenario should be considered. “There
are two schools of thought. There may be cooperation with a Nordic-style model of open access. Or there may be rivalry between centres as there is between Frankfurt, London and Paris. It’s just too early to say which.”

One area where regional links are less obviously taking root is in the banking sector. That’s partly because Latin America remains so dominated by banks from outside the region with Brazil the blinding exception.

Meanwhile, Brazilian banks have been focused on the booming and highly lucrative domestic market where high interest rates generate fat spreads. That restricted mentality is changing, reckons Mr Gruppo. Today, Brazilian banks are evaluating prospects globally and while the crisis makes caution necessary, some are already expanding
overseas. BTG Pactual, Itaú and Banco do Brasil have all been pushing into foreign and Latin markets. Another strategy may using their deep skills in specific product lines for developing monoline companies such as those
offering credit cards, consumer finance or auto finance to move into other Latin countries, says Mr Gruppo.

Already, foreigners are taking note of Latin America’s capital market strengths. US asset managers used to stay in New York, arguing that markets are ever more influenced by global flows and the bulk of Latin trading takes place in the US
anyway. Today, the need for local knowledge and the transfer of liquidity to Latin America is forcing them to reassess. “Many are now questioning whether they can still be credible if they do not have presence in key markets such as
Brazil,” says Mr Gruppo. That surely is a sign of the times.

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