Journal of Financial Economics

REF 124 The Financial Systems in Latin America

After experiencing a significant growth in their industry, most of the major Latin American countries knows a deindustrialization coupled with a return toward international specialization on commodities. Their insertion into the international division of labour for 15 years is from a reprimarisation of their economies (except Mexico and Central America). That favors a premature deindustrialization, a lethargy of their growth (except for Andean countries). In other words, while the number of Asian economies is towards more industrial density per capita and more industry in GDP (except India) and a strong growth, Latin American countries remain confined to a situation where industrial density increases little and the weight of their industry in GDP has declined. Strange return of history of success and failures, this regression could explain the crisis that these countries are going through today?

In this paper, we investigate to what extent terms-of-trade (TOT) disturbances drive cyclical fluctuations and affect trend output in Latin America. We focus on the seven largest economies of the region. We find that TOT shocks are an important driver of business cycles in the region, explaining on average about 30 percent of cyclical fluctuations in the sample. We also find evidence of a long-run relationship between TOT and aggregate output which, in most countries, also affects the short-run dynamics of output growth. Results vary across countries, suggestive of the heterogeneity of the region in terms of exposure to external shocks and domestic policy frameworks.

This paper discusses the monetary and exchange policies followed by Latin American countries during the financial crises that have appeared each decade since the beginning of the 1980s. We examine the implications of a phenomenon defined by Reinhart as “this time is different”. In particular, we report errors in the diagnosis of the structural causes of past financial crises, and the damages caused by the choice of fixed exchange rates. The article also looks at the problems facing the countries today: the resource curse, the dilemma between currency appreciation and financial bubbles, inflation targeting policy. We suggest that governments have learned from past crises, by further anchoring their financial policies to the reality of their economies: the exchange rate regime is no longer the guiding element of inflation policy, loans in local currency have increased due to the rise in domestic bond markets, monetary policies have remained accommodative during the 2008 financial crisis, and central banks have used swap agreements to meet their needs of international currencies.

Most Latin American countries now have floating exchange rates. However, central banks still have the possibility to intervene in the forex market, either directly or through regulations that influence this market. Floating rates have not always been the standard for forex policies. On the contrary, until the early 90s, exchange rates were among the main “anchors” to fight against inflation, then at very high levels in some countries. These strategies had at best mixed performance; quite often, they induced unbearable external deficits. Then, many central banks, whose independence was established or reinforced, progressively shifted towards “inflation targeting” strategies, reducing the role of exchange rates and allowing them to float, at least in most large Latin American countries. However, raw material prices fluctuations (first appreciating, then falling) have led many central banks to intervene, sometimes actively, in their foreign exchange market.

Brazil needs to fix its fiscal situation. The new administration has made progress with the adoption of a dark but realistic fiscal target. The federal spending cap proposal and discussion on social security reform go in the right direction but tax hikes will be probably required. The road to rebalance fiscal accounts will not be easy given the necessity to adopt unpopular measures without growth by a government that was not elected. While Brazilian assets registered an impressive performance in 2016, Michel Temer's government has narrow window to prove it can stabilize the trajectory of public debt. We explore in this article the new fiscal policy, public debt drivers and contingent liabilities.

In 2013, Mexico implemented a comprehensive set of structural reforms aimed at removing the obstacles hindering the economy to renew with growth, in fields as diverse as education, public finance, financial sector, energy and telecommunication. It became therefore one of the few countries to have succeeded in voting such a large number of structural reforms in such a short period of time and accompanied by a broad political support. The reduction of monopolies and oligopolistic organizations that generated inefficiencies and the increase in low-cost access to credit for households and businesses could lead to a rise in Mexico's potential growth by almost one percentage point. If some of the reforms begin to show their effectiveness, the global positive effects on growth are taking time to appear. This delay is especially long given that reforms did not deal with several roots of the fragility of the Mexican growth model. Paradoxically, the Mexican economy shows strong and sound macroeconomic fundamentals, resilience, and great trade openness but remains poorly inclusive, largely informal with endemic corruption and generates strong geographical and income inequalities.

Fifteen years after its historical sovereign default, we describe structural factors weighting on economic growth in Argentina and analyse how they affect economic agents' ability to access financing. Notably, we show that a long track-record of uncertainties regarding the local currency generated an inefficient financial sector. We present the first measures implemented by the newly elected government and give a breadth to the economic perspectives.

The sovereign default in 2001 has brought about in Argentina an era of convoluted relationships with the international financial markets, characterized by large swings in the orientation of macroeconomic policy-making. Focusing on the determinants of supply and demand for external borrowing, this article shows that the country did have access to international capital markets during some periods, particularly after the debt restructuring agreement of 2005. Furthermore, certain episodes of decline in net capital inflows did not arise from constraints on the supply side, but were the consequence of policy choices: a commitment to reducing outstanding sovereign debt, and the imposition of foreign capital entry regulations. The strengthening of certain “unconventional” policies since 2011 is certainly explained by foreign currency shortages – in particular the monetization of fiscal deficits and the imposition of strict foreign exchange controls. Yet, some structural factors have also underlined the domestic authorities' motivations: a quest for autonomy in economic policy through financial autarky, and the “fear of floating” – a reluctance to devaluate driven by the potential impact on domestic inflation.

Since 2012, the economies of the “Andean arc” (Colombia, Ecuador, Peru, Bolivia) seem to experience a paradigm shift in their economic growth model. Indeed, as a result of the upward momentum in commodity prices in the 2000s, these economies have enjoyed a remarkable cycle of economic growth and, at the same time, a primarization of their external sector. The downward trend in mineral commodity prices starting in 2012, reflecting the onset of the downturn in China, followed by the decline in oil prices since 2014, deteriorated the terms of trade of these economies and thus, affected their economic growth path. However, the resilience of these economies to this shock depends on their intrinsic characteristics.

Peru and Colombia appear more resilient, while activity in Bolivia and in particular in Ecuador contracts. These economies are gradually using a policy to change their growth patterns to reduce their dependence on the primary sector. Beyond the voluntariness of the various national authorities, the process of diversification of the growth model remains attached to the comparative advantages of each country and, secondly, to the potential productivity gains.

While Venezuela is facing a major balance of payments crisis following the fall in oil prices, it is essential to understand the origins of this situation. This paper first examines the distortions and economic imbalances underlying this economy, including hyperinflation, and then assesses the country's capacity to face the risk of default. To this end, we build two scenarios of financing needs and resources, highly dependent on oil prices and support from China. We thus show that in the absence of a major rebound in oil prices, the default appears inevitable. Finally, we analyze the growing social and political tensions that accompany this difficult economic climate.

New comer in Latin America, China has become a trading partner as important as EU. China's appetite for natural resource has been the engine of Latin American growth in the 2000, while Chinese slowing down has contributed to the recent crisis of several Latin American countries. This article begins by an assessment of Chinese economic footprint on Latin American economies: while it is strong in the case of trade and it is rapidly increasing in the case of direct investment as well as in the case of credit with the exception of Venezuela and Ecuador. A second part analyses more thoroughly the impact of the Chinese economy on Brazil. While the surge of exports to China lifted the external constraint on Brazil, the country was unable to make use this lever to transform the production structure. Thus the financial boon provided by Chinese exports was at the root of the crisis Brazilian governments were unable or unwilling to fight. In its conclusion the article explores short and medium term perspectives and discusses the future of economic complementarities between China and Latin America.

The quality and predictability of macroeconomic policies in Latin America have been improving over the last twenty years and the development of local currency bond markets has increased. However, capital flows volatility remains high inducing exchange rates volatility and the improvement of macroeconomic policies looks to falter. Accordingly, (consequently?), the development of local currency bond markets stopped in 2012 in Latin America but kept pace in emerging Asia. Today, Latin America emerging economies face a term of trade shock resulting from lower commodity prices and potential restrictive global financial conditions. As a result, there is a stronger case than ever for specific policies promoting the development of local currency bond markets, helped by the international community, as committed by G7 and G20.

The settlement of CNP Assurances in Brazil is a success. Beyond mastering the valuation techniques of insurance companies, through which CNP won the 2001 bidding for the acquisition of Caixa Seguradora, many factors played a part in this achievement. The first of these is two partners (CNP Assurances and the public bank CAIXA) sharing the same values with a common ambition towards sustainable development. To achieve a net profit of R $ 1.9 billion in 2015 and to reach 4th place in terms of market share, the Brazilian subsidiary was restructured shortly after the acquisition, then renovated its products range. In 15 years, the branch has not only increased its presence in the partner's network by building on the very strong CAIXA brand in Brazil, but also conquered new customers beyond the bank's network, at the same time by launching new products and by external growth operations. Today, the clarity of its governance and the rigor of its control allow it to stay clear from the politico-financial scandals that rocks Brazil. Although affected by the Brazilian recession, partly due to its scandals, CNP Assurances, while remaining confident in its activities' potential in Brazil, is sailing towards the digital market's conquest with the first 100% digital platform in Brazil.

Pension funds are a par excellence passionate topic, and this regardless of the country. Chile is not an exception. Representing a real paradigm, the Chilean experience, regarding the way financing of pensions has been reformed, is singular because this country has been a pioneer in this area by substituting, in a radical way, a defined contributions mandatory individual pension funds system to its old pay-as-you-go system. Built on three sections, this article highlights first the virtues of long-term savings, related to the existence of pension funds, generating positive externalities, that has contributed, among other things, to the funding and the modernization of the Chilean economy. Then he describes and analyses the specific modalities and features of the Chilean pension funds and their performances. Finally, it presents and analyzes the main projects of reforms currently in debate in the country, which aim correcting shortcomings in the present-day system of pension funding.

This paper recounts Argentina's pay-as-you-go pension system evolutions from 1993 to the eve of 2016's reform, which introduces a “National historic reparation program for retirees and pensioners”. We show that even though social security system's budget was balanced and provisioned by a buffer fund (the FGS) equal to 13% of GDP, the federal government maintained disputes with retirees whose pensions were incorrectly adjusted to inflation between 2002 and 2006. This balanced budget was also attained to the detriment of the provinces, which were deprived of some of their fiscal resources. This reform offers a compensation payment to wronged retirees and gradually gives the provinces back the aforementioned fiscal resources. Its financing relies however on the higher transfers from the Treasury and the FGS that will probably be emptied to fund this reform. Since on top of that a structural reform is meant to take place three years from now, Argentina's pay-as-you-go pension scheme's future is today uncertain.

Since its widespread diffusion in the mid-1990s, microfinance became an important part of poverty reduction strategies. However, the impacts of its main financial technique, microcredit, have been more and more questioned during the last decade. Several limits of this tool have appeared, which even happened to be harmful to those supposed to benefit from it. After an overview of the state of microfinance in Brazil and a review of the limits of the microcredit tool, we focus on a particular adaptation of the microfinance model: the one implemented by the Brazilian community development banks, which are today more than a hundred on the whole Brazilian territory. One of the main innovations of these civil society organizations is to link microcredit to the issuance of a social currency, the use of which - in addition to the Brazilian Real - is confined to the local territory. We highlight the benefits of these currencies and see to which extent they respond to some of the limits of microcredit, through the example of the Palmas Bank, which founded this model of solidarity finance. Not only economic tools but also social constructions, these currencies participate in endogenous development and can be the vehicle for the co-construction of poverty reduction policies.