WB/IMF/Brookings InstitutionWB/IMF/Brookings Institution55thth Annual Financial Markets and Development Annual Financial Markets and Development

Conference:Conference:The Future of Domestic Capital Markets in Developing The Future of Domestic Capital Markets in Developing

CountriesCountriesApril 14 – 16, 2003April 14 – 16, 2003

DDieter Linneberg ieter Linneberg Superintedencia de Valores y Superintedencia de Valores y

Seguros- SVSSeguros- SVS CHILECHILE

2

Fundamentals of the Chilean Fundamentals of the Chilean EconomyEconomy

Macroeconomic Macroeconomic andand

Financial Financial StabilityStability

External External Sector Sector

StrengthStrength

Microeconomic Microeconomic & Institutional & Institutional

StrengthStrength

Financial Financial SystemSystemStrengthStrength

Monetary Monetary StrengthStrength

FiscalFiscalStrengthStrength

Macroeconomic StabilityMacroeconomic Stability

4

Chile: GDP, 1960-2002Chile: GDP, 1960-2002(billions of 1996 Chilean pesos)(billions of 1996 Chilean pesos)

50005000

1000010000

1500015000

2000020000

2500025000

3000030000

3500035000

4000040000

19601960 19701970 19801980 19901990 2002(e)2002(e)

5

Chile: Inflation and TargetsChile: Inflation and Targets(annual %)(annual %)

00

55

1010

1515

2020

2525

3030

3535

90 90 91 91 92 92 93 93 94 94 95 95 96 96 97 97 98 98 99 99 0000 0101 0202

6

Chile: Monetary Policy Interest Chile: Monetary Policy Interest RateRate (%)(%)

* Before June 1995: PRBC 90 days rate

Nominal Int. RateCPI-adjusted Int. Rate

CPI-adjusted MPR

Overnight Rate *

-0,5

1,5

3,5

5,5

7,5

9,5

11,5

90 91 92 93 94 95 96 97 98 99 00 01 02 2,5

3,5

4,5

5,5

6,5

7,5

8,5

9,5

10,5

11,5

12,5

Nominal MPR

Fiscal StrengthFiscal Strength

8

Fiscal Balance: Average 1992-2001

(% GDP)

-10-10

-8-8

-6-6

-4-4

-2-2

00

22

Argent.Argent.

BrazilBrazil

Chile

ColombiaColombia

Czech Rep.Czech Rep.

HungaryHungary

IsraelIsrael

KoreaKorea

MalaysiaMalaysia

MexicoMexico

PeruPeru

PolandPoland

ThailandThailand

Latin America CountriesLatin America Countries

Other Emerging EconomiesOther Emerging Economies

Financial System Financial System StrengthStrength

10

ArgentinaArgentinaThailandThailand

South KoreaSouth KoreaJapanJapan

MalaysiaMalaysiaMexicoMexicoBrazilBrazilChileChile

Hong KongHong KongItalyItaly

AustraliaAustraliaGermanyGermany

FranceFranceUKUKUSUS

SpainSpainNetherlandsNetherlands

(15, amount 76)(15, amount 76)

Ranking of Banking StrengthRanking of Banking Strength(Source: Moody´s, july 2002)(Source: Moody´s, july 2002)

stronger

less strong

11

Chile: Financial Savings by Institutional Investors (% GDP)

00

2020

4040

6060

8080

100100

19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001

pension funds

insurance companies

mutual funds

12

Chile: Domestic Corporate Bond Market (USD billions)

(total outstanding)(total outstanding) (Issuance)(Issuance)

00

11

22

33

44

55

66

77

19941994 19951995 19961996 19971997 19981998 19991999 20002000 200120010,00,0

0,50,5

1,01,0

1,51,5

2,02,0

2,52,5

3,03,0

outstanding

issuance

Microeconomic & Microeconomic & Institutional StrengthInstitutional Strength

14

ArgentinaArgentinaMexicoMexicoBrazilBrazil

ThailandThailandItalyItaly

JapanJapanCzech Rep.Czech Rep.

S.KoreaS.KoreaMalaysiaMalaysia

SpainSpainFranceFrance

ChileChileU. KingdomU. Kingdom

GermanyGermanyAustraliaAustralia

Hong KongHong KongUSAUSA

(19, amount 49)(19, amount 49)

Competitiviness Ranking 2002Competitiviness Ranking 2002(Source: International Institute for Management (Source: International Institute for Management Development)Development)

+ compet.

- compet.

15

BrazilBrazilMalaysiaMalaysia

MexicoMexicoFranceFranceSpainSpainItalyItaly

S.KoreaS.KoreaArgentinaArgentina

Czech Rep.Czech Rep.ThailandThailandGermanyGermany

ChileChileAustraliaAustralia

UKUKUSUS

Hong KongHong Kong

(9, amount 156)(9, amount 156)

Economic Freedom Index 2001 (Source: The Heritage Foundation)

+ freedom

-freedom

16

ThailandThailandArgentinaArgentina

MexicoMexicoRep. ChecaRep. Checa

BrazilBrazilKoreaKorea

MalaysiaMalaysiaItalyItaly

FranceFranceSpainSpain

GermanyGermanyChileChileUSAUSA

U. KingdomU. KingdomAustraliaAustralia

(17, amount 102)(17, amount 102)

Corruption Index Corruption Index (June 2001; Source: Transparency International)(June 2001; Source: Transparency International)

- corrupt.

+ corrupt.

Recent Structural Recent Structural ReformsReforms

18

Bilateral and Multilateral Negotiations:

Further Trade IntegrationFurther Trade Integration

General Import Tariff (%)

0

2

4

6

8

10

12

14

16

90 91 92 93 94 95 96 97 98 99 00 01 02 03

• Free trade agreement with EU, US, EFTA.

• Currently negotiations are taking place with Corea for a FTA.

• WTO, FTAA

19

Capital Markets Reforms: Central Capital Markets Reforms: Central BankBank• Elimination of all remaning foreign exhange restrictions

• Substitution of nominal MPR for CPI-adjusted MPR

• Streamlining of debt issued by the Central Bank

20

Capital Markets Reforms: legal Capital Markets Reforms: legal changeschanges• New corporate governance and tender offer regulation

• Elimination of capital gains tax on liquid stocks and reduction of withholding tax on interest from 35 to 4% on local bonds for foreign investors

• Increased flexibility for allocation of personal savings

CAPITAL MARKETCAPITAL MARKET

22

Chilean Market OverviewChilean Market Overview

GDP

Stock Exchanges

Listed Sock

Individual Shareholders

70 billion US$ / year

Santiago Stock Exchange (80%)Electronic Stock Exchange (18%)Valparaiso Stock Exchange (2%)

280 Listed Stocks

600.000 (4% of population)

23

Capital Market: Main ReformsCapital Market: Main Reforms

1982Debt Crisis

Tender Offer and Corporate Governance

Law

1981 20001986

BanksReform

SecuritiesLaw

2001 2003

Capital Market Reform ILaw

Capital Market Reform II

Law

24

Investment ValuationInvestment Valuation

Results from McKinsey Interviews

Fuente: McKinsey Global Investor Survey on Corporate Governance, 2002

25

Corporate Governance Corporate Governance ResultsResults

Santander Central Hispano

Investment

Latin American Equity Research: Agosto 2001: Shareholders´Rights, “Slowly Moving in the right direction”,

Categoría Argentina Chile Colombia

Ley Novo M° Ley CBCPMultiples clases de acciones 0 0 1 0,5 0 0,5 0,5Certificados de Depósitos 0 0 0 1 0 0 0Una acción un voto 0 0 1 1 0 0 0Representación proporcional 1 1 1 1 1 0 0Derechos Preferentes 1 1 1 1 1 1 1Tomas de Control 1 1 1 1 1 1 1Derecho a Retiro 1 0,5 1 1 0 0 0Deslistamiento 1 1 1 1 1 0 0Free float 1 0 1 1 0,5 1 1Llamado a Juntas Extraordinarias de acc 1 1 1 1 1 1 1Acciones no bloqueadas antes de junta 0 0 0 1 1 0 0Mecanismos de Opresión de minoritarios 1 1 1 1 0 0 0Independencia del Directorio 0 0 0 0 0 1 1Renovación Directorio 1 vez al año 0 0 1 0,5 0 0 0Comité de Auditoria 1 0 0 1 0 1 1Acceso a Información Corporativa 1 1 1 1 1 1 1Calidad de la Información 0,5 1 1 1 1 0 0Arbitraje 1 1 1 1 0 0 0

Indice Total 11,5 9,5 14 16 8,5 7,5 7,5

Brasil México

26

Cases that Hurt ConfidenceCases that Hurt Confidence

•Financial Scandals in USA: Enron, Worldcom, Tyco. And in Europa: Ahold

•Political and Social Situation in the Region

•Potential insider Trading in Chile (Inverlink case)

27

Business Model of and Informal Broker : Inverlink

Corredora Inverlink

Clientes

Los clientes entregan dinero a corredora Inverlink para celebración de pacto con retrocompra.

Corredora Inverlink entrega certificado donde se detallan valores y se mantiene la custodia en la corredora.

Inverlink Informal

Las operaciones no son registradas en la contabilidad de la corredora. Los dineros son enviados a entidades no registradas.

DineroValores

Chilean Central Bank Chilean Central Bank

Linkage of Linkage of InformationInformation

28

Inverlink Consultores

Moya

Moya endosa los depósitos a Inverlink consultores

Moya recibe pagos personales por los instrumentos endosados

Corredores

Inverlink vende depósitos a corredores

Dinero

Valores

Fondos Mutuos y otras instituciones adquieren los depósitos

Fondos Inverlink

Inverlink Consultores vende documentos a Fondos Inverlink y éste a las corredoras

Business Model of and Informal Broker : Inverlink

29

How to recover market confidence?How to recover market confidence?

30

IssuesIssues• General Corporate Governance mechanisms:

– Ownership identity and structure– Board practices– Disclosure practices– Institutional investors– Market for control– Strong regulations for Intermediaries– Restriction for Public Institutions– Enforcement– Specialize tribunals

31

IssuesIssues

• Latin American specific issues:– Conglomerates– Financial market development– Macroeconomic and political instability– Legal reforms

32

Concluding RemarksConcluding Remarks

• The “fundamentals” of the Chilean economy are solid enough in order to consolidate the capital market.

• Confidence is a main challenge for emerging markets during the last years´ environment.

• The “out layers” misbehavior should not provide the idea of a generalized problem in the market. But the regulator must assure rapid solution and punishment for undesirable market participants.

• Corporate governance is one of the main issues to improve in a coordinate way in the Latino American region.