Latin Finance - May 2008 - 91

hans humes Brazil, Chile, and Mexico started investing aggressively abroad. The one market that has experienced significant growth is government debt. In the past, LatAm relied heavily on foreign financing of its public sector, with the remainder coming either from the banking system through forced reserve requirements, or from the central bank. As macroeconomic conditions improved and inflation declined, domestic placement of government paper thrived. Domestic public bond holdings, at 40% of GDP, represent a much higher ratio than that of any other emerging region, with a growing share of local currency denominated bonds. What Argentina Can Learn From Nicaragua by Hans Humes* Boom and Bust After a long and difficult period of booms and busts, the next 20 years represent a major challenge. For the first time in many years, LatAm financial markets are increasingly prepared. While the size of the system remains small, its institutional and prudential structure is among the best in the developing world and its size is growing. Macroeconomic conditions are better than in any period in the last half century or so, and the region has become less dependent on volatile foreign capital. Ironically, these trends are making the region much more attractive, and foreigners are increasingly interested in investing in most of LatAm. In order to consolidate the benefits of this improved environment, LatAm policy makers will need to work very hard. The banking system will need to expand its lending base; the incipient mortgage market will need to play a greater role in providing home ownership; equity markets will need to become more investor friendly and have greater protection for shareholders; institutional investors should be allowed to have a more diversified portfolio. Finally, it is important to remember that infrastructure requirements can be as high as 4%-5% of GDP ($12-$15 billion) a year for the region, suggesting the need for a strong public-private partnership. This can only take place in the context of a much stronger capital market structure, and better integration with the rest of the world. Only on this basis will it be possible for the region to regain its preeminent position with respect to other emerging economies over the next 20 years, after falling behind during the last 20. LF Nicaragua’s restructuring opens the gates for international investors. It also sets an example for other delinquent sovereigns. O *Claudio Loser, Financial Markets in Latin America, in “Growth and Development in Emerging market economies,” (Saga, New Delhi, Forthcoming 2008); and Miguel Kiguel, “Capital Markets in Latin America: Are they at a turning point?” Prepared for the Latin American Emerging Market Forum, Montevideo, and (December 2007). **Claudio M. Loser is President of Centennial Latin America and Senior Fellow at The Inter American Dialogue UPDATE For more on capital market development see www.latinfinance.com > ver the past 20 years, we have seen the market change more than we could possibly have anticipated. Latin American countries have risen from being extraordinarily indebted and economically paralyzed to becoming, in many cases, net creditors with dynamic economies. The investment opportunities have shifted from speculating in external debt to financing companies and projects that are lifting LatAm from poverty to middle income at one end, to investment grade at the other. I hope I and my firm, Greylock Capital, have adjusted as markets developed. In the 1980s I invested in Brazilian DFA and Mexico UMS, in the 1990s, IDUs and C bonds, Mexican pars and discounts. In 2008, we invest in São Paulo consumer finance companies and construction finance in Monterrey. Of course, the process is staggered. Not all countries have resolved every issue constraining foreign investment. For example, following years of being in default, and 10 years after the first stage of debt resolution, Nicaragua reached arrangement with remaining private sector creditors in December 2007. Greylock was intimately involved with resolution of the commercial bank debt in Nicaragua. We followed a process that retired 80% of the outstanding in 1995, via a World Bank sponsored buyback. We watched in the succeeding 10 years how various firms litigated, attained judgments against the country and pursued attaching assets. A result was that a poor country remained isolated and private capital was deterred. In 2007, there was a tremendous effort by the World Bank, IMF, Lazard and Cleary Gottlieb as advisor to Nicaragua, as well as creditors, who for the most part were not banks but funds like ours. This yielded a deal that removed overhanging debt and litigation. Agreement by the government of May 2008 LATINFINANCE 91
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Latin Finance - May 2008

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