Rising Prices, Less Liquidity
Prices of Latin America’s equities shot up last year, but against a backdrop of dwindling liquidity in most markets. The prospect of a wave of delistings will be further bad news for these struggling markets. Telefónica’s decision to delist its Latin American subsidiaries, to be followed by other major Latin corporations planning to list their shares in New York as American Depositary Receipts (ADRs), would be a further blow for the markets.

This would reverse considerable progress made in the 1990s, which saw the market value of listed companies rise strongly. Market capitalization of the region’s biggest stock markets rose to $932.01 billion, an increase of 63% over 1998, reflecting rising prices.

However, market capitalization has also risen as more companies listed, a reflection of the privatizations of the 1990s. Governments throughout the region typically sold their telephone companies, banks and utilities and listed them on local exchanges. The value of the region’s listed companies quadrupled since the early 1990s.

This effect is most noticeable in Brazil, whose listed companies had a market capitalization of $473.64 billion at the end of last year. Five years earlier, traded companies were worth $275.18 billion.

Although Mexico is yet to embark on a well-ordered mass privatization, its market capitalization nearly doubled last year to $281.2 billion.

       
Source: Economática


Bradys Fall from Grace
Secondary market trading in Brady bonds, securities that represent restructured debt from the Latin debt crises of the 1980s, are still the most liquid emerging market debt instruments, but that distinction may not last much longer. Trading in Bradys has sunk since the 1997 Asian crisis broke, followed a year later by the Russian default from which the market has yet to recover. Brazil’s currency devaluation in January 1999 and concern that it would be driven into default deterred investors: Brazilian debt is the most liquid on the secondary markets, normally accounting for over one-third of turnover. Activity picked up after Brazil emerged from the crisis, but turnover slipped again after Ecuador’s default on its Brady bonds and investors pulled back because of the risk of monetary tightening in the US.

Finance ministers in many Latin countries are anxious to make as complete a break with the past as possible by retiring Brady bonds through swaps, cutting into the mountain of outstanding Bradys bit by bit. Ecuador’s default made governments all the more eager to continue ridding themselves of their stock of Bradys as they continue to fund themselves on the international bond markets. Argentina, Brazil and Mexico were the most active countries exchanging old Brady bonds for new sovereign bonds last year. Developing countries around the world have retired about $25 billion in debt since 1992.

The pattern of debt trading is also changing.

Trading in Eurobonds and local instruments is rising while turnover in Bradys is in decline.

The most recent survey by the Emerging Markets Traders Association shows that trading in Bradys accounted for one-third of turnover, the same proportion as trading in local instruments. Eurobond trading was equal to just over one-quarter of turnover.

       
Source: EMTA


The Attraction of New York
Trading in the largest and most popular Latin stocks continues migrating to the US as more and more companies list their shares on the New York Stock Exchange in ADR form. ADR share prices mirror those of the underlying shares in each company’s home market as traders arbitrate the usually minute price differences between the New York and domestic prices.

However, the performance of the underlying shares becomes increasingly irrelevant as trading becomes concentrated in New York.

The Bank of New York’s ADR indices show how Latin equities have under-performed stocks in other emerging markets. In spite of last year’s rally, the distance between Latin America and markets in Asia and eastern Europe continued to widen. The Bank of New York’s ADR index for all emerging market ADRs doubled last year; the index of Latin ADRs rose a more modest 48%.

The Latin telecom index shows these stocks performing somewhat better, with a 68% increase in 1999. Telecom stocks – the largest and most liquid stocks on most local markets – benefited the most from the rally in the final months of the year.

Telecom stocks outperformed the broad index in Latin America as Bank of New York data shows.

The BNY Latin Telecom ADR Index began tracking the market in January 1999.

The importance of New York trading is likely to grow this year as more large-cap companies list in New York. Telefónica is not the only large company to close down its Latin listings. Argentina’s Pérez-Companc, the oil and gas company that accounts for one-quarter of daily turnover on the Buenos Aires market plans to list its shares in ADR form.

       
Source: Bank of New York


The Decade of Recovery
In Latin America, the 1990s now are considered a decade of recovery from the ‘lost decade’ of inflation and slow growth during the 1980s.

Experience proved then that heavy inflation slows growth, while the 1990s have shown that low inflation is a necessary if not sufficient factor for sustained economic growth.

Economic growth certainly picked up in Latin countries during the last 10 years as inflation for the region dropped to below 10% last year from 660% in 1990. Latin America managed to post positive GDP growth throughout the decade, although output rose just 0.3% last year. The weak performance in 1999 was due to recession in Brazil, Argentina and Chile.

Latin America’s economies grew by an accumulated 40% during the 1990s, which should also have led to a substantial increase in incomes. However, as the chart shows, income growth and economic performance are not always closely correlated. Per capita GDP rose just 20% in the 1990s. Indeed, per capita growth actually went into reverse last year, according to estimates. Brazil had the worst performance over the decade, during which it was able to raise GDP per capita by little more than 3%, while Chile did the best with an accumulated increase of almost 80%.

Credit Suisse First Boston, the New York investment bank, expects regional GDP to continue growing this year and next with an average expansion of about 4.2% for the region’s six largest economies. The bank expects per capita GDP to rise by an average 4.6% over the same period. CSFB’s economists expect Venezuela to grow the most. They forecast GDP growth of nearly 17% in Venezuela and a 15% rise in GDP per head in 2000-2001.

       
Source: Inter-American Development Bank