CAPITAL MARKETS CENTRAL AMERICA: Strength in numbers

While Panama and El Salvador’s common currency have made them particularly well-suited to integrate, Nicaragua is among several countries in the region that are already looking on with interest. The exchange in the Dominican Republic has made clear its strong interest in integrating with Central American peers, sources on the El Salvadoran exchange say. Costa Rica has been involved in discussions on stock exchange integration with Panama and El Salvador for several years, and is studying its financial market regulations with a view to making it happen. The country is a very likely candidate for joining the operation, Dulcidio De La Guardia, minister of finance and economy in Panama, and the former chairman of the Panamanian exchange tells LatinFinance. Central American ambition, when it launches integrated trading with Panama in June.

“Anything that has to do with the integration of the capital markets, Panama will support that, and the integration will benefit the region as a whole,” says De La Guardia. “When you have small, fragmented markets it’s very difficult to have liquidity.”

Unifying Central America’s stock exchanges has been under development for more than a decade, but countries have struggled to reconcile regulatory differences. “We have been talking about the integration since before 2006,” De La Guardia says, adding that aligning regulatory expectations and approach in each country has been one of the largest obstacles to the project. “The big challenge we have to integrate Central American capital markets is to make sure that the regulators in each country realize that it’s better to have one big market than five fragmented small markets.”

The breakthrough came last year when El Salvador’s financial regulator recognized the Panamanian bourse, meaning that the authority accepts the other’s legal framework as adequately meeting its own standards. That allows securities on the Panabolsa to be registered in El Salvador.

“There has been political will on the part of the two markets,” says Roberto Erroa, who is president of the Association of Stock Brokerages in El Salvador and is coordinating the integration process for the Salvadoran exchange.

On September 22, representatives from the Panama and El Salvador exchanges agreed to allow new listings to be automatically registered in the other country, so that securities can be traded on both bolsas. “This is very advantageous. With this, no additional paperwork is required,” Javier Mayora, director general of the El Salvador exchange, tells LatinFinance. The exchanges agreed that they are “recognized jurisdictions”, with regulatory framework providing protection and transparency for orderly transactions.

Another bolsa from the region could join Panama and El Salvador as early as next year, says Erroa. “In three to five years, we could be operating in five countries.”

In the meantime, El Salvador and Panama are working closely to make the most of their new ties. “The integration will benefit the volume, it will benefit the liquidity, and it will also benefit the ability of companies to raise money in different countries in one single market,” De La Guardia says.

Next steps

When Central America’s two largest exchanges launch integrated trading in June, much of the implementation will rest on each country’s brokers, the markets’ natural intermediaries. 

Deals will be conducted through remote operators, which are brokers in one country who will be trained to make trades on the exchange of the other country. There are 12 brokerages registered with the El Salvador bolsa and 81, including bank subsidiaries and independent brokerages, with the Panama bolsa.

“We see plenty of benefits,” Mayora of the El Salvador exchange, says. “A Panamanian or Salvadorian company will be able to have more investors outside its home country and an increase in the participation of brokerage houses can generate more dynamism.”

Regulators in Panama and El Salvador are mapping a plan for training brokers to become remote operators. In addition to training, brokers in one country must garner approval from the other country’s regulator to conduct transactions there. Remote operators in each country will be able to see real-time trades on the other exchange’s electronic trading system.

Instead of a unified trading system, each country will provide brokers with a connection to the negotiating system used by brokers in the other country. “What we intend to do is maintain intact the operating systems of both countries,” says Erroa. 

Officials from the two bolsas will also carry out an intensive campaign targeting local issuers and international investors to promote the integrated market as an attractive option for investing and financing, say sources with the Salvadorian bolsa. A critical piece of a promotion strategy is already in place: in November, El Salvador passed legislation that reduces taxes on foreign investments to 3% from 20%. 

“I believe that interest will increase as we initiate the informational campaign about the functioning and procedures of the integrated market,” says Olga Cantillo, executive vice-president and director general of Panabolsa.

While trading between the two exchanges is set to start in June, market observers say the volume will build gradually. “I do not foresee trading volume becoming overwhelming since here shareholding is very concentrated and volume is historically low,” says Jorge Vallarino, vice president of treasury and institutional relations at MMG Bank in Panama. 

Weighing possibilities 

The integrated exchange offers a number of opportunities, according to bankers, including a larger platform for placing sovereign debt outside of the issuing country. 

“There are opportunities in both countries to advise issuers and investors,” says Vallarino, adding that the integration “should produce more volume on both sides.”

The two exchanges are complementary for investors. Panama has a greater number of listed stocks, while the Salvadoran exchange turns over a slightly higher proportion of fixed income instruments than its neighbor. Panama’s Bolsa de Valores has 176 listed companies, including 20 banks, 15 trusts and 20 funds. In El Salvador, 80 issuers were trading on the Salvadoran exchange at the end of 2014, including 25 banks, savings and loans and financial groups, 17 insurance firms, 16 Central American public sector entities, and 22 companies.

El Salvador’s relatively well-developed pension fund industry, valued at $8.5 billion, has been instrumental in developing the country’s capital markets and is expected to become a resource for Panamanian issuers on the integrated exchange. El Salvadorian pension funds accounted for 50% of placements on the primary market in 2014. Costa Rican pension funds total less than $6 billion, and Panama’s private voluntary pension funds hold only $675.5 million in contributions. 

Meanwhile, Panama’s “very strong banks with robust balance sheets” are prime examples of institutional investors that Mayora expects will take advantage of access to cross-border trading. 

“Little by little, the more visionary actors will begin to take positions in the market,” Erroa, from the El Salvador bolsa, says. 

Trades in the integrated exchanges will likely be concentrated more in bond issues than shares, MMG’s Vallarino says, adding that public and private debt dominates each of the exchanges. In El Salvador, 60% of the transactions are public debt, 30% is private debt, and the remainder is equities. Of the trades on the Panabolsa, 55% are corporate debt, 32% are public debt, and the remaining 13% consists of trading in shares, mutual funds and repurchase agreements. 

New vehicles

The integration comes as measures that aim to expand capital markets in El Salvador and Panama are being put in place. El Salvador passed legislation last year that allows the creation of mutual funds. Trading of these vehicles is expected to launch around the same time as the integration in June. Real estate investment trusts (REITs) in El Salvador are expected to come later, sources say. In Panama, MMG Bank structured and placed the first REIT-like vehicle in 2015. The REIT, which contains commercial real estate, was valued at $36 million and Panamanian and foreign investors alike bought shares on the Panabolsa. “We think there will be many more coming; in Costa Rica, this is already a mature product with good results,” says MMG’s Vallarino.

Recent innovations in El Salvador’s financial markets offer more opportunities to investors, financial analysts say. First, securitizations of cash flows on public works, on payments made to autonomous public enterprises and to banks are gaining popularity. Second, foreign securities and financial instruments can now be registered in El Salvador, making it possible to buy stocks of foreign companies and foreign bonds through a local broker.

At least one potential issuer has expressed an interest in listing in Panama as a result of the imminent integration, market observers in El Salvador say. Nonetheless, executives and bankers do not expect the integration to stimulate a large increase in new listings. “The primary market is nil,” says Mayora. Panama and El Salvador, like many Latin American countries, have an abundance of family-held companies which are often reluctant to go public as it means ceding control of their businesses and complying with stringent transparency requirements.

The major impact of the initial stages of the integration is expected to be an increase in brokerages and investors. Observers expect that existing investors will participate in the broader trading opportunities in the integrated market, which will also attract new investors. “We think this will bring trading, it will give value added to the two markets, there will be greater visibility,” says Mayora. 

While much is left to be played out between numerous actors once the integration is launched, dealmakers agree that the work between Panama and El Salvador signals an important and positive step in the evolution of Central American market and its place in the region. “For operators in the market,” says Vallarino, “a door will open that will allow for creating, in the long term, a liquidity base and demand that today is limited to each market separately.” LF

Additional reporting by Sara Rosner.