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Brazilian Banking System / Capital Markets - for Financial Crisis and Reform in EM (Sobol)

Brazilian Banking System / Capital Markets - for Financial Crisis and Reform in EM (Sobol)

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Published by J.J. Stranko
Fall 2011
Fall 2011

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Published by: J.J. Stranko on Feb 25, 2012
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12/15/2012

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Brazil’s Capital Markets - A work in progress
Much of the credit for Brazil’s phenomenal economic and capital market growth in the lastdecade is due to Fernando Henrique Cardoso’s
Plano Real 
and the country’s subsequentdrive towards macroeconomic stability. Through taming inflation, managing the stability of the real, and sheltering the country from the harsher crosswinds of international capitalflows, aggregate government debt
-
the debt that dominates the country’s overall fixedincome market - has been dropping steadily through the past decade. At the same time,the Brazilian
Bolsa de Valores, Mercadorias & Futuros de São Paulo
(BM&F Bovespa),Brazil’s stock exchange, has made remarkable strides towards becoming a world-classequity market.
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Given Brazil’s high financial intermediation rates, raising equity hasbecome a more attractive option given baseline interest rates can deter many firms fromentering the debt market.But this source of strength for the Bovespa is still one of weakness for the economy atlarge. These successful equity listings, which have included some of the largest globalprivate placements of the past several years, reinforce the difficulty of financing with debt,and one of Brazil’s greatest financial challenges rests in the ability to strengthen localcapital markets (particularly debt markets) by bringing down the cost of financialintermediation while keeping inflation in check. It is a dilemma and there are nostraightforwar dsolutions, but Brazil’s steady march towards global financial integration andworld-class capital markets may soon have to face off with a rate environment reality thatconstrains growth and gives the government leverage to distort the lending market. It isfortunate for Brazil that it faces these challenges with sound regulation, deep markets, anda respect for greater transparency and oversight as a driver of growth rather than aninhibitor.
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Stranko 1
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Economist
, April 14, 2007
 
Equities Markets
Securities Market Size and Scope
By a large margin, the BM&F Bovespa is Latin America’s largest securities market, andwas the tenth-largest in the world measured by total market capitalization at the end of 2010. Unlike in other countries in the region with relatively shallow equity markets, theBovespa is a crucial source of financing for local companies. Even during the turbulence of the financial crisis, the Bovespa has hosted more than 20 initial public offerings since thebeginning of 2009 while equity issuances have dried up across the developed world. TheIPOs launched during the crisis, however, did tend to be of smaller size than those of previous years totaling US$6.32bn in 2010, which is down from US$13.06bn in 2009 and$4.57bn in 2008.
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Others48%
Bradesco5%Itau Unibanco6% Ambev7% Vale (CVRD)10%Petrobras12%
Bovespa Listed Companies, by % Market Cap - Chart 1
Petrobras Vale (CVRD) Ambev Itau UnibancoBradesco Banco do Brasil Santander TelefonicaItau OGX Petroleum Others
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Stranko 2
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Economist Intelligence Unit, Brazil: Country Finance
Source: Bovespa
 
Chart 2 below shows the strong growth the Bovespa has posted over the past severalyears, particularly in contrast with its Latin American peers. From 2001, when the exchangewas smaller than its Argentine counterpart--comprising around 30% of the regional totalmarket cap--it has grown steadily to represent 60% of market cap in the region. Whilemuch of this share gain happened in the wake of post-2001 crisis Argentina, andstagnation in the Mexican exchange, Charts 3 and 4 on the following page show howregional and global overall market cap has grown rapidly over the same period. It is alsonotable that this growth has occurred in the context of broad capital market growth inEmerging Markets, both in the larger markets like China and India and through most of Latin America.
0%15%30%45%60%75%90%2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Percentage of Total Latin American Stock Market Capitalization - Chart 2
 Argentina Brazil Mexico
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Stranko 3
Source: World Bank 

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