Drivers and Trends in Capital Markets Integration

Capital markets in Latin America remain underdeveloped, illiquid and fragmented across national borders. Deepening capital markets via regional integration may, in theory, create a number of positive outcomes: greater investment and growth by disconnecting investment from domestic savings rates and unlocking cross-border capital flows; financing to address the region’s infrastructure needs; financial stability in a region where volatility has historically been prevalent; development and diversification of a private sector that remains commodity-dependent and often crowded out by government investment.

The Inter-American Development Bank (IDB) asked the Capstone team to investigate the possibility for and benefits of regional integration between Chile, Colombia, Mexico and Peru (MILA).  As a first step, based on key drivers of global and regional capital markets trends, the team created a medium- and long-term forecast scenario to assess the potential for deeper capital markets in MILA. The team then elaborated on the costs and benefits associated with a MILA capital markets union. The methodology for this section is a data-driven country-level diagnostic approach. In the final section of the paper the team identified desirable characteristics of a cross-border securities regulation regime.

Based on the analysis performed, the Capstone team provided a set of short-, medium- and long-term public sector policy recommendations. Current research suggested that the gains from capital markets integration in MILA could be considerable, however, strongly depend on certain internal and external conditions. The team therefore recommended an incremental integration approach for policymakers, focusing on those that can be achieved in the short-term and can create momentum for deeper capital market integration.