Across emerging markets, access to finance is one of the largest barriers to success for private enterprises. Business leaders cite scarcity of credit as their main concern for growth, outweighing issues like corruption, tax and political instability.
Companies across Latin America and the Caribbean today benefit from a more robust banking sector than only a few decades ago. As they continue to grow, however, they need long-term capital which they would typically find on local and regional capital markets. Despite significant reforms in this space, capital markets in the region still lag behind their Asian counterparts. For many Latin American and Caribbean countries, domestic financial markets are small and lack sufficient liquidity to attract international investors.
As vice chairman of Corporate and Investment Banking at Citigroup, Jay Collins advises governments across the globe on capital markets. In a recent conversation, we talked to him about the trends he sees in Latin America and the Caribbean and the steps that are necessary to make sure companies can access the financing they need.
In some parts of the region, companies obtain almost half of their capital through one single source. How do you think that is impacting business? How would a greater diversity in this space impact the region?
The region is not only split between those that are growing and those that aren’t, but also on how capital is provided at the high end of the pyramid versus the small and medium-sized enterprises (SMEs). Around the world, SMEs drive more than 70% of job growth. Getting capital to them is absolutely critical. While providing loans to these smaller companies can be riskier for commercial banks, multilaterals like the IDB and the IIC can provide support and guarantee structures to the banks for companies to get the capital they need.
Financial integration is an important concern for companies and investors across Latin America and the Caribbean. What needs to be done in this area so that projects and businesses can be funded more quickly?
Capital formation depends very heavily on capital markets. To support integration across the region, governments need to harmonize key elements like accounting, tax and listing requirements. This will help promote confidence and allow investors to move freely within the region. The Pacific Alliance is the best model of that right now. Its member countries Chile, Columbia, Mexico and Peru are raising the bar on these issues at the moment and the rest of the region should follow their example.
How is Citigroup working with governments and other partners to help facilitate more capital formation in Latin America and the Caribbean?
There is a tremendous need for advice and technical expertise on capital markets formation and local markets. We advise governments on a market-by-market basis and get private-sector players involved to look at the specifics of how we can improve the framework. As part of that, we help governments institutionalize capital markets, allowing companies to access capital longer-term. Among the range of issues we look at are regulatory tax, accounting and legal structures that create this access for companies.
Financing for infrastructure projects has dropped over the past few years. How can we reverse this trend by strengthening the capital markets in Latin America and the Caribbean?
Unfortunately, 2015 saw a fall-off in project financing, particularly in the project bond market. Given the growth challenges in the region, we have to reinvigorate this space. There is a new initiative the IDB is involved in, called the Global Infrastructure Hub, to exchange best practices not just from the region, but from across the world on turning infrastructure ideas by governments into bankable transactions. Our goal is to get more done faster, not just through the banks, but through capital markets. We need to be bolder and more aggressive, and multilaterals have a key role to play to help take risk and crowd in the potential of the private sector.
Why is it so important to bring together both public and private actors to facilitate financing and capital formation for private-sector development?
Governments cannot do it alone and they recognize that. We have to forge partnerships between private companies and the public sector and have them work hand-in-hand to create an environment where capital formation increases and is made more efficient. This is exactly what we are doing with the Americas Business Dialogue. Part of this process is to look at the specifics of how we can drive growth, in particular, how we can drive capital that will grow our economies and employ more people.
photo credit: Flickr/teegardin