WB/IMF/Brookings Institution 5 th Annual Financial Markets and Development Conference: The Future of Domestic Capital Markets in Developing Countries April 14 – 16, 2003 Dieter Linneberg Superintedencia de Valores y Seguros- SVS CHILE CHILE

2 Fundamentals of the Chilean Economy Macroeconomic and Financial Stability External Sector Strength Microeconomic & Institutional Strength Financial System Strength Monetary Strength FiscalStrength

Macroeconomic Stability

4 Chile: GDP, (billions of 1996 Chilean pesos) (e)

5 Chile: Inflation and Targets (annual %)

6 Chile: Monetary Policy Interest Rate (%) * Before June 1995: PRBC 90 days rate Nominal Int. Rate CPI-adjusted Int. Rate CPI-adjusted MPR Overnight Rate * -0,5 1,5 3,5 5,5 7,5 9,5 11, ,5 3,5 4,5 5,5 6,5 7,5 8,5 9,5 10,5 11,5 12,5 Nominal MPR

Fiscal Strength

8 Fiscal Balance: Average (% GDP) Argent. Brazil Chile Colombia Czech Rep. Hungary Israel Korea Malaysia Mexico Peru Poland Thailand Latin America Countries Other Emerging Economies

Financial System Strength

10 Argentina Thailand South Korea Japan Malaysia Mexico Brazil Chile Hong Kong Italy Australia Germany France UK US Spain Netherlands (15, amount 76) Ranking of Banking Strength (Source: Moody´s, july 2002) stronger less strong

11 Chile: Financial Savings by Institutional Investors (% GDP) pension funds insurance companies mutual funds

12 Chile: Domestic Corporate Bond Market (USD billions) (total outstanding) (Issuance) ,0 0,5 1,0 1,5 2,0 2,5 3,0 outstanding issuance

Microeconomic & Institutional Strength

14 Argentina Mexico Brazil Thailand Italy Japan Czech Rep. S.Korea Malaysia Spain France Chile U. Kingdom Germany Australia Hong Kong USA (19, amount 49) Competitiviness Ranking 2002 (Source: International Institute for Management Development) + compet. - compet.

15 Brazil Malaysia Mexico France Spain Italy S.Korea Argentina Czech Rep. Thailand Germany Chile Australia UK US Hong Kong (9, amount 156) Economic Freedom Index 2001 (Source: The Heritage Foundation) + freedom -freedom

16 Thailand Argentina Mexico Rep. Checa Brazil Korea Malaysia Italy France Spain Germany Chile USA U. Kingdom Australia (17, amount 102) Corruption Index (June 2001; Source: Transparency International) - corrupt. + corrupt.

Recent Structural Reforms

18 Bilateral and Multilateral Negotiations: Further Trade Integration General Import Tariff (%) Free trade agreement with EU, US, EFTA. Currently negotiations are taking place with Corea for a FTA. WTO, FTAA

19 Capital Markets Reforms: Central Bank Elimination of all remaning foreign exhange restrictions Substitution of nominal MPR for CPI-adjusted MPR Streamlining of debt issued by the Central Bank

20 Capital Markets Reforms: legal changes New corporate governance and tender offer regulation Elimination of capital gains tax on liquid stocks and reduction of withholding tax on interest from 35 to 4% on local bonds for foreign investors Increased flexibility for allocation of personal savings

CAPITAL MARKET

22 Chilean Market Overview GDP Stock Exchanges Listed Sock Individual Shareholders 70 billion US$ / year Santiago Stock Exchange (80%) Electronic Stock Exchange (18%) Valparaiso Stock Exchange (2%) 280 Listed Stocks (4% of population)

23 Capital Market: Main Reforms 1982 Debt Crisis Tender Offer and Corporate Governance Law Banks Reform Securities Law Capital Market Reform I Law Capital Market Reform II Law

24 Investment Valuation Results from McKinsey Interviews Fuente:McKinsey Global Investor Survey on Corporate Governance, 2002

25 Corporate Governance Results Santander Central Hispano Investment Latin American Equity Research: Agosto 2001: Shareholders´Rights, Slowly Moving in the right direction,

26 Cases that Hurt Confidence Financial Scandals in USA: Enron, Worldcom, Tyco. And in Europa: Ahold Political and Social Situation in the Region Potential insider Trading in Chile (Inverlink case)

27 Business Model of and Informal Broker : Inverlink Corredora Inverlink Clientes Los clientes entregan dinero a corredora Inverlink para celebración de pacto con retrocompra. Corredora Inverlink entrega certificado donde se detallan valores y se mantiene la custodia en la corredora. Inverlink Informal Las operaciones no son registradas en la contabilidad de la corredora. Los dineros son enviados a entidades no registradas. Dinero Valores Chilean Central Bank Linkage of Information

28 Inverlink Consultores Moya Moya endosa los depósitos a Inverlink consultores Moya recibe pagos personales por los instrumentos endosados Corredores Inverlink vende depósitos a corredores Dinero Valores Fondos Mutuos y otras instituciones adquieren los depósitos Fondos Inverlink Inverlink Consultores vende documentos a Fondos Inverlink y éste a las corredoras Business Model of and Informal Broker : Inverlink

29 How to recover market confidence?

30 Issues General Corporate Governance mechanisms: –Ownership identity and structure –Board practices –Disclosure practices –Institutional investors –Market for control –Strong regulations for Intermediaries –Restriction for Public Institutions –Enforcement –Specialize tribunals

31 Issues Latin American specific issues: –Conglomerates –Financial market development –Macroeconomic and political instability –Legal reforms

32 Concluding Remarks The fundamentals of the Chilean economy are solid enough in order to consolidate the capital market. Confidence is a main challenge for emerging markets during the last years´ environment. The out layers misbehavior should not provide the idea of a generalized problem in the market. But the regulator must assure rapid solution and punishment for undesirable market participants. Corporate governance is one of the main issues to improve in a coordinate way in the Latino American region.