Economy

As Global Markets Go South, Investors Turn To Latin America

The President of Colombia ringing in New York
The President of Colombia ringing in New York
Jenny González

SANTIAGO - It’s July of 1990, and the two Germany’s have just united, marking the end of the Cold War, and capped with West Germany’s soccer World Cup victory over Argentina.

As the images of the defeated players travelled the world (who can forget Diego Maradona’s tears?), in New York, a Latin American company was symbolically ending the lost decade. A lot of water has passed under the bridge since that summer when the Telephone Company of Chile (CTC) managed to get listed on Wall Street, for an amount that seems quaint today - $75 million.

Two decades later, developed countries are in the middle of an unprecedented crisis and investors are turning to Latin America. With its positive growth rates, large investment projects, controlled inflation, rising commodity prices and political stability, Latin America and its companies have become very attractive.

Companies like Ecopetrol from Colombia, Pacamayao from Peru and Cencosud from Chile have shown this by ringing the bell in the most important stock exchange in the world, as well as by attracting investors to local stock exchanges.

How can we take advantage of the momentum and transform it into a structural change?

For Jorge Errazuriz, the Chilean president of Celfin Capital who worked on the CTC listing, Latin America has to believe in itself more. He also says that the ideal situation would be for more of the investments to happen through local stock exchanges, something that is already taking place.

And it is not only foreign investors who are taking note. There are many new investment funds popping up around Latin America and investing in local projects, particularly in Brazil, Mexico, Chile, Colombia and Peru, which are considered the largest markets in the region. Taken together, these markets are capitalized at $3.9 billion.

The rest of Latin America, on the other hand, is generating little interest, given the size of their stock exchanges and the number of companies listed. “They are what’s called borderline economies, which implies that the liquidity, rules and regulations are not attractive or stable enough for investors to invest without major risks,” explains Daniel Velandia, a Colombian economic researcher.

Integrated markets and synergy

Velandia says there is a lot of opportunity in the Latin American Integrated Market (MILA), which includes Peru, Chile and Colombia. The three countries have complementary strengths; Chile has financial and retail companies, Colombia has energy companies and Peru mining companies. Although Colombia and Peru have relatively few listed companies, the integrated market can generate a lot of positive synergy. It could get even better, if Mexico decides to join the MILA.

However, experts agree that the MILA hasn’t taken off yet, due to a lack of standard practices among the different countries. According to Errazuriz, the countries in MILA should act like their financial markets were part of a "United States of Latin America."

“All of the markets should be interrelated, so that someone here could buy stock in Mexico with the same ease as if he or she were in Mexico,” says Jaime Humberto Lopez, president of the Colombia Association of Stock Exchange Agents.

As attractive as it is, the region still faces risks that derive, at least in part, from its own success. An example that illustrates the challenges for the region, according to analysts, is the situation in Brazil, where a revaluation of the currency caused volatility in the markets.

For Sandra Manuelito, an economic affairs officer at CEPAL, the resistance among Latin American companies to list themselves on the stock market is another limiting factor. “Many of the companies in the region belong to families or small groups, and listing on the stock market means opening up the company and sharing control,” she explained.

Companies are also reluctant to make their information public, which is one of the conditions to listing on the stock market. The different actors in the financial markets have to convince companies of the advantages of being listed in the stock exchange.

Up to a certain point, that is working, because investors are clamoring for new offerings. But in spite of it all, both analysts and stock exchange directors agree that they should avoid artificially accelerating the transition.

Juan Pablo Cordoba, the president of Colombia’s stock exchange, sums it up well, “We’re talking about a major structural change, about how to convert this global economy into a source of financing and growth.”

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Society

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum

-Analysis-

SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.


It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

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