The Latin American Integrated Market (Mercado Integrado Latinoamericano, MILA) was first set up in 2011 by the stock exchanges of Chile, Colombia and Peru. The Mexican stock exchange, Bolsa de Valores de México (BVM), joined in late 2014. MILA’s aim is to generate more and better exposure for the stock markets of which it consists, and to provide a wider range of products and opportunities for investors. The four countries that comprise MILA are also members and co-founders of the Pacific Alliance trade group and share a commitment to market-friendly, outward-facing economic development. MILA’s proposition is that stocks and shares listed on one exchange should be visible and tradable on the others as well.
According to the World Federation of Exchanges, MILA is the number one Latin American market in terms of the number of companies listed and overall capitalisation. Market officials say there are now over 780 companies listed in the four countries. At the outset of 2015, MILA’s total market capitalisation was calculated at $939bn, which placed it a little ahead of Brazil’s Bovespa. Both experienced sharp falls during the course of the year. By the end of September 2015 Brazil’s Bovespa had a market capitalisation of $496.2bn, and was followed in descending order by the BVM with $422.6bn, and the Bolsa de Santiago (BCS) in Chile, with $181.5bn. At that point the Bolsa de Valores de Colombia (BVC) had a market capitalisation of $93.5bn, ahead of both Peru’s Bolsa de Valores de Lima ($59.8bn) and Argentina’s bourse ($58.1bn). While MILA is in its early stages, it can, formally at least, claim to be the number one bourse by aggregate market capitalisation, at $767.4bn. At the beginning of 2015 a total of six investment funds were following the MILA market, including a special index, the S&P MILA Andean 40.
While international investor interest in Latin America has waned somewhat – in step with the ending of the commodities boom – a number of analysts stress that the Pacific Alliance countries have tended to outperform the rest of the region. The four Pacific Alliance countries, with a population of 209m and a GDP of $2.2trn, are expected to grow between 2% and 4% in 2015 and 2016, at a time when a number of other Latin American economies are in recession. According to Juan Ruiz, the chief South America economist for BBVA Research, the four Pacific Alliance/MILA countries can together be regarded as the sixth-largest economy in the world, and if they manage to maintain their current growth rates, within 10 years they will be the fourth-largest, behind China, the US and India.
John Price, managing director of Miami-based consultancy Americas Market Intelligence, has noted that the Alliance countries have been more persistent at undertaking structural economic reforms. “The countries that have continued the gradual process of reform are the ones that continue to capture foreign investment,” he said, noting that in its positive growth forecasts the IMF had cited strong domestic consumption, low unemployment and wage growth in Colombia, Peru and Chile. Speaking in March 2015 Jeff Bunder, global private equity lead for EY, said “There has been a shift in focus, first and foremost, to Colombia over the past year…Private equity investors have bought into the concept of the Pacific Alliance. It is an ambitious plan, but if they can move it forward it is definitely interesting.” Although the comment was made prior to the outbreak of further bearish sentiment about emerging economies, it indicates that the Pacific Alliance capital markets may see a lesser sell-off, and an earlier recovery, than some of their peers.
There have been some initial discussions between MILA and Bovespa, Brazil’s São Paulo-based stock exchange. These are exploratory: both parties have been considering some form of collaboration or alliance. In June 2015 BVC directors met with those of Bovespa. In a public statement the BVC said that Bovespa was considering acquiring shares in the BVC in accordance with local regulations, which would restrict its holding to no more than 10%.
Separately Bovespa had said it was interested in acquiring sufficient shareholding stakes in all the MILA exchanges, such that it would be able to appoint one director on the board of each. Bovespa already holds an 8% share in BCS, the Chilean stock exchange. In its statement the BVC said, “The initiative is totally in line with the strategic objectives that the BVC has long pursued for greater financial integration in Latin America.” Existing BVC shareholders include private pension fund administrator, AFP Porvenir, with 9.57%; Universidad de Medellín, with 6.7%; the New York-based Kuroto Fund, with 4.37%; and local investment firm, Inversiones CFNS, with 4.31%.
MILA members are planning to gradually increase the integration of their capital markets. At present it is possible to trade shares, and efforts are being made to widen this to allow simultaneous initial public offerings (IPOs), trading in fixed-income securities, and the introduction of indexed funds for sectors such as mining and energy. Speaking in June 2015, Mexican finance minister Luis Videgaray said, “The initial public offerings will be able to be undertaken by companies from the four countries of the alliance, in any of the stock markets of the four countries.” Members of MILA have said they hope to establish a unified framework to allow the introduction of fixed-income trading in 2016.
Speaking at a panel of Pacific Alliance members in New York, Colombian finance minister Mauricio Cárdenas said that in the context of a decline of inward foreign investment across most of Latin America, deeper integration would help boost regionally-focused growth. The aim was to go beyond MILA purely as “a platform for issuing IPOs, trading stocks and trading fixed income instruments”, and to include institutional investment flows. In a long-term process that might take 10 years, Cárdenas said that the aim was to allow private pension funds to invest across the four member countries. He also noted that this would require lifting a number of restrictions. Luis Valdivieso Montano, executive president of the Association of Pension Fund Administrators, the Peruvian pension fund association, told OBG that the long-term aim should be to make private pensions portable across MILA countries, but that this will require resolving tax and currency issues.
Some form of tax standardisation across MILA capital markets is seen as a key – although gradual – evolution needed to support an integration process. One area where Colombia has been seeking to bring itself into line with the other MILA members is the tax on profits made by foreigners dealing in peso-denominated local government bonds, known as TES. In January 2013 the tax rate was cut to 14%, down from 33% previously. In mid-2015 deputy finance minister Andrés Escobar said a further reduction was under consideration, to enable Colombia to remain competitive relative to Mexico, Peru and Chile. “If we want to integrate more, we have to move. It is very important to send a clear message to portfolio investors that Colombia is good for business,” Escobar said.
Although share trading across national frontiers within the MILA group remains relatively low, the authorities continue to have ambitious goals for the future. Speaking in November 2015, BVC president Juan Pablo Córdoba said plans for 2016 included the introduction of an integrated market in private debt, the introduction of trading in development capital certificates, known as CKDs, and the introduction of fideicomisos de inversión y bienes raíces (Fibras), a type of security currently traded in Mexico that is modelled on a US-style real estate investment trust. Córdoba explained that financial and capital markets integration remained one of the most effective responses that countries could take to the challenges posed by adverse global economic conditions in 2016.
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