1. INTRODUCTION

The consolidation of large companies required developed financial markets which, by nature, promote speculative activities. It is assumed that the most relevant function of the financial structure in business development is the creation of credits. When these are channeled into the “real” sphere, they expand production and accumulation, though they can also be used to buy and sell financial securities in order to obtain financial gains. Non-bank financial institutions provide liquidity to illiquid assets and thus become a vehicle for distributing profits within the capitalist class (rentiers and investors).

Our take is that bank loans channeled to non-financial companies are linked to the expenditure of capital in circulation (^{Seccareccia, 2003}) and the purchase of securities. Short-term non-monetary financial instruments (private and public bonds, both domestic or foreign) are kept to take on outstanding commitments as they have a resale value which does not substantially deviate from their par value. Meanwhile, long-term securities like stocks and long-term bonds (consols), generate liquidity and provide access to financial gains.

The analytical framework of this discussion is an oligopolistic structure in which large companies dominate and is inextricably linked to the capital market. The primary objective of this article is to analyze the relationship between financial development as expressed through financial complexity, large companies and the financial (in)stability of developing countries in Latin America.

The hypothesis to be tested is that the financial complexity in Latin America responded to the valuation needs of large foreign capital, thereby generating great instability. On the one hand, there was a large influx of foreign capital (Foreign Direct Investment-FDI and Foreign Portfolio Investment-FPI) with a reduced presence in domestic financial markets. Latin American non-financial corporations (multilatinas) also emerged in these markets with a reduced share. Big capital marginally operated in the region’s domestic bond and stock market and generated growing external debt with little economic growth.

Specifically, we argue the Latin American financial complexity responded to the movement of external capital caused by FPI in the first half of the 1990s and during the Global Financial Crisis of 2008 (GFC-2008). It sought to be valued in Latin America and was accompanied by FDI that installed itself in the most dynamic productive sectors. The peculiarity of this process is that the operations of large companies in the region failed in bringing about a strong expansion of its bond and stock market.

Then, in spite of this market’s development, its expansion into the international market, which deepened after the GFC-2008, did not achieve a high degree of complexity, resulting in growing external debt. Thus, the influx of foreign capital and dependence on external liquidity renewed developing countries’ dependence, as demonstrated by Luxembourg at the beginning of the 20th century (1913, chap. XXX).

This article is divided into five sections including the introduction. The second section presents a brief theoretical discussion on the development of large companies and their relationship with the financial market. In the third we review the development of the financial market in the region’s countries while paying close attention to the makeup of the market’s different segments in order to evaluate the depth and diversity of financial securities. The fourth section presents an econometric model that measures the impact of capital inflows (FDI and FPI) on a set of financial and real sector indicators. Finally, the fifth section presents our conclusions.

2. LARGE COMPANIES AND FINANCIAL MARKET DEVELOPMENT

3. SIZE AND MAKEUP OF THE LATIN AMERICAN MARKET’S FINANCING

The analysis of the financial structure’s impact on the economy’s evolution will be made by studying the movements and composition of financial flows in six economies in the region (Argentina, Brazil, Chile, Colombia, Mexico and Peru). These differ in their economy’s size, degree of internationalization and financial multinationals’ control over the institutions that operate in the local market. The period analyzed is 2000-2019, preceded by the period of deregulation (1980) and globalization (1990). The period analyzed is divided into three stages: the first is between 2000-2007 and is marked by economies’ transnationalization, where local corporations merge with foreign ones through strategic alliances. A second, covering 2008-2014, begins with the outbreak of the GFC-2008, followed by a program of quantitative easing. This program’s course of action was asset acquisition by central banks and reducing the target interest rate close to zero. This unleashed an excessive amount of liquidity which developed countries could not absorb, resulting in strong capital outflows to Latin America. The last stage (2015-2019) started with the United States intent on a return to “monetary normalization” (announced in 2014) with warnings of interest rate hikes in December 2015 in order to strengthen its financial center and regain monetary control.

The starting point for this analysis is capital’s cross-border movement in Latin American economies (see Table 1). There are two common elements in all countries analyzed with the first being the negative status of their current accounts. The exception is during the transnationalization stage, explained by the improvement in the region’s terms of trade. This reverted in the period after the 2008 crisis. The second is the inflow of foreign investment exceeds the financing needs of the current account.

In general terms, long-term flows (FDI) dominate, with Chile, Brazil, Colombia, Mexico and particularly Peru standing out with an increase in short-term flows at the beginning of the globalization period (1990-1994) and after the GFC-2008 (2009-2014).

Under these conditions, after the GFC-2008, the Chilean financial system’s behavior is quite representative as, in spite of a reduction in the net flow of short-term funds, there is an inflow of FPI (3.7% of GDP). This, however, is accompanied by an export of capital to the rest of the world (4.8% of GDP). Chile is the economy that receives the largest volume of FDI with respect to its GDP (see Table 1), followed by Mexico, with a volume of short-term inflows of 3.7% of GDP, followed by Colombia with 2.1% and Peru with 1.8%. It is striking that the latter economy has higher volumes of capital exports with respect to GDP than Mexico and Colombia (see Table 1). Finally, in the last stage of the study, Argentina is the economy that receives the highest short-term flows (2.3% of GDP), explained by the shift in economic policy towards an open economy, primarily financially, which explains in large part the financial crisis faced again by this country at the end of 2019.

Another important element is the volume of debts with respect to output, called financial depth, which reflects a country’s financial complexity. Financial depth is measured through monetary aggregates, specifically by the difference of M₄and M1,⁴ divided by GDP. Measurements of Argentina’s financial depth is not included for special periods such as the “convertibility regime” which reigned between 1991 and 2001 (see ^{Pierre-Manigar, 2009}), and the protectionist policies of Kirchnerism. A common element is a growing financial depth (defined in footnote 7) that accelerated after GFC-2008. Such is the case of Chile, Brazil, Mexico and, to a lesser degree, Colombia and Peru (see Figure 1). A fact that stands out is that the acceleration in debt growth was due to external factors, explained by the inflows of external capital.

Notes: The indicators of monetary aggregates were M3 for Chile and Colombia, M₄for Mexico and Brazil, and liquidity for Peru. Source: calculated by the authors based on information from the International Financial Statistics Yearbook, IMF eLibrary, 2008 and 2018 https://www.elibrary.imf.org/subject/041).

Figure 1 Monetary aggregates to GDP 

Another important indicator of financial complexity is the ratios of total credits to GDP. These are not very high in the region except for Chile and Brazil, followed by Colombia as a distant third, and Mexico occupying the last place (Banks of International Settlement [BIS] does not provide data from Peru, see Table 2). This ratio increased throughout the twenty-first century, with the exception of Argentina as explained by the high credit ratios after the convertibility regime’s collapse and the economic crisis in 2001. With the exception of Chile, there was a reduction in the ratio of bank loans to the private sector in early 2000s. This increased during the period after the crisis, but in a reduced manner. This makes it possible to argue that the relationship between foreign capital and the supply of bank loans to the non-financial private sector is not very robust (see Table 2). Thus, with the exception of Chile, credits do not play an important role in the economic evolution of the region’s countries. This would indicate that external flows are not linked to the private sector’s financing.

Another important element of financial complexity is the evolution of the stock market (see Table 3). It evolves inverse to the flow of external capital due to large foreign companies’ reduced share of local capital markets. In other words, these institutions do not participate in their host markets, just as large Latin American companies have a reduced share of local markets.

The largest number of listed companies is in Brazil, followed by Chile and Peru (a relatively small economy), and then Mexico and Argentina. In terms of capitalization value relative to GDP, Chile tops the list, followed by Brazil and Colombia. Peru is a distant second, followed by Mexico and Argentina.

The behavior of the Mexican Stock Exchange is representative as Mexico is an economy with a lot of multinational and multilatina companies, both in the financial and non-financial sector, with few companies listed in the stock market, and reduced capitalization and turnover ratios, except for Chile.

Finally, we analyze the bond market. The first sign is that the issuance of international bonds has a long history in the region. In the 1970s and 1980s, the countries with the highest volumes of international bond issuance were Mexico, due to the presence of oil and the subsequent large external debt, followed by Brazil. Argentina joined the issuance of international bonds in the 1980s. This trend accelerated in 1990, as explained by the convertibility regime; and Mexico’s and Brazil’s shares drops, Mexico’s due to the signing of NAFTA and Brazil’s to the vitality of the domestic financial market. The issuance of Chilean and Peruvian international bonds is revitalized in the 1990s, continuing until the 2010s. Even in the latter period, these economies lead the issuance of international bonds with respect to their GDP (see Figure 2a).

Source: calculated by the authors based on BIS (2020), Table 3 (https://www.bis.org/statistics/secstats.htm?m=2615).

Figure 2a Total international bonds issued by country 

The novelty is that, according to the type of issuer, Non-Financial Corporations (NFC) became quite active in issuing international bonds in the twenty-first century, with the exception of Argentina and Brazil (see Figure 2b). The Chilean NFCs have a share of more than 60% of total international bonds issued, reaching in the first and second decade of the 21st century, 30.6% and 46% of GDP, respectively. Mexican NFCs doubled their share between the first and second decades of the 21st century (9% to 19% of GDP) and something similar happened in Peru when it went from 1% to 18% of GDP. An additional element is that most bonds issued are long-term, both from general government as well as from financial and non-financial corporations.

Source: calculated by the authors based on BIS (2020), Table 3 (https://www.bis.org/statistics/secstats.htm?m=2615).

Figure 2b Total international bonds issued by non-financial corporations 

The issuance of domestic bonds (see Table 4) indicates that this market became active quite late, with Brazil placing first in the region during the first two decades of the 21st century, with 164% and 311% of the output, respectively (the total includes those issued by the Central Bank). In a distant second place are Mexico and Chile, with significant increases in Colombia and Peru. This indicates that these economies also made progress in developing the domestic bond markets but to a much lesser degree.

In Brazil, the government and financial corporations are the largest issuers of domestic bonds, with NFCs only accounting for a relatively small number of them. Between 2010 and 2014 in Chile (information is only available for the period of 2008-2014) financial institutions are the ones that issued the majority of domestic bonds while NFCs show significant growth. This number though is much lower when compared to the issuance of international bonds. In Mexico, the general government is the one that issued the majority of domestic bonds, with financial corporations accounting for a significant amount while NFCs’ share is insignificant. Finally, the distribution in Peru is relatively the same as that in Mexico, in spite of it being a much smaller and less developed country in the financial sector.

We also analyze the evolution of economies’ external debt (see Table 5). The common denominator in the countries analyzed is that each country’s external debt to GDP is higher in the 2001-2008 stage; it falls significantly in the phase of excess liquidity (revaluation of the exchange rate and low interest rates) and rises again in the period of monetary normalization (2015-2018). This is explained by strong currency depreciations in the region due to the increase in the United States’ interest rate.

In Argentina, Brazil, Chile and Peru, external debt carries greater weight, especially in the first two stages. Argentina, at the beginning of the new century, has the largest volume of external debt, explained by the crisis it faced between 1999-2001 with the public sector accounting for almost half and the private sector only accounting for a small part. This came about due to the default of public debt in 2001 (which is restructured in 2005) along with a low share of private sector debt. We must point out that after the GFC-2008, the external debt in Argentina is drastically reduced, especially public debt and, to a lesser degree, private debt. It maintained that same composition during the 2015-2018 stage. Brazil is an interesting case that has relatively lower debt than Argentina, although the private sector accounts for a large part of it, especially during 2015-2018, since a good part of the public debt is of domestic origin. This phenomenon also applies to Chile and Peru which have debt greater than Brazil and where the private sector is an important source of external debt. In Colombia and Mexico, external debt is relatively high.

The different behavior of external debt is due to crises (Argentina) and to the fact that the private sector prefers to borrow from the international market as it is cheaper than local markets. This does not happen in Mexico and Colombia, given that there is large capital dissociated from the domestic private sector.

4. EXTERNAL CAPITAL AND ITS EFFECTS: CAPITAL INFLOWS, FINANCING AND GROWTH

In this section we present an econometric analysis to show the causality and effect of these capital flows (FDI and FPI) on financial and real sector variables, as regards a sample of Latin American countries. Specifically, we analyze the relationship between capital inflows and the domestic financial market’s deepening, as well as economic growth and external debt. This is achieved by using non-financial sector’s credit and stock market indicators

Some analyses support the positive effect of FDI and economic growth: neoliberal approaches; those of the new economic geography; the advantages of cluster economies in productivity and technology transfer (^{Blomström, 1989}; ^{Dunning and Lundan, 2008}; ^{Wan, 2010}). Based on this theoretical approach, recent econometric analyses show the positive effect of FDI on economic growth; an example is the case of the Mexican economy (see ^{Rivas and Puebla, 2016}) or the case of Latin America (see ^{Varela and Salazar, 2021}). However, there is no difference between periods analyzed and the effects of portfolio investment on financial and real variables are not verified.

This section presents an econometric test to isolate the effect of FDI and portfolio investment on financial and real sector variables and determine their effects in two periods during 2000-2018.

The statistical analysis uses variables obtained from the World Bank database (in millions of dollars at current prices) and the BIS,⁵ and is divided into two stages. The first corresponds to 2001-2009, starting after the dotcom crisis and ending with the housing crisis. The second covers 2009-2018, and includes the period of quantitative easing and monetary policy normalization from 2014 to 2015, which generated a recessionary process for Latin American economies until 2018.

The variables were filtered using panel unit root tests,⁶ resulting in first order integration. As such, we used them in logarithmic first difference, meaning the model’s coefficients can be interpreted as growth rates (semi-elasticities). A preliminary inspection of the variables is shown in Table 6, where the average growth rates and the variation coefficient for the two periods analyzed are presented.

The period of 2009-2018 stands out in the analysis of Table 6. During that time, the growth rate for the turnover (DTO), traded stocks (DS) and GDP growth rate (DGDP) sees a significant reduction compared to the previous period (from 8.1% in 2001-2009 to 3.3% in 2009-2018); commercial bank credit to the private sector (DDCPSBanks) sees modest growth, while foreign currency bond-debt issuance grows vigorously, doubling the average growth rate of foreign currency debt issued by financial and non-financial institutions (20.9% and 21.9%, respectively). Likewise, the average growth rate of external debt stock doubled (from 3.9% in 2000-2009 to 8.7% in 2009-2018). Finally, during 2009-2018, the growth rate of capital inflows decreased, presenting great volatility (variation coefficients for FDI -IFDI- and portfolio capital -Dcart- was -67.39 and -21.84, respectively). In other words, the second period was characterized by greater volatility, less growth, and growing external debt, led by large non-financial companies listing bonds.

After the statistical analysis, using the econometric methodology, we seek to highlight the particular effect of capital inflows (FDI and FPI) on financial and real sector variables in two stages: the first, covers the period of 2001-2009 (with a dummy representing the crisis); the second covers the period of 2009-2018. Next, we will briefly present the coefficients for the different estimates in Table 7 for the proposed periods.⁷

Table 7 shows the coefficients of the two models in two periods; the exogenous or explanatory variables are the FDI growth rate (DFDI) and the portfolio capital growth rate (DFPI). It should be noted that due to lack of information in the first period, the effect of portfolio investment on the variables analyzed could not be obtained (observations were lost in the process of logarithmic linearization and differentiation). A dummy, which was not significant, was included for the period of 2015 onwards.⁸ As a result, it can be said that the volatility present in the second period analyzed was a feature characteristic of the period after the 2008-2009 crisis.

The following can be stated based on an analysis of Table 7.⁹

With these findings we can claim that the different forms of development for large domestic (multilatina) and transnational companies in Latin American countries affected the stock market’s vitality through FDI (specifically via mergers and acquisitions), with a reduced impact on economic growth. One can also see that after the GFC-2008, FPI had an important role in invigorating financial markets, both the bond and stock market, although with a reduced effect on economic growth (the average growth rate of FPI and FDI plummeted in the second period (see Table 6)). Furthermore, the inflow of capital did not increase economic growth, nor did bank financing to the private sector. Based on the aforementioned, we can say that capital investment opened up a new form of external debt, specifically through the non-private business sector, that is to say via large companies.

Thus, one of the main effects of decoupling large companies’ activities from domestic financial and productive markets is reflected in the promotion of continuous indebtedness due to placing their debt abroad and their expansion into external markets. When you add to this the fact that much of FDI comes in the form of mergers and acquisitions, it has little impact on accumulation and prolongs economic stagnation, income concentration and dependence on external capital. This creates conditions for growing financial instability for all economies in the region.

5. CONCLUSIONS

Within the heterodox approach, credits - and financing in general - are not necessarily related to production as there is a variety of explanations for financial risk. ^{Keynes (1936}) explains financial instability from the present view of future variations in the interest rate which, combined with institutional investors’ speculative activity, generates gains or losses within the space of capital circulation. ^{Kalecki (1971}) relates financial risk to companies’ balance sheets, thereby assuming a mix of productive and financial activities that can reduce losses if investment prospects are not met. Minsky (1975) tries to merge Keynes’ (1936) and Kalecki’s (1971) approaches by proposing a business cycle where investment spending generates increasing leverage rates that modify interest rates and the volume of bank loans. Minsky’s approach concludes by arriving at an explanation where the business cycle is linked to movement of capital and how the main agents of economies develop, specifically corporations and the government.

By applying this analysis to the behavior of some Latin American economies, we found that the institutional change that took place in the 1990s and opened the Latin American financial markets to the rest of the world failed to revolutionize the behavior of the main financial institutions. It created a great liquidity of international funds with a reduced deepening of financial institutions. However, this happened without strongly expanding credit’s share of financing as large companies led a great development in the issuance of bonds in the international space. This in turn promoted a growing external indebtedness where the private sector played an important role. Even in the Brazilian economy, where the domestic bond market developed strongly, NFCs do not take on a very active role.

From the econometric analysis we can conclude that during the first decade of the 21st century, the FDI growth rate had a positive effect on GDP, mainly on the turnover rate of the stock market, traded stocks and the listing of debt-bonds by non-financial institutions. However, in the 2010s, after the GFC-2008, the effect of the FDI growth rate on GDP declined. It should be noted that FDI had a greater effect on external debt than on growth. The growth rate of portfolio investment positively affects the growth rate of domestic share capitalization, traded stocks, external borrowing and bond issuance for all institutions, but especially for financial and non-financial ones. That is to say, portfolio investment became a rejuvenating agent for the capital and bond market in the second period, leading to greater external indebtedness.

We can therefore affirm that one of the main effects of decoupling large companies’ activities from domestic financial markets is reflected in the continuous indebtedness by placing debt externally. This, together with the entry of FDI in the form of mergers and acquisitions, ends up reducing accumulation, prolongs economic stagnation and promotes income concentration.