This chapter takes stock of existing efforts at regional financial integration. Integration initiatives have a long history in Latin America; however, many have lost momentum after initial enthusiasm. This chapter looks in particular at two ongoing regional initiatives that—among other objectives—are aiming at financial integration. It finds that prospects are good for both of them, and that they may be the most suitable vehicles for taking the integration process forward at this time.
Many factors indicate that now may be the time for Latin American economies to work toward greater regional financial integration. This would not be a substitute for wider integration in the world economy; some Latin American economies are among the most active in global initiatives. However, given the recent economic slowdown in much of the region, limited progress in pursuing global agreements, and the widespread withdrawal of global financial institutions from emerging markets (including those in Latin America), regional financial integration could help buttress the economies of Latin America, enhance competition, and—over the medium term—lead the way toward global integration.
In the countries that make up the LA-7 (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay), insurance penetration (measured by premiums in percent of GDP) remains low, ranging from 1 to 4 percentage points of GDP, although the sector has expanded at a significant rate over the past decade. In 2014, assets totaled almost 10 percent of regional GDP, influenced in many cases by changes in the domestic regulatory frameworks. Broadening of formal sectors and larger nominal losses from natural disasters are likely to fuel the non-life segment, whereas purchases of life and retirement products have been growing the life portion of the insurance sector for some time now. The sector’s growth is partly stymied by the limited availability of long-term financial instruments denominated in the domestic currency, given that their demand is often crowded out by pension funds.
Pension funds are becoming increasingly important in financial markets in the LA-7 (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay). The size of these pension funds has surpassed 17 percent of GDP in assets under management, largely driven by growing participation following legal changes in most of the region. Brazil dominates LA-7 pension fund assets in value terms, while the Chilean pension fund industry—whose framework has often been used as a model in the region—remains the largest in relation to the country’s size. Despite the rapid growth, total assets and participation rates within the LA-7 remain below those of advanced country averages, thus strengthening expectations that LA-7 pension fund growth will continue to outstrip that of regional GDP. Countries’ regulatory frameworks restrict most pension funds to largely domestic investments, although in many cases Latin American pension funds have outgrown domestic capital markets.