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Capital Market Reforms Needed To Boost Colombia’s Growth

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A new World Economic Forum white paper highlights the key obstacles that prevent the further development of deep and liquid capital markets in Colombia, and defines measures to help overcome these challenges and boost economic growth.

Recent gains in Colombia’s capital market development have come under significant pressure in the new macroeconomic environment. The size of the Colombian equity market as a share of GDP has declined by almost half in two years and liquidity in the local equity market has declined over time, placing Colombia’s turnover ratio among the lowest in emerging markets. Colombia has only 74 companies listed on the stock exchange and has a low free float at less than 30%.

“Colombia’s capital markets have developed significantly over the past decade, and we believe there remains great potential for further development,” said Michael Drexler, Head of Investors Industries, World Economic Forum. “However, given today’s challenging macroeconomic environment, the job is often easier said than done. This white paper reflects the views of all key stakeholder groups on how Colombia can further develop its equity market, helping create both the necessary conditions for sustained economic growth as well as providing a roadmap on how to unlock new pools of investment capital to finance economic development imperatives, such as the next generation of infrastructure.”

The white paper identifies four key areas of action – encouraging greater issuer participation, improving the investor value proposition, enhancing market efficiency and transparency, and attracting global interest – as key steps that must be taken to develop Colombia’s capital markets in the near term. Within these areas, the report specifically points to several areas that Colombia must tackle in the short term to develop its equity market:

Creating additional investment opportunities by encouraging increased issuer participation: the report points to the limited number of investment opportunities as a primary barrier to deepening and developing the Colombian equity market. As of December 2015, Colombia has only 74 companies listed on its stock exchange, which is dominated by only a few companies, including Ecopetrol, the state-run oil company that accounts for nearly 45% of the total market capitalization.Furthermore, compared to peer economies, the Colombian equity market has a very low level of free float, at only 29% as of 2014, which can threaten the market’s liquidity and discourage investor participation. In contrast, its closest peers in Latin America are ahead – Mexico has 159, Chile 230, and Peru 275. The average free float at the end of 2014 was 39% in Chile, Peru 43%, Brazil 53%, and Mexico 59%. Promoting greater issuer education, addressing the burden and cost of issuance versus bank funding, and improving corporate governance were the areas identified as short-term priorities to reverse this recent decline.

Broadening the investor base by improving the investor value proposition: Tax regimes that align with financial development objectives, robust regulatory and legal frameworks that protect investors, strong corporate governance standards, and regulatory changes that encourage greater risk-taking were identified to help attract investors across all segments. While Colombia has made significant progress in developing a local investor base – especially pension funds – the equity market could benefit from a larger and broader investment base and specifically, from additional shorter-term investors with more speculative strategy. Insurers, mutual funds, hedge funds and family offices were identified as key groups to lead to a more liquid market with a wider range of investors and a broader suite of professionally managed capital market products.

Improving market access and efficiency: Despite significant development over the past decade, some operational and regulatory challenges still constrain access and efficiency in the Colombian equity market. For the market to continue growing in the future, Colombia’s risk culture needs to evolve, recognizing that risk is inherent in capital market activities. Therefore, all market stakeholders need to strengthen risk management practices rather than create restrictions that can stymie further development. Further developing repurchase agreements, securities lending and derivative markets, increasing transparency and flexibility in the foreign exchange market, and encouraging access for foreign investors were the key areas identified that needed to be addressed.

Latin America’s capital markets grew rapidly in recent years. The total stock market capitalization more than quadrupled in the decade before 2012, with Brazil, Mexico, Chile and Colombia representing the largest markets for equities. Similarly, bond markets have grown steadily across the region, with government bonds making up the majority of the market. However, since the end of the commodities boom in 2012, all markets have faced headwinds, and Colombia has fallen behind its emerging market peers in several areas. Given the complexity of capital market development, this white paper reflects the views of multiple stakeholders that policies must continue to be put in place now that will allow capital markets to flourish far into the future. Additional measures could improve Colombia’s long-term economic growth prospects, particularly if key issues, such as the underdevelopment of the country’s infrastructure, are addressed.

This white paper also defines a set of recommendations in the context of further development of the corporate bond market in Indonesia.

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Inequality threatening human development

MD Staff

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Despite global progress in tackling poverty, hunger and disease, a “new generation of inequalities” indicates that many societies are not working as they should, the UN Development Programme (UNDP) argues in its latest report released on Monday. 

The 2019 Human Development Report (HDR) states that just as the gap in basic living standards is narrowing for millions of people, inequalities surrounding education, and around technology and climate change, have sparked demonstrations across the globe. 

Left unchecked, they could trigger a ‘new great divergence’ in society of the kind not seen since the Industrial Revolution, according to the report. 

“This Human Development Report sets out how systemic inequalities are deeply damaging our society and why,” said Achim Steiner, the UNDP Administrator. 

 “Inequality is not just about how much someone earns compared to their neighbour. It is about the unequal distribution of wealth and power: the entrenched social and political norms that are bringing people onto the streets today, and the triggers that will do so in the future unless something changes. Recognizing the real face of inequality is a first step; what happens next is a choice that each leader must make.”  

‘Inequality not beyond solutions’ 

Mr. Steiner added crucially that “inequality is not beyond solutions”. 

The human development approach views “richness” as going beyond the idea that economic growth will automatically lead to development and wellbeing. 

It focuses on people, and their opportunities and choices.   

UNDP research shows that in 2018, 20 per cent of human development progress was lost due to the unequal distribution of education, health and living standards. 

“What used to be ‘nice-to-haves’, like going to university or access to broadband, are increasingly important for success, but left only with the basics, people find the rungs knocked out of their ladder to the future,” said Pedro Conceição, Director of the HDR Office at UNDP. 

Invest in education, productivity, public spending 

The report recommends revamped policies in the areas of education, productivity and public spending. 

As inequality begins even before birth and can accumulate through adulthood, investing in young children’s learning, health and nutrition is key. These investments must continue throughout life as they have an impact on earnings and productivity in the labour market. 

UNDP observed that countries with a more productive workforce generally have a lower concentration of wealth at the top, which is enabled by policies that support stronger unions, the right to a minimum wage, social protection and which bring more women into the workplace. 

The report further highlights the role of taxation, which cannot be looked at on its own.  Rather, fair taxation should lie behind policies that include greater public spending on health, education and greener energy alternatives. 

Beyond today 

As the UNDP chief noted, “Different triggers are bringing people onto the streets — the cost of a train ticket, the price of petrol, demands for political freedoms, the pursuit of fairness and justice. This is the new face of inequality”. 

Looking to the future, the report asks how inequality might be viewed years down the line, especially in relation to  “two seismic shifts” that will shape the next century. 

Those are the climate crisis, and the progress of the technological transformation that includes renewables and energy efficiency, digital finance and digital health solutions. 

The report calls for opportunities to be “seized quickly and shared broadly”. 

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Concerted Action Needed to Address Unique Challenges Faced by Pacific Island Countries

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Small island developing states (SIDS) must position themselves to take full advantage of often limited, but nonetheless available, opportunities to improve standards of living and accelerate economic growth, according to the latest issue of the Asian Development Bank’s (ADB) Pacific Economic Monitor launched today.

The Monitor focuses on addressing the development needs and challenges of the Pacific SIDS, which in the context of this publication are the Cook Islands, the Federated States of Micronesia, Fiji, Kiribati, the Marshall Islands, Nauru, Palau, Papua New Guinea (PNG), Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu.

The Monitor notes that the geographic and physical challenges faced by SIDS manifest in elevated cost structures and heightened economic vulnerability that severely constrain development prospects. These are further compounded by fragility from thin institutional capacities for effective governance and increased climate change risks.

“Development challenges stemming from vulnerability and fragility, which are further amplified by climate change impacts, call for a differentiated approach to long-term development among the SIDS,” said ADB Director General for the Pacific Ms. Carmela Locsin. “Sustainable development financing as well as innovative, fit-for-purpose strategies for institutional strengthening are central to such an approach.”

This is the 28th issue of the Monitor, the ADB Pacific Department’s flagship economic publication, which was launched in 2009 to provide more regular economic reporting on the Pacific islands. It reveals that a weak external environment is translating into a softer 2019–2020 outlook for the Pacific through subdued exports. The subregional outlook is for average growth of 4.0% in 2019 before moderating to 2.5% in 2020, largely reflecting weaker prospects in Fiji and a return to low growth in PNG as the ongoing recovery from last year’s major earthquake fades.   

The Monitor includes country articles as well as policy briefs. Country articles feature analyses of labor productivity and youth unemployment in Fiji, fishing revenues in Kiribati and Tuvalu, and how various SIDS manage unconventional revenue streams. Other articles focus on recent fiscal adjustments in PNG, sustaining tourism-led growth in the Cook Islands, improving the business environment in Palau, Samoa’s ability to rebound and build resilience after disasters, and urbanization issues in Tonga.

Topical policy briefs in the report further examine the common development challenges faced by SIDS. The first policy brief discusses the structural constraints to long-term development among SIDS and highlights the crucial role of sustainable development financing to overcome these. Another policy brief mapping fragility in the Pacific shows that although some progress has been made over the past decade to strengthen institutional capacities among SIDS, there is still work to be done. Other policy briefs outline key takeaways from some Pacific atoll nations at the frontlines of climate change, and explore poverty reduction challenges in small island developing states, with special reference to PNG.

The Pacific Economic Monitor is ADB’s bi-annual review of economic developments and policy issues in ADB’s 14 developing member countries in the Pacific. In combination with the Asian Development Outlook series, ADB provides quarterly reports on economic trends and policy developments in the Pacific. The Monitor welcomes contributions of policy briefs from external authors and institutions.

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Weak Outlook in GCC Due to Muted Oil Prices & Global Trends

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Economic growth in the Gulf Cooperation Council (GCC) was significantly weakened in 2019 due to muted oil prices and excess oil supply, according to the new World Bank’s Gulf Economic Update released today. As a result, overall real GDP growth in the GCC is estimated to drop to 0.8% this year compared with 2% last year. While most GCC countries retained strong external positions in 2019, the ongoing slowdown in China and the continued global trade war are hindering their efforts to boost non-oil exports. Meanwhile, resurgent geopolitical risks are raising risk perceptions, which could hurt prospects for investment.

This issue of the Gulf Economic Update, titled “Economic Diversification for a Sustainable and Resilient GCC”, explores ways in which GCC countries can pursue diversification that is environmentally sustainable and resilient to global megatrend. Many countries in the region have pursued ‘traditional diversification’, meaning diversifying away from hydrocarbon production but towards heavy industries that still depend on fossil fuels. The emissions-intensive nature of ‘traditional diversification’ has increased the GCC countries’ exposure to disruptive low-carbon technologies, international policy efforts to address climate change, and negative public perceptions of fossil fuels and their derivatives.

“As GCC countries strive to diversify their economies, they should ensure that diversification strategies are aligned with environmental sustainability goals,” said Issam Abousleiman, World Bank Regional Director for the GCC. “Ensuring that the Region’s diversification efforts are climate-friendly is critical not only for environmental sustainability but also to help the GCC invest in sources of growth that are resilient to global technology and policy impacts.”

The report suggests three ways to help align diversification strategies to environmental sustainability objectives.

First, ensuring that diversification strategies take an ‘asset diversification’ approach; one that moves beyond the concept of diversifying output and broadens the composition of a country’s national wealth to include human capital, in addition to natural and produced assets.

Second, GCC countries can hedge the risks of traditional diversification by liberalizing energy and water prices, scaling up investments in renewable energy and carbon capture and storage to help mitigate the impacts of climate change. Energy subsidy reform and increased investment in renewable energy are already underway in the Gulf.

Third, the GCC must establish effective environmental management institutions and practices to ensure that the region protects its fragile ecosystem and reduces environmental cost of industry as it invests heavily in new sources of economic growth.

GCC Countries Outlook

Bahrain: Bahrain’s economy is expected to grow at a moderate rate of 2% in 2019 and average 2.3% over 2020-21, driven by the non-oil sector. Nonoil GDP growth will be driven by an increase in manufacturing output and higher levels of infrastructure spending.

Kuwait: Kuwait’s growth rate is expected to dip to 0.4% in 2019 before picking up to 2.2% in 2020, as the OPEC production cuts expire, and 2% in 2021, as the government increases spending on oil capacity enhancements and infrastructure to boost the non-oil sector.

Oman: Oman’s growth rate is projected to accelerate from an estimated 0% in 2019 to 3.7% in 2020 and 4.3% in 2021, supported by rising natural gas production. The potential boost from the diversification investment spending would continue supporting growth in the medium term.

Qatar: Qatar’s economy is projected to grow by a modest 0.5% in 2019 before accelerating to 1.5% in 2020 and 3.2% in 2021. Growth will be driven by a boost in gas production as the new Barzan Project starts operations as well as by the non-oil sector supported by the government’s investment program targeting infrastructure and real estate.

Saudi Arabia: GDP growth rate will likely slow to 0.4% in 2019 driven OPEC’s oil supply reduction drive, before rising to 1% in 2020 and 2.2% in 2021.

United Arab Emirates: GDP growth rate is projected to stabilize at 1.8% in 2019, before accelerating to 2.6% in 2020 and 3% by 2021, driven by government stimulus and a boost from hosting Expo 2020.

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