Latin America Financial Industry Analysis

Latin America Financial Industry analysis

Latin America Business

Zhiyuan Wang

Jinpeng Liu

Professor Carrillo

Introduction

        Nowadays, financial industry in Latin America plays an important role in the world. Researching Latin American financial industry has a significant meaning for learning Latin American economy. Financial industry in Latin America is facing some challenges, such as financial liberalization, financial enterprise corruption, devaluation, exchange rate changes, etc. In general, we can study Latin America financial industry by researching these four main representatives of Latin American countries: Argentina, Chile, Brazil, and Mexico.

Financial Industry in Latin America

Related to Latin America

At the beginning of the twentieth century, Latin America was one of the richest regions in the world. In this term, the financial industry in Latin America also had a good performance. From the middle of twentieth century, the military government was built in Latin America frequently. In this period, military government implemented fiscal control, which damaged to financial industry. After 1970s, Latin America undertook financial liberalization with the rise of neo liberalism. They made the new policies for financial industry to carry out financial liberalization, including interest rate liberalization, open capital inflows, and relieving fiscal control. However, these countries were so anxious to accomplish financial liberalization that they did not consider their realistic economy situation. In this case, the financial industry in Latin America was suffered from the new policies. As a result, the majority of Latin American countries always got involved in the financial crisis.

Argentinian government tended to complete financial deepening by advocating financial liberalization. Financial liberalization includes Scope of business, free exchange rate and free flow of capital. In 1989, Argentinian government liberalized restrictions on foreign investment. They did not have foreign exchange restrictions and the credit limit. Argentinian government claimed that the exchange rate between Argentine Peso and dollar is 1:1. Thus, the central bank issued a peso; there should be one US dollar foreign exchange reserves as a foundation. The respective central bank should unconditionally accept the market at a fixed exchange rate against the US. However, Argentinian government overestimates their currency; they did not prepare enough foreign exchange reserves for the market, which was a disaster for the export in Argentina. Thus, once the government do not have enough property to sale, dollar would stop following to Argentina. The currency in the nation would reduce, and its economy would tend to bust. In this case, Argentinian did not have the ability to pay back the massive debt, which increased to 120 billion dollar. Finally, Argentinian fell into financial crisis. After that, the implementation of monetary policy that made by the government alleviated the financial crisis, but it was still suffer from the serious inflation. Inflation of as much as 40 percent is the biggest economic challenge Argentina faces (Massa, 2015, para. 1). Hence, financial liberalization is a double-edge sword for finance and foreign exchange, which is a hidden danger for finance security. It is difficult to control financial liberalization, especially opening the field of bank securities. It can accelerate the speed of sailing state-owned enterprises, obtaining a great deal of foreign capital. Argentinian would not find the crisis until financial crisis break out. In that moment, they would realize that their financial lifeline has been controlled by other countries. The government would not have the ability to undertake macro-control. In that case, the local government cannot make sure their citizens’ deposits to be secure, and the other countries would not provide the loan for them because they do not have enough property as mortgage. This problem also exists among the main Latin American countries, such as Therefore, the over quick financial liberalization could undermine the development of financial industry in Latin America.