Latin American Capital Markets

94 VALERIANO F. GARCIA AND LUIS ALBERTO GIORGIOwhich substantially helped the Mexican economy. This was a one-shot event andshould not be generalized to other countries. Mexico will need to rebuild its financialmarkets or fully integrate itself into the U.S. financial market in order to make itsgrowth sustainable. Howeven the Mexican experience shows that in emerging markets,where short-term borrowing is usually the bulk of financing, commercial credit issignificantly relevant and may be a good substitute for short-term banking loans.In most countries in Latin America, equity markets are quite underdeveloped.However; Brazil has sophisticated stock exchanges. For example, the Sao Paulo stockexchange, Bovespa, and the Bolsa de Mercadorias & Futuros (BM&F), which specializesin derivatives, are at the world frontier in technological advances. Electronic tradingcomprises 90 percent of Bovespa's trades and 55 percent of its traded value.BM&F has recently incorporated the Global Trading System, an advanced electronictrading platform with international capability. However, although Bovespa's marketcapitalization was 33 percent of Brazil's GDP during 1996-2000, about half of thatcapitalization consisted of the 10 largest companies, and relatively few medium enterprisesentered the market (IMF 2001).There is still a wide gap between Brazil'stechnological advance in managing and administering its stock exchanges and the narrowuse of those platforms by the majority of its medium and even large enterprises.Why are capital markets, in general, and stock markets, in particular; underdevelopedin most Latin American and Caribbean countries? What have been themost important constraints to the development of capital markets in emergingeconomies? Here we focus on the constraints imposed by the following macroeconomicand structural factors, which could be considered exogenous to the microeconomicdesign of capital markets and the performance of its participants: poormacroeconomic policy; negative externalities produced by banking industry regulations;and structural constraints, such as lack of efficient institutional infrastructure,minimum size of the market, and poorly designed financial and nonfinancial reforms.Poor Macroeconomic PolicyA well-organized and vibrant capital market cannot co-exist with a weak macroeconomicsetup and much less with an explosive fiscal deficit or inconsistent policy mix.Among its functions, a capital market intermediates risks overtime. Expectations aboutthe value of macroeconomic variables are difficult to build under high and/or volatileinflation; real exchange rate volatility; noncredible exchange rate regimes; inconsistentmonetary cum fiscal policy; distortionary and/or high tax rates; and directed and subsidizedcredit.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub