Latin American Capital Markets

146 KAREN GOLDSTEIN ROSSOTTOeconomic environment of low inflation and positive interest rates in order to restoretrust and stability in their capital markets.This commitment should be part of an overallplan to exercise conservative fiscal policy. By decreasing debt, governments will facless pressure to finance their activities through pension fund investment in governmentbonds, thus allowing capital to shift to the corporate bond and equity markets.Financial stability will also enable the government to establish credibility as a debt issuerand thereby extend a legitimate long-term yield curve as a benchmark for otherdebt markets. Without decreased fiscal pressure, government will be constrained ttdevise a regulatory framework that is shaped to accommodate its needs, rather thanone that is aimed at further sector growth through innovation and greater efficiency.Movement toward Regional Market IntegrationTo offset problems of capital scarcity and low liquidity in attracting institutional investorsto Latin American and Caribbean capital markets, governments in the regionshould consider measures to facilitate easier cross-border transactions and movementtoward regional integration. The fact that institutional investors in the UnitedStates had access to a vast, integrated area played a significant role in facilitating thegrowth of a domestic institutional sector Institutions in the European Union are experiencingsimilar benefits. Both these markets can provide guidance to Latin Americaand the Caribbean in terms of benefits and implementation.Although markets in the region have moved to facilitate cross-border transactionsthrough regional entities, such as the Caribbean Community (CARICOM) anthe Latin America Integration Association (LAIA), other measures may be taken toassist institutional investors specifically. For example, the European Union has takensteps to establish a common market for mutual fund-like investments. In 1985, theEuropean Union passed the Undertakings on Collective Investments in TransferablSecurities directive, permitting investment companies that register in one Europeancountry to sell shares in other European countries. This mutual fund "passport" wasintended to assist in allowing funds to cross borders more easily. In addition, theEuropean Commission has taken the initiative on pension reform at the EuropeanUnion level to create a single market for these investments.To facilitate integration, local markets in Latin America and the Caribbeanshould continue to move toward adopting high standards of reporting and disclosurthat apply across borders, such as the GAAP in the United States and the InternationalAccounting Standards.The adoption of fundamental principles of securities reg-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub