Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 297tant goal. In fact, like any other major project that involves many institutions and policies,developing vibrant capital markets, and bond markets in particular, requires asound framework, the right inputs, and proper management Therefore, due to the importanceof bond markets in building a sound capital market, governments shouldtake the lead in developing a comprehensive framework Moreover; bond markets areone of the principal means for achieving a developed and sound domestic capitalmarket. Thus, governments, through their ministries of finance, are not only developers,but also issuers. Policymakers must address important questions about the sequenceof development, the essential initiatives, and the role of the government.This chapter provides general policy guidelines and recommendations formarket development. The main goal of the chapter is to convey the simple but importantmessage that it is essential for policymakers to work on bond market developmentas a comprehensive and dynamic process. It is clear that the government,through the ministry of finance or in some cases the central bank or the securitiesregulatory agency, must lead the development process. A developed bond market diversifiesthe risks of the entire economy and leads to a more competitive economicand financial environment, which is especially important in Latin America because theregion's lack of competitiveness has historically hampered economic growth.Thus, itappears clear that bond market development and, more generally, capital market developmentwill lead the region to more sustainable economic growth. In addition, thechapter provides a succinct description of what Latin American countries have doneand the biggest challenges ahead. 1A Comprehensive ViewGovernments pursue economic growth and development by their policies and actions.Well-developed capital markets provide benefits for the entire economy andare thus an essential tool for growth. A sound domestic capital market reduces risksand interest rates, leads to lower volatility and higher diversification, and establishes along-term horizon for investments.The money market is usually the first step in thedevelopment of a sound domestic bond market, followed by the government securitiesmarket, the corporate bond market, and finally the derivatives market This se-1 The chapter relies heavily on World Bank and IMF (2001), World Bank (2001), and our experience as bond and capitalmarket developers and debt managers.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub