Latin American Capital Markets

300 CLEMENTE DELVALLEPrerequisites for Market DevelopmentDevelopment of the government bond market is a long-term, dynamic process. Buildingand establishing a credible market for government securities must be viewed as akey component of the country's development strategy. It should be noted that not allthe mature economies have a similar strategy, either because the government has notrun budget deficits requiring funding or because the country is not large enough tosupport the necessary infrastructure (see box 10-1). There are two main prerequisitesfor developing medium- and longer-term government securities markets: a certainlevel of macroeconomic stability and a liberalized and stable financial system supportedby competition. In addition, in order to develop a corporate bond market, itis essential to pass a bankruptcy law that clearly delimits rights and obligations. Therefore,at first, efforts must be aimed at achieving these basic prerequisites, which willthen be complemented by others, such as a credible and stable government and asound legal and regulatory frameworkThe Macroeconomic FrameworkA sound and credible macroeconomic framework includes sustainable fiscal policy,stable monetary conditions, and a credible and transparent exchange rate regime.Fiscal PolicyIn the context of government securities market development, the government mustbe able to communicate to the market that fiscal policy is on a sustainable path andunder control.Therefore, it is important that investors perceive the ability of the governmentnot only to manage expenditures and debts but also to collect taxes; otherwise,a higher risk of default will be perceived, and the cost of the government debtwill rise. A credible budget and control system for expenditures plays a key role in fiscalpolicy. High real interest rates are one of the common effects of an economy witha government incapable of implementing discipline on the fiscal side and constitute amajor impediment for extending the yield curve and developing a liquid nominalbond market.Monetary ConditionsStable monetary conditions are closely related to fiscal policy because fiscal deficitsfinanced by the central bank through monetary issues generate inflation. InflationaryCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub