Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 301Box 10-1 ISmall Economies and Bond MarketsSome countries have not developed a domestic bond market because they do not carry fiscaldeficits or the size of their economy is not big enough to support the infrastructure required todevelop a bond market This is relevant in Latin America, where many countries have small andnondeveloped economies. In these cases, governments must carefully analyze the necessity of developinga bond marketThe authorities have to explore what other mechanisms of funding mightprove more efficient. Some alternative funding channels are private placements, access to internationalmarkets, and regional solutions.Other schemes could include syndicated lending, multilateral organizations lending, bilateralloans, or combinations of these alternatives. It is clear that Latin American economies rely on externalsources to finance their needs. In fact, except for Brazil, Costa Rica, Chile, and Jamaica, theexternal debt is greater than the domestic one in every Latin American country. This could increasegovernment exposure to foreign exchange risk that could become unsustainable in themedium term.In many cases, the activities undertaken are more the consequence of an improvised fundingmechanism than a strategic funding policy. A particularly interesting possible solution for countrieswith small financial systems is a regional market. Merging different small markets in a bigger regionalone would create scale economies that could support the required infrastructure and resourcesthat markets require. However; this type of initiative requires macroeconomic and financialharmonization among participants, which is especially difficult to accomplish among developingcountries.The lack of compatibility among financial and macroeconomic country schemes constitutesa major barrier for market integration.External Debt as a Percentage of GDP, December 2000Source: ECLAC.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub