Latin American Capital Markets

304 CLEMENTE DELVALLEkets. In addition, if the system operates under a flexible regime where banks dominatethe asset management industry (for example, mutual funds and pension funds) andthe brokerage firms, this lack of interest could become a major impediment to developingdomestic debt markets.The Situation in Latin AmericaCurrently in Latin America, bond markets are unevenly developed because of structuraland economic differences in the level of development across countries.To a largeextent, differences in the key prerequisites described above explain the differences inachievement. For example, larger economies in the region may find it easier to supportdevelopment of their debt markets. For instance, the second group of countries(Argentina, Brazil, Chile, Colombia, and Mexico) achieved a level of macroeconomicstability during the first half of the 1990s. 2 For the financial sector, the 1990s were alsocharacterized by reforms, such as the liberalization of markets and the inflow of foreigndirect investment to the financial system.The latter was prompted in some countriesby the Mexican crisis, which exposed deficiencies in corporate governance andweaknesses in the regulatory framework of the financial system.The second half ofthe 1990s was characterized by developments in the bond markets, which were favoredby lower levels of inflation, sounder financial systems, and relatively more stablemacroeconomic environment. In fact, low inflation allowed these governments to extendbond maturities and issue fixed-rate instruments. It is important to set aside thecase of Chile, which implemented reforms long before any other Latin Americancountry and, in certain areas of capital market development, is more advanced. However,in the case of bond markets in Chile, most fixed-income securities (central bankand corporate sector securities) are inflation indexed, which has represented a majorimpediment for more active and deeper markets.Brazil and Mexico have been exposed to currency and macroeconomic crisesduring the past decade. However, since the crisis of 1995 and the North American FreeTrade Agreement (NAFTA), Mexico has been consolidating key reforms in the macroand financial sectors. For example, after the 1994-95 crisis, the government encouragedinternational banks to participate in the domestic financial market, leading to privatizationand consolidation of the banking system. Due to better macroeconomic and financialpractices, Mexico was upgraded to investment grade.This positive environment,combined with a more proactive debt management strategy to develop the local debtCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub2 Chile gained macroeconomic stability much earlier due to the reforms implemented during the 1980s.The recentcurrency devaluation in Argentina has introduced a high degree of macroeconomic instability in that country.