Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 305markets, has proved to be quite effective. The Mexican authorities have been able toextend the average maturity of the debt portfolio, increase its duration with the introductionof the 5- and 10-year nominal fixed-rate bonds, and improve liquidity becauseof increased fungibility and the reopening and introduction of market makers in 2000.Since its devaluation in 1999, Brazil has experimented with high levels ofvolatility in the key financial variables. Although the country has achieved importantresults in terms of consolidating a sounder macroeconomic framework, volatility continuesto be high and Brazil's real interest rates are among the highest in the world.This environment represents a major constraint for further development of the localdebt markets and has forced the government to offer indexed instruments (to theforeign exchange rate and the overnight interest rate) in order to extend maturitiesand maintain control of refinancing risk and the cost of debt in the short term.Therefore,reducing real interest rates and realizing further stability in the financial variablesshould be key priorities for the government going forward.Colombia implemented important reforms in the macro and financial sectors,combined with a relatively well-organized strategy, which proved effective inbuilding the market. Colombia is one of the few countries in the region that has beenable to establish a liquid 10-year benchmark for nominal bonds. Since 1997/98, deteriorationin Colombia's fiscal situation has brought a more complicated debt overhang,which is seriously endangering the process of development However lower realinterest rates have contributed to partially offset the problem of accelerated growthin the stock of government debt.Argentina had built a stable macroeconomic framework during the 1990s,which contributed to development of the local debt markets. However, the unsustainablefiscal deficit carried over during the past few years has led the country to defaultand devaluation, creating an unstable macroeconomic environment aggravatedby a broken financial system.The situation in the third group of countries is substantially different. CostaRica, Uruguay, and Venezuela are in some ways the more advanced markets within thisgroup, given the more proactive role of their governments in supporting bond marketdevelopment, which is still in its early stages. In Peru, relatively small net financingneeds and the country's explicit decision, until recently, not to engage in active financingin the local soles market explain the limited development of the local debt markets.In addition, the real sector relies on dollar-denominated loans. In the case ofPanama, the economy is fully dollarized and the country has been a financial centerfor a long time.These special conditions have enabled the government to rely primarilyon international sources (capital markets and international organizations) and toa lesser degree on local sources.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub