Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 317Figure 10-3 I The Investor Base in Selected LatinI American Countries, December 2000I (Percentage of assets)Source: World Bank (2001).A broad investor base implies several benefits for developing a governmentsecurities market, including but not limited to market stability, financial innovation, increasedliquidity, and lower costs of funding.The government must lead the processof expanding its investor base through developing an environment that attracts diverseinvestors.The banking disintermediation process deserves special attention becausebanks do not have great incentives to expand the investor base and disintermediatetheir activities.Therefore, regulation and competition become essential toolsto achieve that goal.Figure 10-3 shows that countries like Colombia, Costa Rica, Honduras, Jamaica,and Panama rely heavily on public sector investments that constitute a captivesource of funding. For example, in Colombia, financial surpluses from state companiesand agencies must be invested in government securities, including the public sectorsocial security fund, and this captive investor represents around 50 percent of thetotal demand for government bonds. In addition, the majority of Latin American countriesstill directly or indirectly require that banking reserves be met exclusively by governmentsecurities.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub