Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 323Private SectorThe development of corporate bond markets will come, in general, after the developmentof government securities markets and will require three specific elements: acredit rating system, a disclosure system, and bankruptcy laws. With the exception ofthose in the United States, secondary corporate bond markets are not very liquid; themain activity of the private sector bond market is focused on the primary marketThesize of the corporate bond market differs noticeably among developed and developingcountries: in the latter, the private sector bond market rarely exceeds 10 percentof gross domestic product, while in the former, the market generally exceeds that figure,reaching the highest in the United States (70.2 percent of gross domestic product).5 There are two main classes of corporate bond issuers: major issuers and minorissuers. Major issuers are financially strong, issue low-risk and uniform bonds, havelarge and stable issues, regularly access the market in a nonopportunistic manner, andare well known by the investor community. Minor issuers are those that access themarket irregularly and at opportunistic times, have heterogeneous bonds that are notfrequently traded in secondary markets, and usually reach certain types of investorswith specific investment needs.Benefits of the Corporate Bond MarketFrom a macroeconomic point of view, the corporate bond market benefits not onlythe private sector but the entire economy as well. Corporate finance managers haveto decide how to finance their companies, and they know that an adequate mix ofdebt and equity is essential for sustainable growth.They must choose between loansand bonds. Although both vehicles have advantages, bonds are more cost-effective forlong-term, large-scale, and opportunistic financing. From a broad perspective, corporatebond markets do the following: provide long-term investment products for longtermsavings, improve the supply of long-term funds for long-term investment needs,lead to financial innovation in order to meet the specific needs of investors and borrowers,provide lower funding costs by capturing a liquidity premium, relocate capitalmore efficiently, and diffuse stresses on the banking sector by diversifying credit risksacross the economy. Private sector fixed-income securities not only contribute to thedisintermediation process mitigating financial risks but also reduce interest rate, foreignexchange, and refunding risks by issuing long-term, fixed-rate local currency bonds.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub5 Data for December 1998 from World Bank and IMF (2001, table 12.4).