Latin American Capital Markets

324 CLEMENTE DELVALLEAn underdeveloped and dysfunctional corporate bond market can havewidespread consequences that produce an impact not only on the corporate sectorbut on the whole economic system. The absence of private sector fixed-income securitiescomplicates diversification of assets, leading to inefficient portfolio investments.Other negative effects are that companies may be forced to build an unbalancedstructure of funding, financing their needs through international corporate bond marketsand exposing the economy and themselves to foreign exchange risks.Current TrendsTwo main trends are supporting development of the corporate bond market: (a) disintermediationand (b) deregulation and privatization. The latter is related in mostcases to the increasing incapacity of governments to finance major infrastructure projects,utilities, and housing. In addition, due to the pursuit of economic efficiency, governmentcompanies and infrastructure activities have shifted from the public sector tothe private one. These changes have been implemented by privatization and deregulationprocesses. Given the large sizes and long development periods of infrastructureprojects, the corporate bond market is the proper place to finance those projects, althoughmany of them are financed by syndicated loans from commercial banks, particularlyin the early stages of the projects. From 1990 to 1997, it is estimated that indeveloping countries, 10 to 20 percent of infrastructure projects were financed bydebt securities. 6 By contrast, in many developing countries, privatized companies arebecoming the most outstanding issuers of private sector bonds. Given that housing isone of the government's major socioeconomic priorities, efforts have to be aimed atdeveloping a mortgage market. Disintermediation through securitization is the rightprocedure for promoting and developing the mortgage market, not only because itleads banks toward a higher lending capacity, but also because housing is an engine ofeconomic growth (box 10-3).The size of residential mortgage markets varies throughoutthe developed countries, but these markets are clearly underdeveloped in emergingeconomies, in many cases due to limited standardization of the mortgage loan marketIn any case, governments have to assess, design, and implement the developmentof an efficient corporate bond marketDevelopment of the government bond market constitutes a sort of prerequisitefor development of a private sector fixed-income securities market. The exis-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub6 World Bank and IMF (2001, p. 368).