Latin American Capital Markets

490 KENROY DOWERS, RUBEN LEE, AND ANTONIO VIVESThe implications of this lesson for capital market development strategies are,however, more difficult to infer than at first sight appears. One critical implication isthat, prior to building any particular market infrastructure, an assessment needs to bemade about whether the market in question would be sustainable. Such an assessmentis in general not easy to undertake for a range of reasons.There are many riskfactors that may limit the development of capital markets in a particular country,some of which are within the power of the country to control, while others are notIn addition, special interests may dictate the rationale for developing the market, butdo so without a broad national consensus.Ideally, for a capital market to function efficiently, a constellation of many requirementsis necessary. At a minimum, these include a relatively stable macroeconomicenvironment and the existence of a sufficient number of large and profitableenterprises that cannot fund their projects utilizing internally generated funds or thathave surpassed their debt capacity. It is also important to have a well-functioning andefficient banking and payment system; an operating trading system; sound and competentbrokers and investors; a secure clearing and settlement system; appropriatelegal, regulatory, accounting, and taxation frameworks; reasonable enforcement mechanisms;and an independent regulator In many capital markets, however; not all theserequirements are present.An example of the difficulty in assessing the viability of a particular market canbe seen in considering the United Kingdom's Know-how Fund to support the developmentof the Budapest Stock Exchange in Hungary. An evaluation of the completedBudapest Stock Exchange project noted that its principal original objective and justificationhad been to ensure that the exchange was in a position to support effectivelythe trade in shares issued to the public through privatization (DFID, undated).The assumeddealing volumes on which the computer trading systems were planned werebased on government privatization plans that appeared realistic at the time. However,the privatization program proceeded considerably more slowly than expected; as a result,the trading system operated well below its planned capacity, and turnover on theexchange was only a fraction of what was originally forecast. Although this clearly affectedthe viability of the exchange, it was beyond the control of the aid agency.In similar examples in Latin America and the Caribbean, governments haveled efforts to introduce an exchange, but the exchange never became a high-volumetrading entity. Stock exchanges in Peru, Colombia, the English-speaking Caribbean, andCentral American countries are good examples of government-led efforts. Althoughthe rationale for these efforts is clearly understood, after the incubation period, a subsequentprivate sector-led phase did not materialize.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub