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Latin America’s local currency bond markets: an overview

Domestic bond markets have remained underdeveloped for much of Latin America’s modern history owing to a number of policy and structural impediments. The resulting structure of domestic government and private sector debt, which was heavily biased towards short-term and/or dollar-indexed liabilities, contributed to a worsening of the financial crises in the region during the 1990s and early 2000s. In recent years, however, domestic bond markets have constituted a growing source of financing for Latin American economies and of portfolio allocation for global investors (Figure 1). This has called into question the view that countries in the region cannot borrow in local currency at longer maturities, sometimes referred to. | Latin America s local currency bond markets an overview1 Serge Jeanneau2 and Camilo E Tovar3 1. Introduction Domestic bond markets have remained underdeveloped for much of Latin America s modern history owing to a number of policy and structural impediments. The resulting structure of domestic government and private sector debt which was heavily biased towards short-term and or dollar-indexed liabilities contributed to a worsening of the financial crises in the region during the 1990s and early 2000s. In recent years however domestic bond markets have constituted a growing source of financing for Latin American economies and of portfolio allocation for global investors Figure 1 . This has called into question the view that countries in the region cannot borrow in local currency at longer maturities sometimes referred to as the original sin hypothesis.4 The expansion of these markets has reflected a conscious effort by the authorities of most countries to reduce their vulnerability to adverse external shocks. In this context a key objective has been the strengthening of demand conditions for domestic debt. This has been accomplished inter alia through a transition to more stable macroeconomic policies a move to privately funded and managed pension systems and the removal of restrictions on foreign investment. Policy initiatives have also been taken on the supply side including a gradual shift of government liabilities to the domestic market a move to greater predictability and transparency in debt issuance and attempts to create liquid benchmark securities. Such initiatives have been supported by a particularly favourable external environment including high commodity prices and their beneficial effects on internal and external accounts together with a search for yield on the part of international investors. Notwithstanding the progress made so far major challenges remain in improving market access to the private sector. Drawing mainly on national sources this paper