Latin Americas local currency bond markets an overview.pdfVIP

Latin America’s local currency bond markets: an overview1 2 3 Serge Jeanneau and Camilo E Tovar 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 ha