## **Box 5.1   The case of Chile: Corporate bonds issued to finance infrastructure have spurred market development**

Chile has a fairly large corporate bond market that has developed rapidly over the past two decades, especially when compared with most other emerging market economies. Corporate issues accounted for 38 percent of total bonds outstanding in Chile, according to the most recently available data.<sup>a</sup> Issues in the public utilities and transport sectors have been credited with speeding up the development of Chile’s corporate bond market (Braun and Briones, forthcoming). These sectors were the sole local issuers of corporate bonds until 1998, and they constituted nearly half of all issues on the domestic market and more than 40 percent of average amounts raised from 1990 to 2005, according to one estimate. Private firms in the construction sector participating in the government’s concession scheme for transport infrastructure drove much of the growth in the country’s corporate bond market from 1990 to 2005.

Infrastructure sectors have played a major role in corporate bond market development in Chile largely because they have been able to attract a high credit rating, which has been key to the growth of the corporate bond market, given the importance of pension funds and insurance companies on the investor side, and the regulations that have governed their investment choices over the past two decades.<sup>b</sup> Corporate bonds issued to finance infrastructure development in Chile amounted to 13 percent of all outstanding bonds as of the fourth quarter 2007. Excluding bonds issued outside the country, as well as bank bonds and securitizations, the proportion of corporate bonds issued by infrastructure providers rises to just under half of Chile’s total bond activity.

a. The figure for corporate bonds outstanding as a percentage of total bonds for Chile is current as of September 2007 and sourced directly from Chile’s Superintendencia de Valores y Seguros (SVS).

b. The Chilean insurance sector’s investment in corporate bonds increased from 7 percent of total assets in 1999 to 33 percent by 2006, according to the Central Bank of Chile.

# Equity markets

To date, stock exchanges in the focus countries have played a minimal role in effectively mobilizing and allocating resources. Aside from the Johannesburg Securities Exchange, most African stock exchanges have very few listings (particularly by national companies), low liquidity levels, and inadequate market infrastructure. Trading activity is often concentrated in one or just a few stocks. Development of the region’s exchanges also has been hindered by high levels of poverty and the reluctance of local companies to become less reliant on bank finance and issue securities. That reluctance can be traced to insufficient resources, inexperience, wariness of financial disclosure requirements, and the cost of listings. On the demand side, there is a general lack of awareness of the benefits of investing in shares. In many African countries, most of the local investors who do invest in securities prefer short-term government securities that offer high and liquid returns. An underdeveloped institutional investor base, poor corporate governance practices, and inadequate protection of minority shareholder rights also stand in the way of well-functioning stock exchanges.

To assess the actual and potential role of equity markets in financing infrastructure development and the depth of local and regional stock markets (where they exist), we used the following indicators: recent stock market capitalization, ratios of market capitalization to GDP, listing tallies, annual turnover ratios, the market capitalization of companies operating in infrastructure development sectors as a share of total market cap of listed companies, and the extent to which Africa-based firms are raising equity financing via cross-border listings on regional and international exchanges. These indicators are summarized in tables 5.6 and 5.9.

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