|**Table 17:** Capital market developme|ntin Latin Am|erica, G-7,|andEast <br>|Asia,1990 a<br>|nd2004(|percent)|
|---|---|---|---|---|---|---|
|**Market development indicator**|**Latin A**<br>**count**<br>|**merican**<br>**ries**<sup>**a**</sup><br>|**G-7 cou**<br>|**ntries**<sup>**b**</sup><br>|**East A**<br>**count**<br>|**sian**<br>**ries**<sup>**c**</sup><br>|
||**1990**|**2004**|**1990**|**2004**|**1990**|**2004**|
|**Domestic stock market**|||||||
|Market capitalization/GDP|12.4|42.3|48.2|93.6|53.5|147.1|
|Value traded domestically/GDP|2.0|6.1|23.9|92.2|82.7|104.5|
|Capital raised domestically/GDP|0.4|0.5|0.9|1.4|3.4|5.9|
|**Domestic bond market**|||||||
|Amount outstanding of domestic<br>public sector bonds/GDP|12.3|20.7|50.5|67.9|13.9|25.6|
|Amount outstanding of domestic<br>private sectorbonds/GDP|4.4|10.7|38.6|47.7|15.9|36.3|

Notes:<sup>a</sup> Averages for Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela.<sup>b</sup> Averages for Canada, France, Germany, Italy, Japan, UK, and US.<sup>c</sup> Averages for Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Taiwan, and Thailand. Source: Bank for International Settlements, S&P Emerging Markets Database, World Bank and World Federation of Exchanges in de la Torre et al. (2006).

Pension funds already have a substantial participation in the markets for some instruments (Figure 20). In 2005, their holdings of public sector bonds was around half of the total in Chile and Peru and about one-third of the total in Argentina, Colombia, and Mexico. For the other three instruments shown in Figure 20 – except for time deposits in Chile with pension funds holding more than one-third of the total in 2005 – the participation of pension funds is not as concentrated, which might be partially due to local regulatory frameworks, but it has been showing an overall increasing trend.

The under-representation of pension funds in equity markets is to some extent due to local capital market limitations. Domestic equity markets in LAC are generally illiquid, particularly in the case of small and medium caps, reducing the attractiveness of this asset class. Although PFAs are not active traders in equity markets, illiquid shares prove to be challenging since they make market exit difficult while creating valuation problems, which may negatively affect rates of return. This could be worsened with the inclusion of additional small cap shares, which would impose higher research and monitoring costs without significantly improving the portfolio’s risk-return profile (IMF and World Bank 2004). In Chile, as of December 2006, pension funds were allowed to invest in 91 listed stocks approved by the Risk Rating Commission, but they were actually invested in 70 stocks and total investments were below the quantitative ceiling for this asset class. Yet, given their importance as institutional investors, the lack of interest of pension funds for such instruments may, in turn, discourage their issuances.<sup>55</sup> The view that pension funds have contributed to the development of the domestic capital market prevails. Several analyses of the interactions between the growth of pension funds and capital market development highlight the influence of PFAs in: (a) the development of better regulations, (b) their fundamental role in the creation of important institutions (e.g., central custodian and electronic stock exchange), (c) their role in the development of specific instruments (e.g., mortgage bonds and corporate bonds), and (d)

> 55 See also Catalán (2003).

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