MARKET DATA REVIEW : The role of capital markets in financing development

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Last week the WFE held its annual assembly and general meeting in the city of Cartagena in Colombia, for which I had an opportunity to attend, interact and share our cause — this being a matter of necessity in our competitive world where global capital is sought after by almost everybody in order to finance their local development projects and enterprises.

And, obviously, for a meeting of such a global body, with some member exchanges making significant use of capital markets and having thousands of listed companies within their market infrastructure and billions of US$ in market capitalisation as well as several decades of existence; the agenda for such a conference would normally vary from issues that matters to small and emerging markets, like mechanisms for enhancing of market liquidity to complicated topics that are far fetching for our imagination, given the level and pace of our market development, ideas such as black pools or blockchains or Distributed Ledger Technologies, or roles of central counters parties (CCPs) in clearing and settlement of OTC and derivative instruments, etc — these are challenging ideas to digest and therefore it made me think of how long our journey still is.

The existence of the capital market in an economy encourages broader ownership of productive assets by small savers. It enables them to benefit from economic growth and wealth distribution, and provides avenues for investment opportunities that encourage a thrift culture critical in increasing domestic savings and investment ratios that are essential for rapid industrialisation. Additionally, the capital market mechanism allows not only an efficient allocation of the financial resources available at a certain moment in an economy – from the market’s point of view – but also permits to allot funds according the return and the risk – from the investor’s point of view – offering a large variety of financial instruments with different profitableness-risk characteristics, suitable for saving or risk covering.

Capital market also provides equity capital and infrastructure development capital that has strong socio-economic benefits through development of roads, water and sewer systems, housing, energy, telecommunications, public transport, etc. These projects are ideal for financing through capital market via long dated bonds and asset backed securities. Infrastructure development is a necessary condition for long-term sustainable growth and development. In addition, capital market increases the efficiency of capital allocation by ensuring that only projects which are deemed profitable and hence successful attract funds. This, in turn, improve competitiveness of domestic industries and enhance ability of domestic industries to compete globally, given the current momentum towards global integration. The result is an increase in domestic productivity which then spill over into an increase in exports and, therefore, economic growth and development.

MARKET DATA REVIEW : The role of capital markets in financing development

What you need to know:

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