The Fixed-Income Market in Uruguay

Abstract

Uruguay’s capital markets remain underdeveloped despite the country’s financial liberalization dating back to the 1970s, which was reinforced by passage of several additional laws in the 1990s whose aim was to promote the local financial markets. The government is able to raise funds domestically in what is a liquid bond market, but private firms continue to fund themselves mostly out of retained earnings or else via bank loans and suppliers’ credit. Moreover, when compared to others in Latin America, Uruguayan firms feature the highest ratios of liability dollarization, and corporate debt structures with the shortest maturities – currency and maturity mismatches that render them (and by extension, their creditors) extremely fragile. A deepening of the domestic capital market would probably alleviate this vulnerability of the Uruguayan economy. The financial fragility of Uruguayan firms amplified by corporate governance issues are the main impediments for the development of the capital markets. Given the current firm practices and the absence of sizeable institutional investors besides pension funds, the fixed-income market will most likely remain a source of funding for very few firms.