THE IMPORTANCE OF INSTITUTIONAL INVESTORS DIVERSIFICATION IN THE DEVELOPMENT OF THE GOVERNMENT SECURITIES MARKET

Abstract

The development of a government securities market is a complex process that is interrelated with the financial and market system development of each country. For many countries, this implies huge challenges that often are amplified by economic issues. For instance, some government securities markets rely on a few domestic banks for funding, which makes competition scarce, and transaction costs high. In addition to this, the lack of a sound market infrastructure may make specific actions to develop a government securities market premature and ineffective. At the same time, the insufficiency of institutional investors, low domestic savings rates, and lack of interest from international investors generate a small, highly homogeneous investor group, contrary to the diversity needed for an efficient market. Furthermore, economic instability, often accompanied by high fiscal deficits, rapid growth of the money supply, and a deteriorating exchange rate, weakens investor confidence and increases the risks associated with the development of a market for government securities. This article aims to describe the importance of a diversified investor base in developing a government securities market and to show the experience of the Republic of Moldova in this regard.