Well-functioning capital markets important to economic growth,says Moody's

by **Cals** Wed 21 May 2014, 01:48

Business & Markets 2014

Written by theedgemalaysia.com

Tuesday, 20 May 2014 10:50

KUALA LUMPUR (May 20): Well-functioning capital markets can help foster macroeconomic stability, access to financial services and the overall development of economies, according to Moody's Investors Service.

In a statement Tuesday, Moody's president and chief executive officer Raymond McDaniel said developed capital markets are good at mobilizing, directing and allocating local and international savings.

"To be effective, they must offer a menu of risk/return options that is both suitable and useful to various types of investors and investments," said McDaniel

On the topic of the capital markets, while they provide a great number of benefits when they function well, McDaniel states that "The capital market is a system. How well -- or poorly -- each part operates inevitably depends on how the rest of the system is working."

"And one of the crucial ingredients for the overall effectiveness of markets is credit -- which in its simplest form is the trust that enables one party to temporarily provide resources to another market," he said.

The benefits that better-developed markets can bring include creating an important safety valve in the system for instances where banks are constrained to lend; a more disciplined process for capital allocation; and strong market-based signals that enable investors to monitor the use of and returns on their financings.

McDaniel said that public policy had an important role to play in establishing the rule sets that make markets deliver these benefits.

"The global recovery is still fragile. In this context, getting financial markets to work well becomes increasingly important," says McDaniel, adding, "A strong overall market design, with appropriate macro-prudential oversight, a sound legal framework, and broad availability of information, can attract and encourage participation by both domestic and foreign investors."

In this context, the international credit rating agencies can also play a role in deepening liquidity.

Credit ratings are useful tools in promoting secondary market liquidity because ratings are a readily available and globally comparable point of reference that can encourage a deeper understanding of credit risk.

"The creation and operation of well-functioning capital markets is a shared responsibility of both the public and private sectors," says McDaniel.