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Brazil, Chile and Mexico have all issued green and sustainability-linked bonds on very favorable terms. Here Christ the Redeemer statue in Rio de Janeiro. (Photo: Artyominc)
Wednesday, July 21, 2021

Latin America Sees Record Bond Issues

Low interest rates, high investor demand, govt needs drive Latin America bond boom.

Inter-American Dialogue

The total amount of bond issuance in Latin America and the Caribbean, including sovereign and corporate debt, reached $52 billion in the first quarter of this year, a record total, the United Nations Economic Commission for Latin America and the Caribbean said in a recent report. The amount grew 89 percent from the fourth quarter of last year and is 10 percent higher than in the first quarter of 2018, the previous peak. What factors are fueling bond issuance in Latin America and the Caribbean, and will the current trend continue? What will be the long-term impact of the increase in bond issuances, and which countries and sectors will be most affected? How manageable are the new debt loads for countries and industries in the region? What are the reasons behind–and the significance of–the region’s record high in green, social and sustainability bond issuance, which hit $16.6 billion at the end of April?

Edgardo Sternberg, vice president and emerging markets portfolio manager at Loomis, Sayles & Company in Boston: There have been several factors behind the record issuance of debt in Latin America: extremely low interest rates, fiscal and social spending needs by governments, refinancing needs by sovereign and corporate issuers and strong demand for emerging-market bonds from investors as this is one of the few asset classes that commands some yield. It is important to note that not all gross debt issuance becomes new additional debt; much of this year’s issuance of bonds has been to refinance maturing debt or to extend the duration of bonds maturing in the next few years, most of it at low rates that are very attractive for issuers; therefore, we need to separate gross from net new issuance. Sovereign issuers may be adding to their debt stock this year as they have larger financing needs as a result of lower revenues and much higher spending due to the pandemic. Some of these countries, such as Chile and Peru, have room for fiscal spending as their debt stock and levels as a percentage of GDP are quite low. Others, such as Colombia and Brazil, have fiscal constraints on growing their debt by much more. Although the former group is expected to spend more to calm social unrest or as a result of new governments open to more social spending, the latter group is expected to reduce their net debt issuance as growth picks up and they wind down the extra spending because of the pandemic. Also, countries such as Chile, Peru and Uruguay have been issuing more debt in their local currencies as Uruguay’s and Chile’s recent large issuance of local currency debt attests; debt in local currency is considered less burdensome as it does not require the use of international reserves to pay it back. Even if dollar-denominated debt increases, it bears lower interest rates and the net effect for the country would not be as negative as it appears. The amount of gross issuance may taper as yields rise in the United States, dampening demand. 

Joy K. Gallup, partner in the Corporate Department of Paul Hastings LLP:  Major drivers behind the current surge in bond issuance in Latin America are low interest rates (which are expected to rise) and high investor demand, especially for ESG bonds. Many corporate and sovereign issuers are tapping the bond markets for their future financing needs to benefit from relatively low interest rates while they can. Some had delayed expansion plans last year and are now catching up, and some are refinancing upcoming bond maturities. In this low interest rate environment, investors seeking higher yields are drawn to emerging markets, including Latin America. Countries such as Brazil that are staying ahead of inflation are also more attractive. Meanwhile, with clients, customers and investors alike all clamoring for results on climate change and social governance, ESG bonds represent one way to provide measurable evidence of an issuer’s commitment to these matters, as well as being politically popular. Brazil, Chile and Mexico have all issued green and sustainability-linked bonds on very favorable terms, some with very innovative structures, and this trend is likely to continue to grow. The current opportunistic bond issuance improves the long-term capital profile for issuers in capital-intensive manufacturing sectors and for bank and nonbank lenders. For sovereign issuers, the amount and terms of the bonds must be weighed against the government’s ability to service the debt. Some sovereigns choose different currencies to spread out their foreign exchange risks. A significant amount of recent bond issuance represents financing for infrastructure and development, which is much needed across the region.

Alberto J. Bernal, chief emerging market and global strategist at XP Investments: The first quarter of the year is usually the busiest one, as countries and corporates take the pragmatic decision to fund their respective financial plans early in the year, as to not have to deal with uncertainties related to the possible changes that could take place in monetary policy and financial conditions later in the year. In addition, it was logical to expect increased issuance in the first quarter of this year, as developed market rates remained low, and fiscal imbalances remained much wider compared to last year’s first quarter, as the pandemic and the subsequent collapse in economic activity generated a material retrenchment in tax revenues. Much wider regional fiscal imbalances, increased debt issuance and consequent higher debt-to-GDP ratios are placing regional credit ratings at risk. Many countries have seen negative rating actions since the pandemic started, with, for example, S&P downgrading Colombia to junk status in May, and Fitch downgrading Colombia to BB+ (junk) on July 1. Going forward, the region needs to find the capacity to grow faster to arrest the risk of further credit deterioration taking place. The international environment is helping greatly at this time (very high terms of trade and lingering low intervention rates), but accurate economic policy formulation remains a necessary precondition for the region to be able to stabilize debt ratios. In terms of the material increase seen in green bond issuance, the reality is that this is a worldwide phenomenon that will most likely not be reversed going forward, as stakeholders have become increasingly ESG conscious. The challenge for the region going forward will be to prove able to demonstrate that the resources are being well spent and in line with the established criteria.”

Matias Silvani, partner and head of emerging markets at GoldenTree Asset Management: The short answer for this bond issuance spree in the region (and around the world) is that there has been an insatiable demand for risk and ‘spready’ assets. First, global monetary and liquidity conditions remain ample and loose, which has led to inflows into the asset class. Ample liquidity tends to correlate with higher risk appetite (by investors and issuers). Second, for dedicated benchmarked investors, spreads look attractive as compared to developed markets, even if in absolute terms yields are historically low: Investors can always hedge interest rate risk. Lastly, sovereigns and companies are taking advantage of this demand for risk and low-rate environment; to an extent funding in anticipation that current conditions may not last in the future. Having said all of this, the market is not open for all, and this differentiation is likely to continue. Of course there are risks going forward, as ample liquidity and a ‘search for yield’ environment also leads to looser borrowing standards. As for the long-term impact of this ‘cheap’ credit issuance, if resources are well used it can lead to sustained growth going forward, something the region hasn’t been used to in a long time. Similarly, as long as global rates remain historically low, which is likely for the foreseeable future, debt loads become less of a constraint, making the quality of management and policies the most important aspect for issuers.

Manuel Agosin, professor in the school of economics and business at the University of Chile: The new bond issues are related to sharp increases in government spending due to the pandemic. Many countries have spent more on assistance to families whose incomes have been hit by lockdowns, and by helping small enterprises hit by reductions in sales. If the region can overcome the pandemic in the next few months, and since these expenditures are not recurrent, for some countries the pandemic-related increase in expenditures will be temporary. However, there is a great unevenness in the advances in vaccinations. While some countries have made progress, others have bungled their response to the pandemic and have failed to make arrangements to have access to vaccines. Other countries just do not have the resources to purchase the large numbers of vaccines needed to inoculate their adult population. Even Chile, where inoculations with the Sinovac vaccine have already covered more than 60 percent of the population, is making slow progress in containing the virus. The arrival of the Delta variant only complicates the situation. This mutation is much more contagious than the original virus, and nobody knows for certain how well the vaccines already in use can protect people. There is no alternative to international action to ensure full inoculation of the population with high-protection vaccines.


Republished with permission from the Inter-American Dialogue's daily Latin America Advisor




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