South America Financial News

Latin America’s Heavy Debt Load May Spark Extra Unrest in 2022

(Bloomberg) — Latin America appears set to take the reins subsequent yr because the creating world’s largest issuer of recent debt, a step that in accordance with some strategists might sow the seeds of future turmoil within the area.

Nations within the area are seen issuing round $38 billion in bonds in 2022, greater than some other space in rising markets. General issuance quantity worldwide is prone to fall, however Latin America will sluggish much less, strategists mentioned. The area’s borrowing could spell future political and social bother for the nations, mentioned Nathalie Marshik, a managing director for mounted revenue at Stifel Nicolaus & Co. 

There are at the least two drivers for Latin America’s anticipated pre-eminence in bond gross sales: states bordering the Persian Gulf, traditionally a number of the largest debtors in rising markets, have in the reduction of on gross sales as oil costs rise. And Latin American governments are sluggish to chop their spending amid the pandemic, particularly because the area prepares for upcoming elections in Chile, Colombia and Brazil, in accordance with Sara Grut, a strategist at Goldman Sachs Group Inc. in London. These nations signify three of the highest 5 economies within the area. 

A lot of the promoting subsequent yr will come from Latin America’s investment-grade nations, or markets that have been lately downgraded from funding grade, Grut mentioned. Traders are too danger averse at this stage to purchase a lot junk debt, she added. 

“There are numerous political developments happening in funding grade, or former funding grade markets, that may drive 2022 issuance, and lots of it has been associated to fiscal growth,” Grut mentioned.  

Chile is predicted to be the area’s highest issuer subsequent yr whatever the consequence of its Dec. 19 elections, and can promote some $8 billion to assist meet its $21 billion in exterior financing wants in 2022, in accordance with Grut. Mexico can also be seen promoting round $6 billion in bonds, and Colombia’s elections in Might might imply extra spending subsequent yr, whereas Peru continues on an expansionary path, Grut mentioned.

Rising U.S. Treasury yields, in addition to additional funding within the type of particular drawing rights from the Worldwide Financial Fund, are anticipated to tamp down complete debt gross sales in Latin America to about $36 billion in 2022 from round $57 billion this yr, Citigroup Inc. strategist Donato Guarino wrote in a observe. 

However there could also be a draw back to this borrowing. The area is quickly mountaineering rates of interest whereas nonetheless recovering from the pandemic, which means the massive provide of debt in contrast with the fiscal traits paint a worrisome image, in accordance with Stifel’s Marshik. Governments could have to chop again on spending, she mentioned. 

“Stability sheets have deteriorated in all places, populations are struggling, and poverty charges have gone up,” Marshik mentioned. “There’s no actual indication that there shall be a leap in productiveness to induce development, and governments will battle to implement painful changes.”

U.S. Federal Reserve charge hikes may shut some rising international locations out of markets, Kenneth Rogoff, a Harvard College economics professor, mentioned on Bloomberg TV on Wednesday. 

Cloudy Company Outlook

Whereas many company issuers in Latin America have comparatively wholesome stability sheets after practically two years of consolidating positions after the pandemic, 2022 might additionally show turbulent for Latin American company issuers, particularly in markets with divided political landscapes like Chile and Peru, in accordance with Joe Bormann, a managing director for Latin America corporates at Fitch Rankings in New York.

“The outlook for Latin American corporates is partly cloudy resulting from excessive political and financial uncertainty,” Bormann mentioned. “Most firms will head into the brand new yr in a defensive posture, and social unrest might be part of inflation and rising rates of interest as key variables that may very well be disruptive within the area.”

Some sectors could buck the development, just like the meat business, which continues to fare nicely as demand from China stays robust. And mining will proceed to learn from the worldwide inexperienced transition, as demand for metals utilized in inexperienced expertise like copper and lithium will increase. However excessive inflation and decreased client buying energy threaten to complicate the outlook for the Latin American firms, Borman added.

ESG Push

BNP Paribas SA, one of many largest underwriters of ESG-linked bonds, is bracing for a flurry of offers from the area subsequent yr, in accordance with Anne van Riel, head of sustainable finance capital markets Americas at BNP. The financial institution is projecting $880 billion in world inexperienced bond gross sales, together with $265 billion from rising market in 2022.

“Plenty of LatAm issuers which were sitting on the sidelines given the volatility within the final couple of weeks shall be searching for window” in January, mentioned van Riel in an interview.

Virtually 40% of all Latin American issuance year-to-date had some sort of ESG taste, which is a giant quantity in comparison with different areas, mentioned van Riel. Issuance this yr was pushed by sustainability-linked bonds and social bonds, together with from sovereigns like Chile and Peru tapping into insatiable demand from ESG-friendly buyers, she added.

Governments and firms in Latin America alone have raised a report $42 billion in worldwide debt offers tied to environmental, social and governance initiatives to date this yr, in accordance with knowledge compiled by Bloomberg. That’s practically 4 occasions the $11 billion issued all of final yr. 

However as sustainable bond gross sales blossom within the area, some buyers and analysts have raised questions on whether or not the securities are actually inexperienced, or are extra greenwashing. Labeled bonds, nonetheless, are nonetheless the “clearest communication instrument that rising markets have to draw capital for transition,” and inexperienced bonds are particularly fitted to issuers trying to display transparency in how they plan to make use of bond proceeds, mentioned Trevor Allen, sustainable analysis analyst at BNP.

Elsewhere in credit score markets:

Americas

Quicker Federal Reserve tightening is a serious danger for sanguine credit score markets in 2022, in accordance with UBS.

  • U.S. junk bonds notched a second straight day of positive aspects on Thursday even amid a broader risk-off tone
  • Traders withdrew $1.26 billion of money from funds that put money into U.S. investment-grade bonds for the week ended Dec. 15, marking the third straight week of outflows, in accordance with Refinitiv Lipper
  • Purdue Pharma LP’s multi-billion greenback opioid settlement was dealt a stunning blow on Thursday when a federal decide reversed a chapter courtroom’s earlier approval of the deal
  • Intelsat SA, the satellite tv for pc operator that has been in chapter for greater than 18 months, secured courtroom approval for its restructuring plan
  • For deal updates, click on right here for the New Difficulty Monitor
  • For extra, click on right here for the Credit score Daybook Americas

EMEA

Gross sales of recent bonds in Europe’s main market reached about 1.62 trillion euros ($1.84 trillion) this yr, in accordance with knowledge compiled by Bloomberg. That’s about 5% behind the 1.7 trillion euros offered in 2020, when issuers rushed to the market to bolster their stability sheets to navigate the pandemic.  

  • KfW expects to problem bonds with a quantity of as much as 85 billion euros in 2022, the majority as euro and U.S. greenback benchmark debt. It additionally expects to problem inexperienced bonds in giant volumes and in numerous currencies for a complete quantity of at the least 10 billion euros
  • Lehman Brothers Holdings Inc., father or mother of the agency that went bankrupt throughout the 2008 monetary disaster, is in search of to reverse a U.Okay. ruling that may lower recoveries for its collectors
  • Telecom Italia SpA’s board is unlikely to decide on KKR & Co.’s 10.8 billion euros ($12.2 billion) takeover bid at a vital assembly on Friday, in accordance with folks aware of the matter

Asia

A leap Friday in greenback bonds of Chinese language builders together with Shimao Group Holdings Ltd. gave Asian credit score a partial reprieve after a blowout in spreads this week.

  • Shimao Group Holdings’s bonds rallied Friday on indicators that monetary authorities have been coordinating negotiations between the corporate and a few belief companies for mortgage extensions
  • Shimao’s credit standing has been slashed to junk territory from funding grade by Fitch Rankings, making it a ‘fallen angel’ on the worldwide danger assessor. That adopted its long-term ranking being downgraded deeper into junk by Moody’s Traders Service
  • The Financial institution of Japan introduced a sluggish stroll of its withdrawal from emergency pandemic support in a transfer that contrasts with the urgency of different main central banks winding again stimulus
  • South Korea is among the many world’s largest vendor of inexperienced bonds, and one in all its high issuers, the Export-Import Financial institution of Korea, is planning to faucet the worldwide debt market extra aggressively subsequent yr to supply sustainable funds to native firms working overseas

 

©2021 Bloomberg L.P.

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