Latin American and Caribbean (LAC) countries sold debt at a strong pace in the first half of 2017. Flows were driven by a search for higher returns than have been offered by developed bond markets, and encouraged by an improvement in economic conditions in the region, according to an updated edition of the report Capital Flows to Latin America and the Caribbean: Recent Developments, released by the Washington Office of the Economic Commission for Latin America and the Caribbean (ECLAC). Enthusiasm for LAC assets was supported by low interest rates across de globe and sustained weakness in the U.S. dollar.
With appetite for its assets rising and economic conditions improving, the total amount of debt issued by Latin America and the Caribbean in international markets in the first half of 2017 reached US$ 74 billion, the third highest half-yearly amount ever issued in the region.
Argentina’s sale of a 100-year bond in June, with a coupon of 7.125%, stressed investors’ interest in instruments that offer higher-yields. Joining only a handful of sovereign borrowers to sell century bonds, Argentina’s move highlighted investors’ enthusiasm for emerging market securities.
The region’s strong international bond market performance was supported by a tightening in bond spreads, although the credit quality in the region continued to deteriorate: there were sixteen sovereign downgrades from January to July, and six upgrades, the report states.
According to the study, the highlights of the region’s performance in the international bond market in the first half of 2017 are:
• Oil quasi-sovereign companies and sovereigns led in size, with several issuances above US$ 2 billion. Almost 20% of the total Latin American and Caribbean issuance in the first-half came from Brazil’s Petrobras, Mexico’s Pemex and Peru’s Petroperu.
• There were twelve debut issuances from January to July accounting for 7% of the total issuance in the period, as widespread investor interest in emerging market debt led to favorable terms for several Latin American and Caribbean issuers.
• Bonds with a green focus accounted for almost 4% of the region’s total issuance. While only two were labeled green bonds, there were other bonds with proceeds to be set aside for renewable energy investments.
• Argentina (26%), Brazil (22%) and Mexico (16%) were the region’s top issuers (sovereign and corporate issuance combined), accounting for 64% the first-half total.
• Issuance in the first-half of 2017 was dominated by high-yield issuers: they accounted for 64% of the total issuance (sovereign and corporate combined) in the period.
• Although dollar-denominated issuance accounted for 78% of the total, there were issuances in many other currencies. Local currencies, which included the Chilean Peso, the Peruvian Sol, the Brazilian Real, and the Uruguayan Peso, accounted for 12% of the total.
The report also discusses possible risks to the region’s debt markets. Challenges include the possibility of higher volatility from a faster than expected rise in U.S. interest rates or a resumption of the dollar ascent, and of market turmoil associated with the need to increase the U.S. federal borrowing limit or debt ceiling at the end of September. Another risk for the region’s financial markets looking forward is the health of the Chinese economy.
Those risks, plus tight liquidity and a crowded market could lead to a market correction. However, despite the risks, most investors seem to believe that the benign conditions for emerging markets and Latin American bond markets are likely to persist in the near-tem, the report adds.