Latin America and the Caribbean Saw the Best and Worst Conditions for Tapping International Capital Markets in 2018

Last year (2018) was a period of contrasts for Latin America and the Caribbean’s financing conditions. The report Capital Flows to Latin America and the Caribbean: 2018 Year-in-Review, released by ECLAC’s Office in Washington D.C., reviews the main 2018 trends in capital flows to the region. According to the study, the region saw the best and the worst conditions for tapping international capital markets: from US$ 32 billion in January, the highest ever monthly volume of debt in international markets to zero issuance in December, making it the worst December on record for LAC issuers.

According to the report, total debt issuance in international markets in 2018 was US$ 94 billion, the lowest annual issuance in three years and 35% lower than in 2017. Bond activity in 2018 was affected by a heavy electoral calendar at the domestic level, and by U.S. interest rate hikes, withdrawal of dollar liquidity, dollar strengthening, and instability in global stock markets.

Both Latin American stocks and debt spreads were adversely impacted by the increase in volatility and risk perception in global markets, the research adds. While bond spreads showed a widening trend, equity prices showed a narrowing trend since the end of January. LAC bond spreads widened 149 basis points in 2018, while stocks lost 9.3%.

The widening in spreads was broad-based, affecting all LAC countries included in the JPMorgan EMBIG index. Spreads widened as financial market turmoil related to rising global interest rates and trade disputes increased risk aversion toward emerging market and LAC assets. The external backdrop took a toll on countries that are highly dependent on external financing, ECLAC states.

The study finds that credit quality in the region continued to deteriorate in 2018. There were fifteen more negative credit rating actions than positive in the region. Of the total twenty-six negative actions taking place in 2018, fourteen were downgrades. Of the eleven positive actions that took place, only three were upgrades. Negative credit rating actions (including downgrades and downward outlook revisions) have outnumbered positive actions in the region for six years in a row.

The combined forces of higher U.S. interest rates, stronger U.S. dollar and lower dollar liquidity drove Latin American and Caribbean assets in 2018, with the year ending on a weak note. In the beginning of 2019, however, issuers from the region, sovereign issuers in particular, returned to international debt markets. Uruguay, Mexico, Colombia and Ecuador tapped international bond markets in January, and Paraguay in early February. The total amount issued was US$ 9.6 billion, a huge improvement from December 2018. However, it marked a 70% decline from the US$ 32.6 billion issued in January 2018.

Looking ahead, the ECLAC report affirms that the shift from synchronized growth in developed economies to a more mixed trend should continue to be a challenge for issuers and assets from the region in 2019. Another challenge is China’s more uncertain economic outlook. There is also the risk that confidence in the region’s financial assets could deteriorate further, which could make tapping international capital markets more challenging.