Strong issuance of Latin American debt could weigh on the future

Latin America It appears to be on track to become the developing world’s largest issuer of new debt next year, a step that some strategists say could sow the seeds of future turmoil in the region.

Nations in the region are projected to issue about $ 38 billion in bonds in 2022, more than any other emerging market region. The total volume of emissions around the world is likely to fall, but in Latin America it will slow less, strategists said. The region’s indebtedness may spell future political and social problems for nations, said Nathalie Marshik, managing director of fixed income at Stifel Nicolaus & Co.

There are at least two catalysts for Latin America’s expected preeminence in bond sales: the states bordering the Persian Gulf, historically some of the largest borrowers in the US. emerging markets, they have cut sales as oil prices rise. And, second, the delay of Latin American governments to cut their spending amid the pandemic, especially as the region prepares for the next elections in Chile, Colombia and Brazil, according to Sara Grut, a strategist at Goldman Sachs Group Inc. in London. These nations represent three of the top five economies in the region.

Most of next year’s sales will come from investment grade Latin American countries or markets that were recently downgraded from investment grade, Grut said. Investors are too risk averse at this stage to buy a lot of speculative grade debt, he added.

“There are several political developments taking place in the investment grade, or previously investment grade, markets that will drive the 2022 issuance, and many of them have been related to fiscal expansion,” Grut said.

Chile is expected to be the largest issuer in the region next year, regardless of the outcome of its elections on December 19, and will sell about $ 8 billion to help meet its $ 21 billion in external financing needs in 2022, according to Grut. . Mexico is also expected to sell about $ 6 billion in bonds, and Colombia’s elections in May could mean more spending next year, while Peru continues on an expansionary path, Grut said.

Rising U.S. Treasury bond yields, as well as additional financing in the form of special drawing rights from the International Monetary Fund, are expected to reduce total debt sales in Latin America to around $ 36 billion in 2022, from about $ 57 billion this year, Donato Guarino, a strategist at Citigroup Inc., wrote in a note.

But there may be a downside to this loan. The region is rapidly raising interest rates while still recovering from the pandemic, which means that the large supply of debt compared to fiscal trends presents a worrying outlook, according to Stifel’s Marshik. Governments may have to cut spending, he said.

“Balance sheets have deteriorated everywhere, populations are struggling and poverty rates have risen,” Marshik said. “There is no real indication that there will be a jump in productivity to induce growth, and governments will have a difficult time making painful adjustments.”

Rate hikes by the US Federal Reserve may also exclude some emerging countries from markets, Kenneth Rogoff, a Harvard University economics professor, said on Bloomberg TV on Wednesday.

Cloudy corporate outlook

While many corporate issuers in Latin America have relatively healthy balance sheets after nearly two years of consolidating positions after the pandemic, 2022 could also prove turbulent for Latin American corporate issuers, especially in markets with a divided political background, such as Chile and Peru, according to Joe Bormann, managing director for Latin American companies at Fitch Ratings in New York.

“The outlook for Latin American companies is partially cloudy due to high political and economic uncertainty,” Bormann said. “Most companies will enter the new year with a defensive posture, and social unrest could join inflation and rising interest rates as key variables that could be disruptive in the region.”

Some sectors may buck the trend, such as the meat industry, which continues to do well as demand from China remains strong. And mining will continue to benefit from the global green transition, as demand for metals used in green technology, such as copper and lithium, increases. But high inflation and declining purchasing power of consumers threaten to complicate the outlook for Latin American companies, Borman added.