LatAm Letter: Emotional scenes
Bond markets bid farewell to 2021 but Ecuador looks to relight the flame
There were emotional scenes across Mexico and the rest of Latin America this week as the region bid farewell to iconic singer Vicente ‘Chente’ Fernández, the king of ranchera music, after he died aged 81 in Guadalajara.
To live in a world, with a dream, Is a crazy hope, and makes the heart suffer…
LatAm bond buyers may find the words appropriate to their 2021. A year that started with an overwhelming consensus that EM was set for a rip-roaring 12 months ends with most investors fatigued after disappointing performance.
Indeed, few tears will have been shed as this week as Latin America finally said goodbye to new bond issuance for the year. Banco del Estado de Chile was the only issuer to approach investors, but its week-long roadshow was strictly non-deal, largely focussed on the bank’s ESG framework.
Yet by the end of the week, LatAm bankers were in a more buoyant mood and feeling rather more positive about January than they might have otherwise been. Wednesday’s crucial Fed statement came and went without disruption in bond markets, despite a hawkish shift, and one LatAm syndicate head reckoned the market had “ticked off by far the biggest headline risk for EM”.
Admittedly, predicting what the market will look like on the morning of January 4 is a mug’s game. But, assuming the second half of December brings no further nasty surprises, there is at least reason to believe the tone will be constructive.
EM bankers and investors were largely full of praise for the Fed’s signalling and decision to set a positive tone. Indeed, though EM bonds have had a tough year, it would be hard to say there’s been anything approaching a taper tantrum — new issue markets have generally remained open throughout. We highlighted in this leader column the importance for EM of the Fed managing to provide a relatively soft landing.
Still, no one seems to be kidding themselves about the headwinds coming in 2022. Rather than taper tantrum, let’s call it melancholy of monetary stimulus removal. Moreover, China’s slowdown, reduced fiscal and monetary stimulus, lower growth, inflation in EM, and possible Covid disruption all loom large.
The first few trades in January will likely set the tone, with the usual sovereign suspects expected to line up first. Keep an eye on Brazilian corporate issuance — which has been silent since September.
Given Brazil’s elections in October, funding is likely to be frontloaded. But Brazilian corporate bonds have repriced on the back of recent fiscal noise, and some companies will have to pay higher yields than they are used to. Some feel if the first few deals underwhelm, other Brazilian issuers may prefer plan B — either the bank market, or the red hot domestic bond market.
Volver, Volver (Return, Return)
Of course, ‘Volver, Volver’, perhaps Vicente Fernández’s most recognisable tune, stirred the crowd at the funeral like no other ballad. “And come back, come back, come back, to your arms again…”
Perhaps the song about losing a great love stirred something in Ecuador, too. By 2019, the South American country had become a rather clingy partner in its affair with bond markets, issuing far more frequently than the size of its economy merited. Inevitably, that relationship ended badly, with the pandemic triggering default and restructuring.
Bit by bit, Ecuador is making amends. It has renegotiated its IMF deal and passed a crucial tax reform, and president Guillermo Lasso felt emboldened enough this week to claim the sovereign would return to primary markets in the first quarter of next year.
But Ecuador’s followers are concerned. Despite El Rey’s emotive singing, sometimes it’s best not to go back. As Nathalie Marshik of Stifel asks, “does Ecuador really want to go back to issuing at above 9%?” She told us that talk of a new issue is “premature”.
Graham Stock of BlueBay, which was one of the lead bondholders negotiating Ecuador’s restructuring last year, agreed.
“I think there is value in Ecuador’s bonds, but it would be unwise for the country to issue in the first quarter,” he told GlobalCapital. “I’m not sure they need it, and I’m not sure there would be appetite.
“A new issue would be a bad signal; the government needs to consolidate the fiscal improvement first and show that it is on top of the governability challenges.”
At the other end of the rating scale, Chile’s election concludes on Sunday. Left-winger Gabriel Boric is leading polls, but there is some disagreement among investors — firstly on whether his victory is already priced in, and, secondly, regarding just how radical he might end up being.
If that’s too much tension for you, at least you can breathe easily in Uruguay. After keeping the sovereign at BBB- with a negative outlook for three years, Fitch this week decided it was time to reward Uruguay’s strong pandemic performance with a stable outlook. Our write-up here.
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This is GlobalCapital's LatAm Letter written weekly by Latin America reporter Oliver West. If you enjoy it, sign up for free in a matter of seconds here and feel free to pass it on to colleagues and contacts.
The best of this week’s LatAm bond coverage: