Latin America faces an uphill struggle to maintain investor interest as capital flees its shores in search of safer havens offering higher returns.
The exodus from Latin America-focused equity funds began in 2014, a process that accelerated as the year wound down. According to EPFR Global, a US-based research firm that tracks fund flows, more capital exited than entered Latin American equity funds in all but two weeks of the final quarter of 2014.
The exodus continued into the new year, with more than $2.3bn fleeing regional-focused equity funds in the first 11 weeks of 2015, according to Cameron Brandt, EPFR director of research.
Experts fret that this is the just the start of a period of intensive capital flight out of regional assets and securities.
Sam Aguirre, senior managing director at the corporate finance practice of global business advisory firm FTI Consulting in Buenos Aires, said the situation was set to get “a whole lot worse”, notably in Brazil, a country struggling with corporate corruption, a contracting economy and a political regime in danger of being reduced to lame duck status.
Aguirre said Brazil was likely to be forced to raise interest rates in the months ahead — a move that, while necessary to temper inflation, which the central bank expects to hit 7.9% this year, would “inflict further harm” to the economy.
“Everyone is on alert, and there is a real fear that the currency will be pushed to yet [higher] levels of stress, exacerbating the issue of capital [flight],” he added. Brazil’s currency, the real, is the worst performing major currency in the world this year, having lost 17% against the US dollar in 2015.
Attractive proposition ... for now
Others believe the region’s biggest economy will be hit hard by capital flight — but only in late 2015 or 2016. To Kevin Daly, senior investment manager, emerging market debt, at Aberdeen Asset Management, the country’s eye-watering interest rates — currently standing at 12.75%, a six year high — make debt securities an attractive proposition for now.
But he points to a deteriorating outlook as Brazil’s economy, overseen by a weakened and increasingly unpopular government, continues to slow. “Next year is going to be an extremely difficult year for the country, with an awful lot of fiscal tightening measures set to kick in.”
Two triggers could lead to an acceleration in capital flight, he noted. The first would be the refusal of the National Congress to approve the fiscal measures; the second would be the departure or ousting of Brazil’s reform-minded finance minister, Joaquim Levy.
Elsewhere, the picture is barely any cheerier. Fund managers warned capital outflows were set to rise, even in countries such as Mexico and Colombia, both tipped to report reasonable growth figures in 2015. But perhaps the biggest surprise on the downside, investors warned, would likely be Peru.
The world’s third-largest producer of copper and zinc is suffering in the face of sloughing commodity prices. But global investors have also cooled on the country’s financial and economic prospects, with foreign ownership of local hard-currency bonds down to 38% of the total at March 26, from 58% a year ago.
“Capital outflows [from the region] is inevitable”, but some countries will do better than others, noted Aberdeen Asset’s Daly. “Over the past year, Peru is obviously one of the countries to become less appealing to investors.”