Highlights from the Emerging Markets & GlobalCapital Latin American sovereign debt roundtable
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Emerging Markets

Highlights from the Emerging Markets & GlobalCapital Latin American sovereign debt roundtable

An assortment of borrowers, debt capital market bankers and rating agency officials gathered in Nassau on Friday to discuss the state of play for Latin American bond issuers.

An assortment of borrowers, debt capital market bankers and rating agency officials gathered in Nassau on Friday to discuss the state of play for Latin American bond issuers. High on the agenda were: the ways in which the region’s governments are dealing with the world of low commodity prices; the economic importance of infrastructure programmes; the new fashion of issuing bonds in euros; and developments in the local currency markets.

Emerging Markets brings you some of the highlights of the conversation.

A full transcript will be published on www.emergingmarkets.org and in next Friday’s edition of GlobalCapital.

Participants:

Milena López Rocha, director of public credit and national treasury, Republic of Colombia

Carlos Blanco Cáceres, director general of public indebtedness and treasury, Republic of Peru

Shelly Shetty, head of sovereign ratings Latin America, Fitch Ratings.

Harry Koppel, director, sovereign debt capital markets, Barclays

Michael Cummings, head of Latin American debt capital markets, Credit Suisse.

Moderated by Oliver West, Latin America correspondent, GlobalCapital


Infrastructure: the key to growth?

As Latin America enters what is likely to be a second consecutive year of recession, Shelly Shetty described growth as the region’s biggest challenge. Although the regional aggregate is influenced badly by Brazil and Venezuela, “the deceleration story is broad”, said the head of LatAm sovereign ratings at Fitch.

Shetty mentioned the end of the commodities super-cycle, uncertainty around China’s growth, and a more cautious overall view of EM as reasons for lower growth.

“The growth challenge matters for several reasons,” said Shetty. “The first really is that the region has made tremendous progress in recent years in growing its middle class and reducing poverty rates, and has thus made a dent in social issues.

“Furthermore, it has enhanced political stability and higher growth has supported better fiscal outcomes. As the cycle reverses, it will be important from our perspective to see how these gains are maintained and preserved.”

Colombia and Peru have both been affected by depressed commodity prices, although in very different ways. In Colombia, treasury head Milena López Rocha pointed out that the effects of lower oil prices on the fiscal side had already been played out. Oil revenues have fallen from 3.3% of GDP in 2013 to 0.3%, so the downside is limited.

Peru’s head of treasury, Carlos Blanco Cáceres, underlined the importance of realising that the country was not as dependent on copper as many might think. In fact, although 23% of exports are copper-related, 20% are gold.

“The two tend to move in different directions, so there is a natural hedge,” said Blanco. “Peru also exports zinc, silver, tin and so many other minerals.

“They are all important components of the overall export basket, and that has helped us to generate a better result than if we were entirely dependent on copper.”

But with oil prices unlikely to return to former highs, and investment in large new mining projects in Peru low — despite a slew of existing projects that will double production — the answer to the growth question does not appear to lie in commodities. Rather, the debt officials both expected one particular sector to facilitate an increase in investment: infrastructure.

In the words of Colombia’s Milena López Rocha, the government’s flagship 4G infrastructure programme “will be a significant provider of jobs in the short term, and bring significant increases to productivity in the long term”.

“The programme becomes even more important in today’s context, when we need to move the economy away from producing oil and into other industries,” said López Rocha. “Part of doing that means increasing productivity, for which Colombia needs proper infrastructure so that you can get products to ports and get them out of the country in a more cost-effective manner.”

Blanco said that Peru was working on something “very similar” to Colombia in the form of infrastructure and PPPs.

“One thing we introduced was the modification to the current PPP law,” said Blanco. “We have a $20bn pipeline of projects at this point — the largest being the line 2 of the metro train in Lima.”

Peru also has roads, ports, airports, and telecommunication projects in the works. Infrastructure will therefore cover the investment that has been coming in via mining but will soon diminish.

“When you look at investment in infrastructure and in mining, you’ll see that the lines will cross — either this year or next year depending on the pace of the new projects,” said Blanco. “Those investment dollars will go into infrastructure projects.”

There was a certain bullishness from the bond bankers about both issuers. According to Michael Cummings, who heads LatAm DCM at Credit Suisse, “Peru and Colombia have done a good job of differentiating themselves from some of the other countries in the region”.

Harry Koppel, director in Barclays’ sovereign DCM team, said he was cautious in the short term on Colombia, but “very optimistic” for the long term.

“There are three major upsides that we see: the fiscal reforms; the multiplier effect of the infrastructure programme that Milena mentions; and then the peace process, where they’re passed four of the six steps that are needed with only the demobilisation mechanisms and the way the agreement will be legitimised remaining,” he said.

Euro denominated bonds: feed the ducks

Chile, Mexico, Peru and Colombia have all issued euro denominated bonds this year, and issuers were clear about the attraction of the European market.

Colombia, which until this year had not issued in euros since 2001 when coupons were above 11%, sold €1.35bn of 10 year notes at 3.875% in March.

“When issuing in euros the coupon is significantly lower than issuing in dollars, so there is a positive fiscal impact in terms of your interest payments,” said López Rocha. “Additionally, when markets are volatile like they are this year, having access to a different investor base becomes that much more important.”

Peru’s last two international issuances were both in euros, and Blanco reiterated that any decision to sell debt in a new currency has to be a long term commitment.

“It’s not just one shop that you make before forgetting the market,” said the funding official. “You need to be there. Investors trust you to do that, and if you don’t do that then you lose their trust.”

Latin American sovereigns’ move to euros has caused much debate on Wall Street as bankers find that the euro deals come well wide of dollar curves on a post-swap basis. But this argument somewhat misses the point.

“Philosophically one could have issued in dollars and swapped into euros and achieved a lower coupon,” said López Rocha. “But that is set on the premise that this is something that I can realistically do.”

López Rocha pointed out that she was “not at liberty to post collateral in order to do a long dated swap transaction”, which limits what she can do in terms of a 10 year swap, while there would be budget issues with potential alternatives like a swap with re-couponing.

By issuing in euros Colombia is accomplishing two objectives, “lower coupons and new investors”, she said, whereas via a swap it would only achieve one.

Ensuring the new paper reaches new investors is the most important aspect of these transactions, believes Koppel of Barclays.

“When global asset managers try to arbitrage between two currencies, it is important that issuers allocate away from them and make the bond go to these new investors,” he said.

Moreover, Europe is still going through QE but US rates are going up.

“In two previous rate cycles there have been long periods where triple-B sovereigns have not had good access to dollar markets,” said Koppel. “The euro option therefore has a lot of value, and the more volatility there is in the market, the more value that option has.”

The euro wave may not stop here, and may not even be restricted to triple-B or single-A names, according to Cummings of Credit Suisse.

“There’s just not enough paper for European accounts given what the ECB is doing: the ducks are quacking, feed them,” said the DCM head. “People are looking for other sources (of paper) such as Latin American issuers, other sovereigns or corporates.

“They are going to look down the credit spectrum, too. Euros doesn’t necessarily have to be an investment grade market for Latin American borrowers, and I do think there would be appetite for some sub-investment grade names in euros.”

Local currency markets: gradually developing

Although Latin American issuers are looking across the Atlantic for more funding, there was an acknowledgement that recent history has seen the region overcome the original sin of over-borrowing in foreign currency and having very shallow local capital markets.

“There has been growth of institutional investors domestically, which has been key in developing local markets,” Shetty said. “Furthermore, non-resident investors have also increased participation in numerous countries, adding to the depth of local markets.”

On this matter, Blanco had an update on plans for the Peruvian local market.

“Our local markets are becoming more liquid than they were before, but we believe that we can still do more, so we’re trying to make our soberanos bonds Euroclearable going forward,” he said. “We received approval from congress last year, and it may be Euroclear, or may be a similar firm, but the important thing is that we are trying to get more foreign investors to participate in our domestic debt markets.”

It was only last year that Peru last issued a global local currency deal, but volatility in markets and currencies has prevented most new issue activity in the global local asset class since.

As Koppel pointed out, “holders of local currency bonds have endured a very painful couple of years”.

There are a few small signs of hope, but they remain — for now — just signs.

“If we are at the bottom, in some places — for example Brazil — the rates may be attractive enough to take FX exposure and take a risk,” said Koppel. “But it will be a slow process back. Those investors that were hurt over the past two years may need an extra incentive, or we may just need new investors.”

An anecdote from Cummings perhaps summed up the situation.

“There is a view that some of the currencies have reached a trough, so you might see some nascent demand for certain local currencies, yet I don’t think the market is all the way back,” he said. “A very good sign is that a very important money manager reached out to me asking about local currency instruments, but there are just green shoots for now.”

Brazil: bond market benefits

No discussion on Latin American markets could omit Brazil, but rather than worrying about contagion, bond market participants suggest there has been a technical benefit to the other issuers from the troubles in the region’s largest economy.

Brazil comprises just 5% of the LatAm market this year, Cummings pointed out, when historically it has been 35%-40%.

“There’s a lack of Brazilian paper, and other countries are natural beneficiaries of this lack of supply,” he said. “Additionally, some investors were forced sellers as Brazil lost its investment grade rating, and other countries have benefited.”

Koppel at Barclays backed up this point, saying that there was a structural change as forced sellers fell out of indices.

“Investors, instead of reacting very quickly, are reweighting slowly as other positions mature, so there may be a trickle effect there,” he added.

In terms of the region’s economies, Shetty of Fitch admitted that there were countries that had extensive trade ties with Brazil that had suffered somewhat.

Yet in FDI, the country’s political and economic troubles could even be triggering a similar phenomenon to that which has occurred in bond markets.

“Even foreign direct investors are looking more at other markets to see if there are other options,” said Shetty. “One case in point is a country like Paraguay, which had a good issuance recently and is a country with a very extensive dependence on Brazil.

“But Paraguay, despite the recession in Brazil, has been able to grow at 3% and attract companies from Brazil to take

advantage of the cheap labour and other cheaper costs. There has been some positive spillover to other countries, too.”

Argentina: bringing back the bulls

Cummings had a final word on Argentina’s apparently imminent return to bond markets.

“People are underweight Argentina right now, as there has been a dearth of supply for many years now,” said Cummings. “If the Argentine sovereign bond is issued and performs well, it will provide support to our investor base and be a good thing.”

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