It’s a quirk of Latin America’s
modern financial history that the devastation created elsewhere
by the 2008 global crisis was, for the region, something of a
European banks, in particular, retrenched and then
retrenched again as the crisis gained pace. But what was an ill
wind for these institutions proved a boon to their LatAm
The gap these departing banks left in international markets
provided opportunities for local and regional players to prove
themselves. Moreover, in a kind of virtuous circle,
international investors attracted by Latin American interest
rates had the opportunity to test the currency markets.
The two largest Latin economies – Brazil and Mexico
– offered better yields than those in the US or
Europe. Interest rates in Chile, Colombia and Peru were
similarly attractive. And as political risk grew in Europe and
the US, Latin financial markets in some ways came to be
regarded as more predictable than their more established
Though the local markets in many cases still suffer from
limited liquidity and a picky investor base, they are growing.
Importantly, Latin economies for the most part have continued
stabilizing after signing the multi-billion dollar sovereign
debt restructurings which ended the 'Lost Decade’
of the 1980s.
"If you look at the past, in the 1990s, we were going from
one crisis to another," says Alexei Rezimov, head of capital
markets, Brazil, at HSBC. "There is a very different
perspective today – now it’s more
economic policy fine-tuning."
Latin borrowers have taken advantage of increased political
and economic stability to draw international investors to bonds
denominated in local currency. Mexican export-import bank
Bancomext sold the first peso bond tradable
internationally in 2002. The $97.8 million-equivalent
three-year euroclearable note yielded 11.175%. Despite the
chunky yield, swap savings made the deal cheaper for Bancomext
than a dollar issue would have been.
Brazil announced its first international market
real-denominated bond in 2005. The 3.4 billion real ($1.5
billion) 10-year bond garnered global attention for its local
currency and struck a tenor longer than those available in its
Peru took the markets a step further in 2007, when it sold a
$1.5 billion-equivalent 30-year bond through global depository
notes, which are settled through US and European systems.
Still, a concentration of domestic investors and limited
liquidity mean local markets have a long way to develop. In
Brazil, the 10 largest traditional investors represent 80% of
the buyer base, says Itaú BBA institutional sales
officer Rogério Mansur. And a small volume of new issues
– Brazilian corporates tapped local markets for 44.5
billion reais worth of debt in the first half of 2013
– also constrains depth in secondary trading.
"The market that hasn’t developed yet, that we
would like to see happen, is a local capital market in
reais," José Olympio Pereira, CEO of Credit
Suisse in Brazil, says. "We still don’t have
long-term funds in reais from sources other than
Across Latin America, regulators are examining how local
markets can function better. Stability is crucial. That means
long-term investment. A rush of outflows from global debt funds
in the middle of 2013 shows how tough it can be to retain
international accounts in for the long run.
Comments by Federal Reserve chairman Ben Bernanke in
June, suggesting an early end to its program of quantitative
easing, spooked investors and led to the biggest outflows in
five years from Latin American funds. Bernanke indicated that
the US central bank would taper its $85 billion monthly bond
purchases by year-end.
Continued growth in the local markets will depend on the
resilience of dedicated local currency investors and the growth
of domestic sources of capital.
It is impossible to predict how local currency investors
will react to higher US rates, says Diego Pace, former
corporate finance director with Arcos Dorados,
McDonald’s largest franchisee. The volatility
could cut appetite for risks like carry trades.
"The main challenge will be if the US is going to do a soft
QE tapering, or if rates go up quickly, since investors in
these markets focus on yield spread differential and low FX
volatility," he says.
But Carlos García Moreno, CFO of Mexican telecom
América Móvil tells LatinFinance he
expects more local issuance in the company’s home
"There will be windows in which you will not be able to
issue, but things will reach a new normalcy and a new
stability," he says. "These local markets are here to
Reforming for liquidity
Chilean regulators have been working to make the local
currency market more liquid. The Superintendencia de Valores y
Seguros allowed foreign issuers to sell bonds in Chile in 2006.
It took some time for offshore borrowers to take advantage.
Still, the huaso market – where foreign entities
issue local Chilean peso-denominated bonds – has made
some progress. América Móvil was first, selling a
4 million inflation-linked UF ($225 million) five-year note in
In 2011, Chile instituted a broader framework for
international issuance into local markets, opening the
huaso market as a possibility for Latin American
countries that had previously been excluded. The legislation
allowed issuers based in countries with three sovereign ratings
and which belong to the Financial Action Task Force, an
anti-laundering standard setter, or an equivalent organization.
Nevertheless, many international borrowers have yet to take
advantage of the new terms, discouraged by an unpredictable
Pending reforms in Mexico could push trading in
peso-denominated debt and attract further international
investment. The market, meanwhile, has come a long way since
the first Mbono in 2000, and offers both diverse investment
options and a deep yield curve.
In Brazil, the government bond market is liquid, but
corporate debt is less so, says HSBC’s Remizov.
The country cut its 6% financial transactions tax (IOF) in June
to attract more foreign flows.
More sellers needed
A crucial factor in the development of local currency
markets for Latin borrowers has been the soaring rise of
domestic savings, predominantly in pension and insurance
From 2000 to 2012, Chilean institutional
investors’ assets under management grew from $60
billion equivalent to $250 billion. That has been spurred by
higher earnings, more people buying life insurance, and
Chile’s overall economic development, says Juan
Cristobal Peralta, syndication head at Banchile Citi.
"We’ve seen assets under management grow five
times and we’ve seen the money invested in bonds
grow by 10 times," he says.
Still, liquidity remains hampered by investors’
reluctance to trade. "Everyone wants to buy, it’s
hard to find people that want to sell," he says.
For their part, investors say a greater offering of debt
would encourage liquidity. Peruvian pension funds must invest
64% of their funds domestically. Roberto Melzi, head of the
fixed income portfolio for Peru-based pension fund manager AFP
Integra, says he would like to see more corporates issuing
bonds. Until that happens, liquidity will be poor. "So I hope
to see more on the supply side," he says. "But
that’s a wish, not a view."