By Ben Miller
These days Europe is rarely, if ever, held up as a role model when it comes to economic or financial matters – unless it’s to illustrate how things go wrong. And Latin America is only mentioned in that context as a useful historical parallel for how sovereign debt crises typically unfold.
Carlos García Moreno, chief financial officer of América Móvil and former director of public credit at Mexico’s finance ministry, takes a different view.
To him, the Latin America of today bears many similarities to Europe in the early 1990s, and – leaving aside its sovereign debt crises – offers a glimpse of how domestic financial markets could develop in the years ahead.
Bank lending, as opposed to bond funding, was the only option for European corporates for a long time.
“In 1990 or 1991 you didn’t have much of a capital market in Germany,” García Moreno tells LatinFinance. In Germany and in France, five-year borrowing was available, but there were no benchmarks for 10-year funds. Just the UK had a benchmark that long. “You look at what they have today, and it’s completely changed,” he says.
García Moreno says the situation today in Latin America is similar, in terms of corporate borrowing. “You can’t go much beyond five years, and it is open for triple-As locally, maybe double-As,” he says.
While the Europeans perhaps started with a more diversified investor base, “we’ve seen what can happen in 20 years, and there are parallels.”
“Now you are seeing a situation in Latin America where for a number of reasons bank lending is not available, and its incentivizing companies to think hard about other funding options,” says García Moreno.
“To some extent it’s been a good thing, because it has forced more companies to start looking at the capital markets.”
Latin America has a growing number of strong corporates in need of funds, but, by and large, limited in their domestic currency to deals of five to seven years in tenor. Meanwhile, the region boasts an unprecedented pool of capital in the pension funds of Chile, Colombia, Mexico and Peru and with asset managers in Brazil.
Mexico’s local financing markets have come a long way since García Moreno was head of public credit under Ernesto Zedillo’s administration in the late 1990s. Back then, it was an effort to get investors to buy fixed-rate peso-denominated sovereign bonds at three and five-year maturities. The sovereign’s local curve is now a model for the region, but the peso options for Mexico’s corporates are limited to a few national issuers – just as local currency options are limited in Chile, Colombia and Brazil.
Maintaining macroeconomic stability will be critical to allowing institutions to make bigger pools of liquidity available.
In the past decade, América Móvil has pioneered issuances in the international markets: in 2005 it sold a $1 billion 30-year dollar bond and a 5 billion peso ($462 million) global deal; the following year, it sold an 8 billion peso 30-year bond. More recent milestones include the region’s first renminbi bond in 2012 and the introduction of Títulos de Crédito Extranjeros, a domestic security affording the same simultaneous access to foreign and domestic investors that the sovereign has.
Strengthening institutional investors, like insurance companies and mutual funds, facilitates growth of local debt markets, says García Moreno.
Rules allowing companies to get to markets faster could help encourage more issuers. Here, gains are being made. América Móvil’s 2022 Títulos took advantage of a platform that allows a quicker process from filing to pricing.
With the program in place, the company hopes to sell the bonds once a quarter, ideally providing a benchmark for other Mexican corporates. It has raised 22.5 billion pesos so far, and brought in more institutional investors from Brazil, Chile, Colombia and Peru.
In August 2013, borrowers across the region were grappling with what looked likely to be a protracted period of volatility as US monetary policy normalized. Yields on US Treasuries shot up over the summer months, as investors anticipated an end to the Federal Reserve’s quantitative easing program in late 2013.
“Many people are still trying to understand what demand will be like when rates start to pick up,” says García Moreno. But markets must not forget the “lessons” of the past, he says, pointing to the jolt in 1994 when Alan Greenspan surprised the market by doubling the US benchmark lending rate in 12 months. Now, after years of quantitative easing and with extensive portfolio investment in emerging markets, the scale of the problem is much bigger, he says.
“There’s this notion that you will only have a graceful exit [from low US interest rates],” he says. “In the past, markets have not been graceful. But we are told this time is different.”
Issuers from LatAm and EM must be smart in taking advantage of good conditions when they can. Many issuers have not, he says.
“In the next few years, go to the markets when the markets are open,” he says. “You don’t know when they will continue to be there. Don’t try to be too smart.” LF