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LatAm sovereigns hit the “show-me” phase

Mar 31, 2014

Good intentions are not enough — investors are demanding clear improvements from sovereign borrowers

Despite Latin American governments outlining intentions to improve fiscal dynamics, investors want to see proof of action, LatinFinance’s annual IDB Breakfast Roundtable was told on Friday.

"After you’ve realized that an adjustment needs to take place, then there needs to be the 'show-me’ phase," said Sean Newman, portfolio manager at Invesco. "With Brazil, with Costa Rica, with other Central American countries, we’ve now entered the show-me phase."

The comment came as debt management officials insisted their countries were on the right track.

Costa Rica, which has second-round elections on April 6, has tried to keep investors appraised of the likely developments ahead, Jordi Prat, vice minister for finance and director of public credit, told the audience.

"We’ve tried to explain to the market that [the new government is] going to do things that need to be done," he said, in reference to rising CDS spreads after the first round of voting. "When you have 6% GDP deficit, something has to be done. The investors have still been giving us the benefit of the doubt."

Brazil’s head of public credit, Paulo Valle, pointed to stabilizing measures that the sovereign had taken in recent years, pointing in particular to a sharp increase in foreign reserves since 2008.

"We have a lot of cushions to face any volatility," he told the breakfast, which took place on the sidelines of the Inter-American Development Bank summit in Bahia, Brazil. "We have some noise this year because of the electoral process. But we believe that we still have a very good position to face a new volatility period."

Brazil’s local currency debt was attractive, said Marzo Bernardi, executive director at Western Asset Management, and it benefits from sound liquidity. That was a view shared by Newman, although he added that further adjustments were needed.

"We have a favourable view on the local currency instrument — less so on the external," said Newman. "The central bank has done a good job in making adjustment on monetary side, and now we need to see a similar adjustment on the fiscal side." LF



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