Latin America’s heavy debt could spark more unrest in 2022

(Bloomberg) – Latin America is expected to take the reins next year as the developing world’s largest new debt issuer, a step that some strategists say could sow the seeds of future unrest in the region.

Countries in the region issue around $ 38 billion in bonds in 2022, more than any other area of ​​emerging markets. The overall volume of emissions worldwide is expected to decline, but Latin America will slow down less, strategists said. Borrowing from the region could lead to future political and social problems for nations, said Nathalie Marshik, general manager of fixed income at Stifel Nicolaus & Co.

There are at least two factors behind the expected prominence of Latin America in bond sales: The states bordering the Persian Gulf, historically among the largest borrowers in emerging markets, have reduced their sales as oil prices rise. increase. And Latin American governments are slow to cut spending amid the pandemic, especially as the region gears up for upcoming elections in Chile, Colombia and Brazil, according to Sara Grut, strategist at Goldman Sachs Group Inc. in London. These nations represent three of the region’s top five economies.

Most of next year’s sales will come from investment grade Latin American countries, or markets that have recently been downgraded from investment grade, Grut said. Investors are too risk-averse at this point to buy much of the junk debt, she added.

“There are various policy developments underway in the investment grade markets, or the legacy investment grade markets, which will lead to the issue in 2022, and much of it relates to fiscal expansion,” said Grut.

Chile is set to be the region’s top emitter next year, regardless of the outcome of its Dec. 19 election, and will sell some $ 8 billion to meet its $ 21 billion in external financing needs in 2022, according to Grut. . Mexico is also reportedly selling around $ 6 billion in bonds, and the elections in Colombia in May could mean more spending next year, as Peru continues on the path to expansion, Grut said.

Rising U.S. Treasury yields, along with additional funding in the form of Special Drawing Rights from the International Monetary Fund, are expected to reduce total debt sales in Latin America to about $ 36 billion in 2022, from about $ 57 billion. dollars this year, Citigroup Inc. wrote strategist Donato Guarino in a note.

But there may be a downside to this borrowing. The region is rapidly raising interest rates while recovering from the pandemic, which means that the large supply of debt relative to budget trends paints a worrying picture, according to Stifel’s Marshik. Governments may have to cut spending, she said.

“Balance sheets have deteriorated everywhere, populations are struggling and poverty rates have increased,” Marshik said. “There is no real indication that there will be a leap in productivity to induce growth, and governments will struggle to implement painful adjustments. “

The U.S. Federal Reserve’s rate hikes could also exclude some emerging countries from markets, Harvard University economics professor Kenneth Rogoff said on Bloomberg TV on Wednesday.

Cloudy business outlook

While many Latin American corporate issuers have relatively healthy balance sheets after nearly two years of consolidating positions after the pandemic, 2022 could also prove to be turbulent for Latin American corporate issuers, in particular. in markets with divided political landscapes like Chile and Peru, according to Joe Bormann. , Managing Director for Latin American Companies at Fitch Ratings in New York.

“The outlook for Latin American businesses is partly cloudy due to the high political and economic uncertainty,” Bormann said. “Most businesses will approach the new year in a defensive stance, and labor unrest could join inflation and rising interest rates as key variables that could be disruptive in the region.”

Some sectors could turn the tide, such as the meat industry, which continues to do well as demand from China remains strong. And mining will continue to benefit from the global green transition, as the demand for metals used in green technologies like copper and lithium increases. But high inflation and declining purchasing power of consumers threaten to complicate the outlook for Latin American businesses, Borman added.

ESG push

BNP Paribas SA, one of the largest underwriters of ESG bonds, is preparing for a flurry of operations in the region next year, according to Anne van Riel, head of sustainable financial markets for the Americas at BNP. The bank is forecasting $ 880 billion in global green bond sales, including $ 265 billion from emerging markets in 2022.

“A number of Latin American issuers that have sidelined given the volatility of the past two weeks will be looking for a good window,” van Riel said in an interview.

Almost 40% of all issuance in Latin America since the start of the year had some sort of ESG flavor, which is a significant number compared to other regions, van Riel said. This year’s issue was driven by sustainability bonds and social bonds, notably from rulers like Chile and Peru, tapping into insatiable demand from ESG-compliant investors, he said. she adds.

Latin American governments and businesses have so far this year raised a record $ 42 billion in international debt deals linked to environmental, social and governance projects, according to data compiled by Bloomberg. This is almost four times the $ 11 billion issued last year.

But as sales of sustainable bonds flourish in the region, some investors and analysts have questioned whether the securities are really green or if they are more green. Labeled bonds nonetheless remain “the clearest communication tool emerging markets have to attract capital for the transition”, and green bonds are particularly suited to issuers looking to be transparent in the way they plan. to use the bond proceeds, said Trevor Allen, head of sustainable research. analyst at BNP.

Elsewhere in the credit markets:

Americas

A faster Federal Reserve tightening is a major risk for bullish credit markets in 2022, according to UBS.

  • US junk bonds posted second straight day of gains on Thursday, even amid broader risk aversion
  • Investors withdrew $ 1.26 billion in cash from funds that invest in high-quality US bonds for the week ended Dec. 15, marking the third consecutive week of cash outflows, according to Refinitiv Lipper.
  • Purdue Pharma LP’s multibillion-dollar opioid settlement suffered a surprising blow Thursday when a federal judge overturned a previous bankruptcy court approval of the deal
  • Intelsat SA, satellite operator in bankruptcy for more than 18 months, obtained court approval for its restructuring plan
  • For offering updates, click here for the New Issues Monitor
  • To find out more, click here for the Credit Daybook Americas

EMEA

Sales of new bonds in the European primary market have reached around 1.62 trillion euros ($ 1.84 trillion) this year, according to data compiled by Bloomberg. That’s around 5% less than the 1.7 trillion euros sold in 2020, when issuers rushed to the market to strengthen their balance sheets in order to deal with the pandemic.

  • KfW plans to issue bonds with volumes of up to € 85 billion in 2022, most of it in the form of benchmark debt in euros and US dollars. It also plans to issue green bonds in large volumes and in different currencies for a total volume of at least 10 billion euros.
  • Lehman Brothers Holdings Inc., parent company of the company that went bankrupt in the 2008 financial crisis, seeks to overturn a UK decision that would reduce collections for its creditors
  • Telecom Italia SpA’s board of directors is unlikely to make a decision on KKR & Co.’s € 10.8 billion ($ 12.2 billion) takeover bid in a public tender offer. crucial meeting Friday, according to people familiar with the matter.

Asia

A jump on Friday in dollar bonds from Chinese manufacturers, including Shimao Group Holdings Ltd., granted a partial reprieve to Asian credit after the spreads exploded this week.

  • Shimao Group Holdings bonds rallied on Friday following signs that financial authorities were coordinating negotiations between the company and some trust companies for loan extensions
  • Shimao’s credit rating has been downgraded into junk territory relative to investment grade by Fitch Ratings, making it a “fallen angel” to the international risk assessor. This follows its long-term rating which was lowered deeper into junk by Moody’s Investors Service.
  • The Bank of Japan has announced a slow march of its withdrawal of emergency pandemic aid, in contrast to the urgency of other major central banks to roll back stimulus measures
  • South Korea is one of the largest sellers of green bonds in the world, and one of its major issuers, the Export-Import Bank of Korea, plans to exploit the global debt market more aggressively. next year to provide sustainable funds to local businesses operating overseas.

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