MARKET TALK: Q1.2021 OUTLOOK
Interview with Andre Silva Head of Latin America DCM at BNP Paribas
BY JO BRUNI
The COVID-19 pandemic impact on Latin America’s primary bond markets in 2020 was deep and widespread, dictating much of the decisions behind both sovereign and corporate issues, said Andre Silva, head of Latin American DCM at BNP Paribas.
Sovereign issuers had to adapt, relaxing their fiscal targets and funding needs to issue more to combat the effects of the pandemic, he said.
“Sovereigns were virtually done issuing by March, but then COVID-19 came, and they issued more,” Silva said. “So, we saw a tremendous amount of incremental issuance out of the sovereign space.”
Corporate issuers who became concerned about liquidity in what could potentially be a long period of instability, saw that interest rates on international markets were dropping sharply. They pounced on an opportunity to cheaply build their cash piles.
“There was a point in time in April when corporates started tapping revolving credit facilities to get access to liquidity,” Silva said. “So, when they saw the opportunity to increase liquidity by tapping the international markets, they took it.”
The pandemic also brought about “chest pounding trades.” These large trades were opportunities for frequent corporate players to show their capacity to access the markets was undiminished.
The market has turned the page with the US elections even though Trump has not conceded, and it is assuming a healthy distribution of power in Washington.
“I think investors are pricing in the fact that Biden won the election and the Senate is going to be Republican. A balance of power is positive for the markets,” Silva said.
On January 5, 2021 there will be run-off elections to determine both of Georgia’s senate seats, which will determine that balance of power.
So, the only thing left is how COVID-19 plays out in the first half of 2021.
“I’m relatively positive for next year,” Silva said. “Overall, we are in a better place. We have more testing. We have better treatments. So, we are in a better position to fight the coronavirus until the vaccine comes” to all corners of the globe.
Once the coronavirus is under control, the next big challenge for Latin American issuers will be how investors begin to examine more closely corporate and government balance sheets. Then they will have to come up with answers to explain how they go about fixing any damage to their financial structures.
“Today, investors are just focusing on liquidity and the overall macro themes,” Silva said. “But once this is behind us, they will ask, what does this mean for country A, B or C? How much more debt did this country incur? How did its fiscal budgets and targets deteriorate?”
In the case of corporates, investors will also be asking how long it will take for companies to rebound sales and EBIDTA margins to recover.
“Next year’s market will be a more selective market,” Silva said.