MARKET TALK: Q2 2023 OUTLOOK
After slumping last year, Latin American bond issuance rallied in January only to flop again in February on the same concerns: high inflation and interest rates. A recovery is expected in the second quarter of this year, but how fast is yet to be seen.
By Hernán Goicochea
Bond sales in Latin America and the Caribbean are expected to recover in the second quarter of 2023 after a slump last year and a brief flurry of deals in January, analysts say.
“Investors started off very liquid in 2023, with high cash positions,” says Rodrigo González, director of debt capital markets for Latin America at BNP Paribas in New York. “They want to turn the page from a very difficult year to start fresh from a rates perspective.”
International bond sales from Latin American and Caribbean issuers kicked off 2023 with 18 deals totaling $18.6 billion in January, before tumbling to $1.1 billion on two deals in the first two weeks of January, according to data from Refinitiv.
The surge in the first month of the year came as investors bet that a sooner-than-expected decline in inflation would lead the US Federal Reserve and other major central banks to end their hawkish campaign of tightening of monetary policy. US inflation dropped to 6.4% in January, continuing a decline from a peak of 9.1% in June last year. But it’s not come down enough yet for the Fed to change course. Instead, the Fed hiked the monetary policy rate by 25 basis points in February to a range of 4.5% and 4.75%, the highest since 2007.
“There is still some uncertainty in the market. Nothing that we have never seen before, but investors are still focused on rates,” González says.
“Investors are still focused on rates.”
– Rodrigo González
What happens next depends largely on the battle against inflation, which until progress is made means that most issuers will remain on the sidelines, according to analysts.
Mexico was the top sovereign issuer in the first six weeks of this year, raising $5.9 billion, while the Colombian and Mexican state-owned oil companies Ecopetrol and Pemex, respectively, were the top corporate issuers with $2 billion each in the sale of 10-year notes.
Despite the decline in deals in February from the start of the year, analysts say many issues have been oversubscribed. Brazilian petrochemical company Braskem priced $1 billion in 10-year notes on February 8 after investors placed as much as $6.3 billion in orders.
The strong demand bodes well for a recovery in sales in the second quarter.
“The more supply that we see, the better it is going to be for the broader community in terms of trying to rebalance what happened last year,” says Connor Prochnow, senior associate for Latin American debt capital markets at Crédit Agricole in Washington, DC.
González says a number of issuers want to sell bonds, including to pre-finance debt maturing in 2024 and cover investments. There is also a pipeline of possible transactions to finance mergers and acquisitions, as well as potential sovereign issues. Costa Rica, for one, hired Santander and JPMorgan in late February to arrange two planned sales of up to $1.5 billion in dollar-denominated bonds each before the end of the second quarter.
Brazilian issuers, however, could face a harder time in selling bonds in the international markets, given the surge in political uncertainty since President Luiz Inácio Lula da Silva took office at the start of the year. A big concern is his administration’s efforts to put pressure on the independent central bank to cut interest rates and review inflation targets. The recent bankruptcies of Americanas, Gol, Light and Oi are also dampening demand for Brazilian corporate bonds.
“Brazil represents a massive borrowing base in the international markets,” says Prochnow. “In certain discussions with issuers, it’s very challenging for them to come to an international environment with this backdrop.” LF