Capital Flows to Latin America and the Caribbean 2019 Year-in-Review
Washington, D.C., 28 February 2020
ECLAC – Washington Office
Capital Flows to Latin America: 2019 Year-in-Review
Highlights
•
In 2019, international bond issuance from Latin America and the Caribbean (LAC) increased and bond spreads tightened, but credit quality continued to deteriorate although at a slower pace relative to 2018.
•
Lowering global interest rates brought issuance volume up in the region. Total LAC debt issuance in international markets in 2019 was US$ 119 billion, 26% higher than in 2018.
•
Mexican, Brazilian and Chilean borrowers were the main contributors to the region’s performance. Together they were the three top issuers (sovereign and corporate issuance combined) and accounted for 64% of the total LAC bond issuance in 2019. Mexican borrowers increased issuance by 40% relative to 2018, Brazilian by 54% and Chilean by 46%. They accounted for 28%, 25% and 11% of the total, respectively.
•
In 2019, Latin American stocks and debt spreads recovered from the rout caused by the increase in volatility and risk perception in global markets in the second half of 2018. The JPMorgan EMBIG Latin component tightened 222 basis points (compared to a widening of 149 basis points in 2018), while Latin American stocks gained 14% according to the MSCI Latin American index (compared to a loss of 9% in 2018).
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On balance, credit quality deteriorated in 2019. There were eleven credit rating upgrades and twelve downgrades in 2019. When looking at all credit rating actions, including outlook revisions, there were eighteen positive and twenty-two negative actions. Negative credit rating actions (including downgrades and downward outlook revisions) have outnumbered positive actions in the region for seven years in a row, but the imbalance improved in 2019. There were four more negative actions than positive in the region in 2019, compared to fifteen more in 2018.
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Finally, there was a recovery in green bond issuances from the region in international markets. In 2019, LAC international green bond issuances amounted to US$ 5.45 billion, which represented 4.6% of the region’s total international bond issuance. In June, Chile became the first sovereign in the region to issue green bonds.
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ECLAC – Washington Office
Capital Flows to Latin America: 2019 Year-in-Review
Overview
Lowering global interest rates supported Latin American and Caribbean bond activity in 2019. Borrowers enjoyed easy financing conditions, as interest rate cuts from the U.S. Federal Reserve and the European Central Bank allowed them to issue foreign currency denominated bonds at increasingly low rates. LAC debt issuance totaled US$ 119 billion in 2019, up 26% from the US$ 94 billion issued in 2018. It was only the fifth largest annual volume, given that the activity of some past large issuers, such as Argentina, was subdued (chart 1). CHART 1: ANNUAL LAC DEBT ISSUANCE (US$ Billions) 160 146 133
140
129
123
119
115
120 100
94
90 92 80
80
Three-period Moving Average
65
54
60
47 38
40
29
20 3
7
13
18
23
47
44 40 39
40 20
46 45 43 19
0
Source: ECLAC Washington Office, based on data from Dealogic, LatinFinance, Bloomberg, JPMorgan and Bank of America/Merrill Lynch.
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ECLAC – Washington Office
Capital Flows to Latin America: 2019 Year-in-Review
The growth in LAC bond markets in 2019 was driven by the corporate sector, which accounted for 64% of the total issuance. Dollar-denominated issuance from the region increased to 83% of the total from a share of 77% in 2018. Volatility slowed down in the second half of 2019. The last peak of volatility observed in 2019 was in August (chart 2). It was driven by an escalation in U.S.-China trade tensions and concerns that the bond market was flashing a recession signal, an inverted yield-curve, with the 10-year Treasury yield falling below its 2-year counterpart. The improved tone around trade after August contributed to a spike in bets against volatility. With renewed hopes for a U.S.-China trade resolution giving stocks a boost, volatility embarked on a downward trend. Expectations that the Federal Reserve would keep interest rates low (with a second and a third interest rate cut taking place in September and October)1 also contributed to reduce volatility and lift stocks. CHART 2: CBOE VOLATILITY INDEX IN 2019 (VIX and VXEEM close) 40
35
30
October 2018: spike in volatility triggered by US elections jitters
December 2018: stock markets rout Early May 2019: spike triggered by uncertainty regarding US and China trade deal
25
August 2019: escalation in U.S.China trade tensions and the bond market flashes a yieldcurve inversion, a recession signal.
20
15
10
5
0 28-Sep-18 28-Oct-18 28-Nov-18 28-Dec-18 28-Jan-19 28-Feb-19 31-Mar-19 30-Apr-19 31-May-19 30-Jun-19
VXEEM
31-Jul-19 31-Aug-19 30-Sep-19 31-Oct-19 30-Nov-19 31-Dec-19
VIX
Source: ECLAC Washington Office, based on data from the Chicago Board Options Exchange. Note: The CBOE Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The VXEEM is the CBOE volatility index for emerging markets (conveyed by MSCI Emerging Markets Index fund option prices).
The renewed optimism regarding a trade resolution between the United States and China after August had a positive impact on both Latin American stocks and debt spreads. LAC bond spreads tightened further, while Latin American equity prices widened (chart 3). Except for Argentina, Venezuela and Ecuador, bond spreads tightened for all Latin American countries in our sample in 2019 (chart 4). Argentina’s spreads increased 927 basis points as political uncertainty rose ahead of the general elections in October and access to foreign credit became more difficult, reigniting currency pressures. Venezuela’s spreads widened 7,895 basis points against a backdrop of political and economic hardships. Ecuador’s spreads did not change. 1
The U.S. Federal Reserve cut interest rates for the first time in July and followed with interest rate cuts in September and October of 2019. At the end of the year its benchmark rate was in a range of 1.5% to 1.75%.
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ECLAC – Washington Office
Capital Flows to Latin America: 2019 Year-in-Review
CHART 3: LATIN AMERICAN EQUITY PRICES VS BOND SPREADS IN 2019 (MCSI and EMBIG indices) 120 115 110 105 100 95 90
85 80 75 70 65 60 55 31-Dec-18
28-Feb-19
30-Apr-19
30-Jun-19
31-Aug-19
MSCI EM LATIN AMERICA
31-Oct-19
31-Dec-19
Latin EMBIG
Source: ECLAC Washington Office, based on data from MSCI Equity Indices and JPMorgan.
CHART 4: EMBIG SPREAD DIFFERENTIALS IN 2019 (Basis points) 9000 7,895
8000 7000 6000 5000 4000 3000 2000
1000
927 0
0 -61
-31
-67
Brazil
Chile
Colombia
-65
-61
-59
Mexico
Peru
Uruguay
-222
-1000 Argentina
Ecuador
Source: ECLAC Washington Office, based on data from JPMorgan.
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Venezuela
Latin America
ECLAC – Washington Office
Capital Flows to Latin America: 2019 Year-in-Review
Latin American stocks gained 14% in 2019 according to the MSCI Latin American index, while emerging markets gained 15% and G7 countries 26%, respectively (chart 5). EM and LAC equities underperformed G7 countries, in part due to EM currency depreciation. CHART 5: MSCI EQUITY PRICE INDEX IN 2019 130
125 120 115 110 105 100 95 31-Dec-18
28-Feb-19
30-Apr-19
30-Jun-19
EM (EMERGING MARKETS)
31-Aug-19
31-Oct-19
EM LATIN AMERICA
31-Dec-19
G7 INDEX
Source: ECLAC Washington Office based on MSCI Equity Indices, http://www.msci.com/products/indexes/performance.html, prices at the end of the month.
Finally, credit quality in the region continued to deteriorate in 2019, although at a slower pace. There were four more negative actions than positive in the region (chart 6). Negative credit rating actions (including downgrades and downward outlook revisions) have outnumbered positive actions in the region for seven years in a row. CHART 6: NET CREDIT RATING ACTIONS IN LAC (Number of Actions) 40
30
28
30 21
18
17
20 10
4 0
0 -4
-10
-3
-6
-3
-3
-4
-12 -20
-16
-15
-23
-30
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: ECLAC Washington Office based on data from Moody’s, Standard & Poor’s, and Fitch.
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