In 2014, when Chile tapped euro markets for the first time, several DCM bankers were rather mystified. Why was a sovereign with barely enough external funding needs to justify an annual dollar outing (it sold just $6.1bn equivalent in hard currency bonds between 2011 and 2015) paying over the odds to tap another currency?
It was, to them, almost indulgent for Chile — a leading light in EM, and with an exceptionally strong local market — to diversify its investor base into a distant currency.
Fast forward seven years, and Chile’s foresight in establishing a presence in the European single currency has been richly rewarded. With its domestic bond market under constant pressure from mass social unrest, political uncertainty and three separate bills from Congress allowing Chileans to withdraw chunks of their pension savings, euros have become a crucial tool in helping the government fund the budget.
Last year, euros accounted for €2.46bn ($3bn) of the almost $6bn equivalent that Chile raised in hard currency. So far in 2021, euros have contributed €1.65bn ($2bn) to the $7.75bn equivalent Chile has issued.
Upheaval
As Chile prepares a new constitution in which the centre-right governing coalition will have a limited say, there is much concern over the direction of policymaking in the long term. Peru and Colombia, also once bastions of stability in a volatile region, face similar issues and are also relying increasingly on international funding — partly an inevitable consequence of Covid-19, partly because domestic politics is disrupting local bond markets and making fiscal prudence a tough task.
In Peru, years of political turmoil are finally taking their toll on creditworthiness, and a looming presidential run-off between far left and far right suggests that — whichever way the country votes — structural reforms will be arduous. Colombia was finally cut to junk last week by S&P as it struggles to control an increasing debt-to-GDP ratio. But the protests that blocked a major revenue-generating tax reform three weeks ago (the tipping point for S&P) continue unabated.
There is a palpable sense of unease among financiers in Santiago, Lima and Bogotá. The admiration these governments enjoy among international investors does not correspond to the sentiments of their citizens, and Covid-19 is only exacerbating the tension. Is this the end of the status quo that saw these Andean issuers gain safe haven status in a region of serial defaulters?
Prudence pays
Whether the last couple of years prove to be a bump in the road or lead to a structural shift in growth models is a question for political scientists. But amid the turbulence, it is notable how seamlessly debt management teams have adapted, covering their funding needs with apparent ease.
Some investors argue that Lat Am governments are perennially complacent, with reforms and fiscal savings during the good times leaving them vulnerable when tough times hit. The same accusation cannot be levelled at the debt management offices, which have for years been diligently terming out debt ahead of time, increasing international participation in the local market, and diversifying funding sources.
Aside from its euro diversification, Chile spent recent years becoming a leading issuer of ESG bonds, thus attracting new investors, and making its domestic curve more attractive to foreign buyers.
Peru for years turned down offers of cheap dollar funding, focusing heavily on local currency. This meant there was pent-up demand when the government was forced back to dollars during the pandemic. In November, Peru sold a century bond when it was on its third president in a fortnight. If it appeared a bold move at the time, in hindsight it could hardly have been better timed.
Colombia has had a flexible credit line (FCL) with the IMF — a precautionary facility exclusively for top-ranking borrowers — in its back pocket for a rainy day since 2009. When the rainy day arrived last year, it became the first country ever to draw down on an FCL, clinching more than $5bn of low-cost funding and relieving pressure on markets.
As one credit analyst told GlobalCapital last week, while Colombia’s credit rating is headed to junk, its access to funding is most definitely that of an investment grade borrower.
All three sovereigns returned to market earlier than usual in March and April, and all three were right to anticipate the bouts of volatility. Peru got ahead of a shock election result, Chile dodged a sell-off that followed the constitutional assembly vote, while Colombia issued just days ahead of anti-tax reform protests.
Sophisticated debt management is not just a tool to avoid a liquidity crisis. Credibility with markets — and broad access to low-cost funding — tends to act as a check to keep governments in line.
A new president — no matter how radical his or her political persuasion — is less likely to plunge the government into a funding squeeze just after taking office if there is something substantial to lose by doing so. This should act as a safeguard against the kind of policies that would endanger the long-term market standing of Chile, Peru and Colombia.
Once a government's access to international funding is limited, as Argentina demonstrates, it has no incentive to keep policy in line with what its creditors would like to see.
In a region where several countries frequently give investors cause for headaches, it is natural to feel a chill when apparently well-managed economies pass — or fail to pass — bills that fly in the face of economic stability or jeopardise local capital markets. But the long-dated, low-cost debt profiles of these countries and their strong bond market relations are a reason to remain calm.