As risk appetite among global fixed income investors returned
in the early months of 2012, new issuance from sovereign
borrowers in Latin America exploded. According to data
, in the first six weeks of the year alone, Latin America
accounted for 43% of all emerging market debt issuance, with 35
deals issued across a wide range of credits. Many of these
transactions were heavily oversubscribed, and several were
priced at impressively modest new issue premiums.
Investors’ enthusiasm certainly seems to be
warranted by the region’s economic fundamentals,
with the IMF forecasting output growth in Latin America and the
Caribbean of 3.6% and 3.9% in 2012 and 2013 respectively,
compared with a tepid 1.2% and 1.9% for so-called 'advanced
The strength of demand has also been supported by Latin
America’s improving debt metrics. In sharp
contrast to Europe, debt levels across Latin America are low
and falling, reducing borrowers’ financing
requirements. According to Moody’s, reduced fiscal
deficits have helped to decrease average financing needs across
the region from 9.2% of GDP in 2009 to 5.8% in 2011.
The region does, however, face a number of challenges. The
recent news of China’s biggest trade deficit for
22 years, for example, may have unnerved some investors
concerned about the perceived dependence of the region on
In spite of vulnerabilities such as this, the consensus is that
the outlook for Latin America remains positive. Against this
backdrop, representatives from a number of sovereign borrowers
gathered at the
IADB roundtable to discuss the prospects for Latin American
economies and capital markets.
Participants in the HSBC-sponsored roundtable that took place
in Montevideo on Saturday, March 17, 2012,
, Director, Debt Management Unit, Ministry of Finance, Republic
, Co-Head of Global Capital Markets, Latin America, HSBC
Securities (USA) Inc, New York
Alejandro Díaz de León
, Deputy Undersecretary for Public Credit,
United Mexican States
Carlos Linares Peñaloza
, Director General, Public Debt Office, Ministry of Finance,
Republic of Peru
Maria Fernanda Suarez
, Director of Public Credit, Republic of Colombia
Paulo Fontoura Valle
, Deputy Treasury Secretary, Brazilian National
Republic of Brazil
(participated separately remotely)
Moderated by Phil Moore
, Roundtables Editor,
Emerging Markets (EM)
Starting with the largest economy in the region, how
significant was the news that Brazil’s rate of
growth for 2011, of 2.7%, was well below
It’s important to recognise how volatile the
global economy has been. We had a very strong year in 2010,
with growth of 7.5%, and we entered 2011 under considerable
inflationary pressure, which the central bank addressed by
increasing interest rates. The process of monetary tightening
was reversed when the external situation worsened in the middle
of 2011, and this year we expect growth of between 3.5% and
It’s also important to recognise how much Brazil
has achieved since the Real Plan of 1994 in terms of
controlling inflation, building our international reserves,
reducing external debt, attracting FDI and generating a primary
What has been the impact on sovereigns around the table of
other external events? Looking at Peru, the multiannual macro
framework for 2012-2014 says that "despite a weaker and more
uncertain world economy, during the period 2012-2014, Peru
[has] the capacity to remain the fastest growing economy in the
region and grow at sustained rates of about 6% yearly." This
framework was published last summer. Have external events since
then led this forecast to be revised?
As you said, our projections were published before the crisis
in Europe became more serious in the second half of last year.
In response to external factors, we originally reduced our
forecasts for growth in 2012 to 5.5%.
However, following strong growth of 6% in December, which
brought growth for the year to 6.9%, these projections have
been revised again and we are now expecting growth this year of
Last year the government put in place a number of measures to
encourage public investment as a way of countering the possible
impact of the international crisis.
Given that 20% of Uruguay’s exports go to Brazil,
what will the impact of a prolonged slowdown there be on the
We haven’t yet been impacted by events in Brazil.
15 years ago around half of our exported goods went to Brazil
and Argentina. We’ve done a lot of work in recent
years to diversify not only our products but also our export
markets, so that today, less than 30% of our exports go to
Of course the slowdown in Brazil will have an effect, because
it still accounts for 20% of our exports. But it
won’t be as harmful as it may have been in the
Our links with Argentina in the financial area have also
declined, with deposits from Argentina having fallen from about
40% to less than 15%. As you saw from the press coverage at the
weekend, the government is monitoring ongoing events in
Argentina which are a concern because of their impact on
certain exports. But Argentina only accounts for 7% of our
In recent years we’ve been less impacted by what
is happening overseas, and going forward our increased
investment in infrastructure will help to offset any slowdown
created by external events. Growth in Colombia in 2011 was
approximately 5.8%, compared with 5% expected in the Medium
Term Fiscal Framework, and FDI reached record levels. Domestic
demand was the main contributor to this performance. Household
consumption grew at more than 6%, while total investment
reached 29% of GDP, the highest value in the history of this
Presumably, Mexico’s economic profile is much more
tied to the performance of the US than other Latin American
Díaz de León, Mexico:
There are two main sources of risk that have a direct impact on
Mexico - a slowdown in the US economy and the potential for
another shock from the Eurozone. The news on both has been
improving, with the US growing and the ECB’s
actions having reduced financial tension in the
It is important to stress that Mexico has engaged in a
medium-term strategy to diversify the economy. In this context
a large effort has been undertaken to promote and diversify
international trade through a number of trade agreements and
unilateral tariff reductions.
The government’s efforts to diversify the
structure of Mexico’s international trade have led
to a gradual but important change. The share of non-oil exports
directed to the US has declined from 90% in 2000 to 76% in
2011, and the share of non-oil exports to countries other than
the US more than doubled in the same period.
While the US is still the main market for our exports, and will
continue to be so in the foreseeable future, the Mexican
economy does not share many of the imbalances that have
affected the US. The US is unlikely to grow at potential for a
while, given that it is still dealing with excess leverage and
a fiscal account that will clearly need some consolidation in
the near future. The fact that we don’t have these
problems has already allowed for the economy to decouple from
its traditional links to the US in terms of GDP growth,
industrial production and job creation.
The exposure of the Mexican economy to events in Europe is
relatively limited, with total exports to Europe representing
only 2% of Mexican GDP.
Growth in 2012 and 2013 is expected to be evenly supported by
internal and external sources. The strong rebound experienced
in the Mexican economy in the second half of 2009 and 2010 was
driven by the performance of exports, which are now
substantially higher than they were before the global financial
How would the region be affected by an accelerated slowdown in
Colombia was one of the few countries worldwide that posted
positive growth – of 1.5% - in 2009, demonstrating the
resilience of our fundamentals in the face of a negative
external environment. Following the deterioration in trade
relations with Venezuela in 2008, Colombian entrepreneurs
supported by the government focused on diversifying their
exports to regions such as Central America and Asia.
Additionally, free trade agreements with key trading blocks
including the EU, the US and Asia have opened up a wider range
of markets for our exports.
A worsening of conditions in Europe and a decline in Chinese
growth could impact demand for commodities, but the
sustainability of our exports has been strengthened by the
opening of these new markets.
China is our biggest export market. It accounts for 17% of
Brazil’s exports, but that is not a particularly
Although Brazil is a commodity-based economy, it is important
to understand that we are talking about a variety of
commodities, ranging from agriculture to minerals and,
increasingly, oil. So we believe our exports are
well-diversified in terms of products and export
Another key point is that Brazil’s economy has
historically been regarded as being too closed. External
markets account for about 11% of GDP, which has traditionally
been seen as a weakness, but in the recent global volatility
our reliance on the internal market has been a
A slowdown in China would have an impact on the whole world,
but we don’t believe Brazil is overly dependent on
the Chinese growth story.
Like Colombia, our links with China are largely indirect rather
than direct. There is a consensus that there will be a slowdown
in China, but we believe Uruguay is less dependent than some
other Latin American countries on commodity exports.
China is one of our main trading partners, so we are obviously
concerned about the impact that a slowdown in China would have
on demand for imported minerals. However, we don’t
expect a sharp slowdown or a hard landing in China that would
have a very negative impact on our exports.
Our trading partners have been diversified through a number of
free trade agreements. About 20% of our trade is with Asia, 20%
with the US and 20% with Europe.
Besides, we feel that confidence is being restored among
private investors, especially in the mining sector. We now
believe that growth in private investment will reach between 8%
and 10% this year, which is higher than we forecast at the
start of 2012.
Does this mean that your forecasts for fiscal surpluses of 1%
of GDP in 2012 rising to 1.8% in 2014 are still in
We will be publishing our new forecasts in May, but these
projections are still in place, in part because the assumptions
we used for commodity prices were very conservative. Our
priority will be to continue to encourage foreign investment,
which will be key to underpinning sustained growth and ensuring
that its benefits are spread among more people.
Will the delivery of these macroeconomic targets stand Peru in
good stead for another ratings upgrade, following the S&P
upgrade from BBB- to BBB in August?
The agencies have expressed concerns about social problems and
about the protests that led to disruption at the Cajamarca
mining project. A new ministry has been created to address the
problem of poverty, and we have already put in place a number
of programmes aimed at assisting people living in poverty and
encouraging the development of micro and small enterprises, so
we believe important steps are being taken to reduce the danger
of social unrest. S&P acknowledged this in its last report,
noting that the poverty level in Peru had fallen from almost
50% to below 30% in the last six years.
Moody’s recently changed its outlook on
Uruguay’s Ba1 rating from stable to positive. But
what does Uruguay need to do to become an investment grade
We have been asking ourselves and the rating agencies the same
question. The agencies have their standard methodologies but
they don’t always take into account the
peculiarities of individual countries.
We’re conscious that we still have some
vulnerabilities which are reflected in the rating. But we also
believe that if we compare Uruguay’s economic
indicators with those of other emerging economies which already
have investment grade status, we compare pretty well. Some of
the vulnerabilities mentioned include the dollarization of our
debt and our financial system, the dependence on commodities
and the lack of diversification in our investor
We think we have made a lot of progress in all these areas.
We’ve analysed each of the vulnerabilities they
tell us we have, and our conclusion is that by now we should
have a better rating.
The most recent report, published by Moody’s,
cites the external environment as the main reason for not
upgrading Uruguay to investment grade. They tell us
they’re going to wait 12-18 months to see how
Uruguay reacts to the external uncertainty and volatility. We
don’t think that is a very appropriate way of
measuring where we stand today. We believe we have made a lot
of progress towards being prepared to deal with any financial
For example, we have built a solid financial cushion by
aggressively negotiating contingent credit lines with the
multilateral lending agencies such as the IADB, CAF and the
World Bank. I’m not sure if any other country has
built contingent lines with quite as much depth as Uruguay has.
We don’t want to have cash available from them
right now. But we do want to have a Plan B in case we are
forced out of the market for quite a while. We have sufficient
resources in place to cover us if we were out of the market for
a whole year.
The other point we make to the ratings agencies is that our
bonds are already trading at investment grade levels in the
So in terms of your cost of funding, how much difference does
the rating really make?
It does not make a difference today. But it may make a
difference in the future if there is major turbulence in the
external environment, as it did in 2008 when all of a sudden
our spreads rose very dramatically. We’re a very
small country. Our policy is to be very conservative, which is
why we have a pre-funding policy and why we have negotiated
these contingent lines. And it’s why we want an
investment grade rating today.
It’s important because an investment grade rating
would give Uruguay access to the sort of investment grade funds
that currently buy Brazil, Mexico, Colombia and
Mexico has been an investment grade credit for a while.
Alejandro, how would you summarize the state of the Mexican
Díaz de León, Mexico:
Two of the agencies downgraded us in 2009 and the other one
kept it constant. One of the issues that they raised is on
growth. In this regard, there is a tendency to look at the last
decade and conclude that Mexico’s potential GDP is
below that of other emerging markets. That argument does not go
deep enough because it overlooks the fact that we were impacted
by two shocks, in 2001 and 2009, that are highly unlikely ever
to be repeated. The first was the accession to the WTO of China
which had important implications for Mexican competitiveness
and the second was the global financial crisis.
As a result of responsible macroeconomic management during
recent years, the Mexican economy is currently in a very strong
position. It has solid public finances, moderate inflation, a
robust financial system, strong external accounts, and
considerable liquidity margins to face possible external
However, although the indications are that the dangers of
contagion to the Mexican economy from overseas are limited, we
will continue to monitor the situation to guarantee that we are
able to adopt any policy response that may be needed in a
Colombia’s upgrade to investment grade last year
was clearly a vote of confidence in its growth prospects, among
other things. Maria, can you comment on how Colombia intends to
meet its targets for sustainable annual growth of 6%, reducing
the fiscal deficit from 3.6% of GDP in 2011 to 0.7% by 2022,
and reducing net debt from 28.4% in 2011 to 10.5% in
There are four cornerstones to sustainable growth of around 6%.
First, Colombia’s growth in the investment rate,
of around 30%, underpins the economy’s GDP growth
potential. More important, this process is being accompanied by
an increase in the savings rate, which is currently 26% of
Second, infrastructure spending will increase from 0.6% of GDP
today to 1.2% over the next three years.
Third, tax reform to be submitted to Congress will generate a
more equitable distribution of income. This will have a
significant impact on households’ disposable
income, leading to higher demand and accelerated growth but
with less poverty and inequality.
Finally, the government has undertaken a series of reforms not
just in the tax area, but also in a social context. For
example, the population with access to the internet is
projected to rise from 2.6m in 2010 to 8.8m in 2014.
Fixed income investors have been responding very positively to
the macroeconomic data coming out of Latin America. Katia, how
would you summarize the activity in the new issue market over
It has been a very constructive market backdrop for issuance
out of Latin America. At HSBC, we led a number of transactions
in November and December, and the activity we saw at the end of
2011 set the tone for a record volume of issuance from
sovereigns and corporates in the early part of 2012.
The market has been open for issues across the maturity curve
and credit spectrum. For example, in addition to a number of
strong sovereign benchmarks, we’ve seen highly
successful issues from borrowers such as Brasil Telecom, Pemex,
Banco Estrado, Bradesco and others. Also, in January there was
a landmark tier I perpetual from Banco do Brasil which was the
region’s first Basel III-compliant
We have also been seeing massive books for many of these deals,
with demand for Mexico’s 30 year benchmark, for
example, exceeding $6bn.
What is driving this demand? Given what’s been
happening in Europe, are Latin American fixed income assets
seen as a safe haven?
Some of it has been driven by a flight to quality, and some by
investors’ hunt for diversification. But the main
driver is ample liquidity within an investor base that is
comfortable with Latin America’s
Let’s move on to debt. Most Latin American
economies now have debt to GDP numbers that Europe would envy
and Japan could only dream about. Chile has a debt to GDP ratio
of well below 10% and many of the sovereigns around the table
have ratios that are comfortably below 50% and are falling
fast. What is the outlook for debt to GDP for the sovereigns
around the table?
The downward trend in Brazil’s debt is very clear.
We expect to maintain annual growth at above 4% over the next
few years and to keep the FX rate and inflation under control.
And we have a commitment to keep the primary surplus at 3.1% of
GDP for the next three years. Achieving these objectives will
be more than enough to maintain the downward trend in the
It is also important to look at our net debt, which was 36.5%
of GDP at the end of 2012, and where the trend is also clearly
downwards. The main difference between our net and gross debt
is our international reserves, which we believe will continue
to rise for the next few years.
Our debt to GDP ratio is also heading in the right direction.
The gross public sector debt is 56% and the target is to reduce
this to 40% of GDP by 2014, which we are on track to achieve.
But it’s important to look at what is behind that
number. Because of the pre-funding policy that we have been
following in recent years, if we look at the net debt to GDP
ratio it is much lower, at about 28%.
It’s also important to look not just at the total
stock of debt but also at the its redemption profile. Over the
next year, the percentage of debt due to be redeemed is less
than 2% of our total.
We are expecting the ratio to reach 25% or 26% at the end of
2012. Looking ahead, we want to maintain a relatively low ratio
but at the same time ensure that sufficient resources are
channelled into key infrastructure investment.
The ratio of public debt to GDP in Peru was about 20.2% at the
end of 2011, which is an important reduction compared to the
previous year. We expect this downward trend to continue, with
the debt to GDP ratio reaching around 15% by the start of 2016.
That is assuming we can meet our targets on economic growth and
maintain a fiscal surplus of at least 1%.
Díaz de León, Mexico:
Very significant progress has been made in
Mexico’s public finances during the last decade,
with the approval of the Fiscal Responsibility Law in 2006
establishing a credible framework for fiscal policy sustained
by a balanced budget rule. Under this rule the deficit should
be zero excluding PEMEX capital expenditure. Since then, other
reforms have broadened the tax base and increased revenues from
non-oil sources, generating a permanent increase in the ratio
of non-oil tax revenues to GDP of approximately 2%.
Notwithstanding the very positive transformation that these
modifications have implied for public finances in Mexico,
challenges lie ahead, mainly related to local public finances.
The federal government’s tax revenues are actually
higher than in other OECD countries with a federal or
quasi-federal structure, such as the US or Japan. However,
local government revenues in Mexico, which were 0.7% of GDP in
2009, are close to one-tenth of the OECD average of 6%. So
local tax collection is where the main challenge is.
Are declining debt levels, twinned with increased local
currency issuance, creating scarcity value in the international
market for LatAm sovereign issuance?
The market has not been flooded with sovereign paper. In spite
of the recent volumes, there has not been enough supply given
the amount of money that needs to be put to work among
investment grade and emerging market investors.
With overall debt levels falling, has the focus of many of the
region’s borrowers in the capital markets been on
liability management and debt
Díaz de León, Mexico:
We are analysing the possibility of executing a liability
management transaction, with the objective of strengthening the
current benchmarks, retiring off-the-run bonds, extending the
maturity and duration of the portfolio and reducing financing
There are two clear trends. The first is that sovereigns are
retiring less attractive, smaller issues in favour of
longer-dated, more liquid benchmarks. The second is that they
are looking to de-dollarize much of their outstanding
An example of this was the 2041 $1.5bn tender offer from
Colombia in January. Maria, can you comment on the backdrop to
After the issuance of our 10 year 2021 US dollar benchmark in
July 2011, we saw the opportunity to enhance the liquidity of
our 30 year benchmark at the lowest yield and spread. It was
the first time Colombia had been able to achieve a rate below
5% for a 30 year bond. The combination of a liability
management exercise and a new funding transaction provided the
best environment in which to achieve the largest long end
issuance ever undertaken by the Republic at the lowest cost. We
also took into account the strength of investor demand for
duration at a time when other LatAm sovereigns
weren’t issuing at the longer end of their
We saw another very striking example of these trends last
December, with Uruguay’s spectacularly successful
transaction involving a tender of $6.2bn of bonds and an
exchange of $1.2bn of local currency bonds into a new liquid
benchmark. Azucena, what was the significance of this deal from
We had been planning this deal for a while, but the third
quarter of last year was a difficult time in which we saw no
local currency issuance from any Latin American sovereign
A window of opportunity opened for us in December. On the one
hand we were issuing local currency linked to CPI. On the
other, the objective was to use the proceeds of the transaction
to buy back debt denominated in foreign currency, principally
dollars but also some euros.
At the same time, in order to maximize liquidity in this new
bond we exchanged a 2018 bond that we issued some years ago
into the new issue.
This meant that we ultimately had a new bond with a size the
equivalent of $2bn, which would be very big for any emerging
market borrower, let alone for Uruguay, considering that the
total amount of our bonds outstanding in the external market is
$11bn. It was certainly one of the biggest local currency
transactions ever completed, which was very positive, and its
main objective was to continue the process of de-dollarizing
our debt, with the new money we raised from this transaction
only around $300m. The de-dollarization comes from the issuance
of $300m and also from the exchange of $1bn from foreign
currency. This is the core of the transaction, and the result
was that we increased the share of our local currency debt to
49% of the total compared with 11% in 2004 and 34% at the end
This figure of 49% compares with an original target of 45%. So
you’re already way above your target. Have you set
a revised target for 2014?
We said when we published this target that it was quite
conservative and would be dependent on market conditions. Our
aim now is to continue to issue in local currency in order to
lift the share to slightly over 50%.
We have no official target for 2014, but let me also comment on
the local currency transaction that we closed last week. This
gave investors the opportunity to exchange securities issued by
the Central Bank with a tenor of no longer than three years for
government securities in local currency with maturities of
between three and 12 years.
The total amount issued in four auctions was the equivalent of
$800m, meaning that more than half our debt is now in local
currency. For us the results were surprisingly good, because we
ended up issuing double the amount we originally hoped, at
yields that were well below our curves.
So we are aiming for an increase in the average life to
maturity of the public sector debt, and to build benchmarks in
the local market, which is very small and illiquid. This has
also slightly increased the total share of debt denominated in
The growth in investor demand for local currency debt has been
a prominent theme in Latin America. We led a GDN [Global
Depository Note] for Pemex towards the end of last year which
was very well-received. Peru has also been focusing on GDN
issuance as a way of attracting international investors to the
local currency market, and Uruguay’s liability
management exercise in December included a successful euro-peso
Díaz de León, Mexico:
One of the elements that has characterized the recent behaviour
of the local debt markets has been the increasing participation
of foreign investors, particularly in Nominal Fixed Rate Bonds
This has been driven by a combination of macroeconomic
stability, the consolidation of a free-floating exchange rate
regime, the development of the domestic institutional investor
base and the increased depth and liquidity of the local debt
market. In response to these developments, Mexican government
securities have been included in a growing number of global
fixed income indices. In particular, Mexico’s
inclusion in the Citigroup World Government Bond Index, which
was formalized in October 2010, prompted an acceleration in
foreign participation in domestic securities. The result was
that by the end of November 2011, non-residents accounted for
40.5% of the total placement of nominal fixed rate
Foreign participation has been mentioned as a possible
vulnerability, but much of the capital inflows have been from
investors adopting a buy and hold strategy, and has remained
stable even during very volatile markets, including during the
financial crisis of 2008.
Our aim in the local market is to achieve the same efficiencies
in terms of price discovery that exist in international
Brazil has seen a very big increase in its BRL-denominated debt
over the last decade, hasn’t
Yes. The foreign currency component of Brazil’s
debt is now very small. At the end of 2011, only 4.4% of the
total debt was in foreign currency. In 2002, almost 46% of the
debt was in foreign currency.
Are you comfortable with this level?
In our annual borrowing plan we publish a model on the optimal
composition of our debt. This model suggests that somewhere
between 5% and 10% of the debt in foreign currency would be the
optimal level in terms of risks and cost.
But nowadays, given the size of our international reserves, it
makes sense for us to stay below this limit. We will maintain
the downward trend in the share of foreign debt because we
incur a cost of carry on our $355bn of international reserves,
because of the big differential in interest rates between the
US and Brazil.
While it makes sense to reduce the international debt because
of the cost of carry, it’s important to keep a
well-defined yield curve in offshore markets.
What sort of balance is Mexico looking to maintain between
local and foreign currency-denominated
Díaz de León, Mexico:
The Mexican government recognizes the importance of maintaining
a diversified investor base, especially in periods of
heightened volatility in financial markets. Taking this into
consideration, we will continue to fund primarily in the local
markets, but will also aim to maintain a regular presence in
the international financial markets. A balance of around 80% in
peso-denominated debt and 20% in foreign currency is one that
serves both purposes.
Earlier, we mentioned Colombia’s landmark upgrade
to investment grade status in 2011. What has this meant for
Colombia’s debt management
It was very positive. It has meant that we have really had to
start behaving like an investment grade country in that we have
needed to be more predictable and more consistent about
delivering on your promises. This is because we
don’t just want to be investment grade. We want to
go higher in the scale.
We expect a positive outlook in the next semester, and we
already trade well above normal BBB levels. Perhaps the market
was pricing in the upgrade some time before it actually took
place, because our funding costs have been reduced
significantly. Also, the local market has provided fair
financing opportunities, with TES bonds being seen as a safe
haven at times of turbulence in the international bond
What progress has Brazil made in its other debt management
We have increased the average maturity of our debt year by
year, and we finished last year with about 22% of the debt
maturing in the next 12 months, compared with 36% in
In the domestic and offshore market we have improved the
profile of our yield curve. Our main focus in the domestic
market has been on increasing the share of fixed rate and
inflation-linked bonds, while in the offshore market our focus
has been on global bonds denominated in US dollars and
The composition of the debt has improved. In 2002, 90% of our
debt was exchange rate-linked or in floating rate bonds, a
share which we reduced to 34.5% at the end of 2011, and the
rest in fixed rate and inflation-linked bonds. This year we
expect the share of fixed rate and inflation-linked bonds to
rise to about 70% or 75% of the total.
Since 2006 we have been committed to our buyback programme as a
means of building a new and more liquid yield curve.
We’ve been creating new bonds with outstanding
volumes of between $2bn and $3bn in 10 and 30 year maturities,
each with coupons below 6%.
The objective of this programme is to create fewer bonds but
with greater liquidity in a very well-defined yield curve in
order to expand our investor base. This is the main reason why
we have stopped issuing in other currencies and have focused
instead on our dollar and BRL yield curves.
So for the time being we can rule out the possibility of a
Brazilian benchmark in euros?
In the future if it helps Brazilian companies by creating a
benchmark we may reconsider issuing in euros. But for the time
being we prefer to focus on liquidity.
Can LatAm sovereign borrowers expect their funding costs to
continue to fall?
Yes. Our recent 30 year and 10 year benchmarks achieved record
low pricing levels. We issued the 30 year benchmark at 4.69%
and our most recent 2021 issue was priced at 3.44%.
In the domestic market we’re also seeing a
reduction. We just created a new 10 year fixed rate benchmark
and last week we issued R1.5bn at 11.55%. This is still too
high, but if you compare it with six months ago it is a fall of
A number of other borrowers in the region have also achieved
outstanding terms in the primary market recently, issuing at
increasingly low new issue premiums. Mexico was a notable
example, with its blowout $2bn 30 year benchmark earlier this
month priced at 170bp over Treasuries, which was a new issue
concession of only about 10bp. Even at the tightened pricing
level, this still attracted demand of $6.5bn. Alejandro, can
you comment on your recent international
Díaz de León
Just to step back, our debt management strategy is as much
about developing markets as it is about financing. By
developing markets you create a framework that allows you to
finance yourself through time. In the last 15 years or so
we’ve tried to focus on ensuring that we have
access to internal as well as external funding, by building
yield curves that are attractive and useful to investors as a
way of expressing their views on Mexican securities. The crisis
of 2008 was a reminder that even though your local markets may
be doing very well and can finance you in a very efficient way,
it is essential to diversify your sources of funding as much as
possible. So our aim has been to maintain access to funding in
dollars, euros and yen.
Of these, the dollar market is the most liquid and efficient,
and the objective of our dollar deals this year has been to
establish a new 10 year benchmark and a new 30 year benchmark.
We issued a $2bn 2020 benchmark in January at a spread to
Treasuries of 175bp. This represented a new issue premium of
about 20bp, which was clearly in line with market conditions.
This transaction was two and a half times oversubscribed, with
more than 260 institutional investors from the US, Asia, Europe
and Mexico participating.
Earlier this month, the Federal Government was able to access
the dollar market a day after the yield on the 30 year bond
reached historical lows. The coupon offered to investors, of
4.75%, was the lowest ever in Latin America for this maturity,
and the issue was oversubscribed by well over three times. More
than 280 investors from all over the world
The trend in new issue premiums reflects how the market has
changed from late last year, when it was a buyers’
market. Now it is an issuers’ market.
I agree the move we’ve seen is towards a much more
balanced market, which is healthy. Supply has been limited and
issuers have been very disciplined in their approach to the
market. We’re not seeing an issuance frenzy with
everyone and anyone trying to tap the market at the same
The point about new issue premiums is a good one. The Republic
of Colombia was another example of a sovereign borrower that
achieved a low new issue premium when it launched the $1.5bn
reopening of its 2041 issue in January. The same has been true
in the corporate market. Pemex, for example, recently issued
with a new issue premium of just 11bp. The pricing trend has
been very positive and deals have performed well in the
secondary market, which has created a positive momentum for
Carlos, when Peru tapped its dollar and nuevos soles issues for
$1.1bn in January, you also achieved an extremely low new issue
premium. Can you comment on this transaction and on the main
features of your funding strategy?
There was definitely very strong demand for Peruvian risk
because it had been 14 or 15 months since our previous
international issue. We knew demand for dollars would be
strong, but we assumed that the big challenge would be to
generate demand for soles. As it turned out, the soles and
dollar tranches were oversubscribed by five and almost seven
times respectively, at spreads that were very favourable to
Looking at our funding plans for 2012, we will be concentrating
mainly on increasing investor participation and enhancing
liquidity in the domestic market. We believe that this will be
supported by the continuation of positive flows into the
region, attracted by the strong fundamentals of many of the
Latin American economies. But we are also planning to inject
more liquidity into the domestic bond market through the
development of a local repo market.
We don’t expect to issue any new instruments in
the international market this year for funding purposes,
although we will continuously monitor opportunities that may
arise for liability management exercises. Although we
don’t think the average maturity of our debt will
be extended this year, some of our bonds at the long end of the
curve probably need to become more liquid.
Have new investors been participating in the recent new issues
we’ve seen from the
Yes. Many countries in Latin America became investment grade.
As a result, the composition of placement began to change with
high-grade investors who typically focus on North America
becoming increasingly comfortable with the merits of Latin
American sovereign risk. So we have seen more cross-over buyers
with very deep pockets coming into this market.
We have also seen private banking becoming much more involved,
not just in the perp market where they have always been active,
but in all of the dollar deals across the whole yield
Another interesting trend in terms of investor demand is that
we have started to see regional players become more involved in
the new issue market. In a new offering for Brazil, for
example, it is not unusual to see Chilean and Mexican investors
coming in to the book.
European institutions also remain a big buyer of Latin American
debt. Led by UK-based institutions, Europeans have typically
accounted for about 30% of demand for Latin American primary
deals. So demand is very seldom driven by a single investor
base, with Latin America enjoying exposure to the high grade
and the emerging market investor bases.
Our upgrade to investment grade has led to a significant
increase in participation by international investors, as it has
given some players the opportunity to invest in Colombia for
the first time. We saw a number of new investors coming into
our 10 year deal last year and in our 30 year transaction this
year. However, international participation in the TES market
remains low, with foreigners holding less than 5% of the
What steps are borrowers around the table taking to further
diversify their funding sources?
Díaz de León, Mexico:
Mexico has a net foreign debt ceiling for 2012 of $7bn, and
given that our past two transactions in the dollar market have
risen an aggregate of $4bn, we have limited room for further
issues in the international capital market.
In 2009 and 2010, the government issued Samurai bonds each
raising ¥150bn, or the equivalent of $1.8bn. Both were
guaranteed by Japan Bank for International Cooperation (JBIC)
and were very well-received, allowing the government to achieve
a low funding cost.
The government is now analysing the possibility of issuing its
first non-guaranteed public bond in the Japanese market in the
last decade. Given that we’ve been out of the
market for such a long time, it will take a while to rebuild
that relationship. Clearly the JBIC guarantee is a way of
fast-forwarding that process, but it is also important to build
relationships without the guarantee. It is precisely for that
reason that we have recently been to Tokyo to meet
But we’re in no hurry to issue in yen.
It’s a medium-term objective and
we’ll move when market conditions are right for
We are also considering alternative currencies such as euros
and sterling, although the financing costs in these markets are
currently not very attractive, compared to US
The universe of investors participating in our transactions has
been widened since we were upgraded to investment grade, but we
want to strengthen our communications with investors in other
regions, especially in Asia and the Middle East, in order to
explain the continued positive evolution of our credit
Already, some very influential investors from those regions
have started to show an interest not just in Colombian fixed
income instruments but also in private equity alternatives.
This is something we want to encourage, both for the benefit of
the sovereign but also for private and public entities looking
for fresh and diversified sources of financing.
We have expanded our investor base in Asia. Last year we issued
a ¥40bn ($491m) Samurai bond guaranteed by JBIC, which we
were very happy with. We had good feedback from investors and
issued at a low spread of 43bp over yen swaps.
We’re not looking to come back to that market in
the near future, but the next target would be to issue a
Samurai bond without a JBIC guarantee. We’re
waiting to see how the Mexico transaction goes. But
we’re a very small issuer and we have to be
selective about the markets we issue in.
A Samurai bond in unguaranteed format could be very
interesting, but at this point we don’t think the
market is ready. Japanese investors are very cautious and need
to become more familiar with our credit. But we will continue
to visit Japanese investors on our marketing trips to Asia in
order to build long term relationships.
We’ve also seen corporate issuers taking advantage
of the opportunity to diversify their investor bases by
exploring new markets. Last year we saw Petrobras issuing in
euros and sterling. This year we’ve seen Braskem
taking advantage of demand in the perpetuals market, mainly out
of Asia. And America Movil opened a brand new market for Latin
American issuers in the offshore RMB sector.
The dollar is generally the currency of choice, because of the
attractive funding costs created by low dollar interest rates,
but LatAm issuers have a global appeal and have shown that they
have access to a variety of markets.
With investment in infrastructure a key priority across the
region, are we seeing more infrastructure projects being funded
through the capital market in Latin
Yes. We’ve enjoyed a lot of success in executing
key mandates in the project bond space for issuers such as
Odenbrecht and Queiroz Galvao in Brazil. We also did a
financing for the ENA toll road project in Panama that was sold
to institutional investors. This is a market that will continue
to develop, locally and internationally.
this was an asset class that made more sense to the bank
market, but is now appealing to institutional investors in
dollars and in local currencies.