By Sally Marshall (Imperial College London)
Latin America has seen some of the highest Covid-19 mortality rates in the world, spurring on recent political instability, economic inequality and social unrest contributing to a region wide humanitarian crisis. Forecasts predict 231 million people will be living in poverty by the end of the year.
It is, therefore, unsurprising to see the devastating toll this has taken on economies across the region. The reliance on informal sectors, making up 54% of all work across the region, have widened inequality and suggest figures may be even worse than those published. Shrinking GDPs in countries, many of whose economies were already in shaky conditions prior to the pandemic, has resulted in many different actions taken by central banks and governments in attempt to stabilise their nations.
PERU – Issuing of Century Bonds
Despite being one of Latin America’s fastest-growing economies this century with its GDP quadrupling over the past 20 years, 2020 has been a difficult year for Peru, who has seen one of the world’s worst Covid-19 mortality rates. The result has had massive impacts on the growing economy, exposing inequality and forcing the Government to issue one of Latin America’s most ambitious stimulus packages – selling $3 billion of debt this spring. Debatably, the devastation from Covid-19 has contributed to one of Peru’s most politically tumultuous fortnights. Over the past two weeks, the country has seen 3 presidents: Martín Vizcarra, who was forced to quit following his impeachment by congress, Manuel Merino, who only lasted 5 days after huge street protests forced him out. Now, Francisco Sagasti, a former World Bank official, has stepped in as an interim leader to guide the country through new elections in 2020.
The political turmoil has massively weighed on the country’s assets, where not only did we see the currency, the sol, at a record low, but dollar bonds set to mature in 2050 have also slipped 5 cents this month. However, the government launched the sole of $1 billion of century bonds this Monday, the lowest-yielding century bonds ever issued by an emerging market. Peru was able to price the century bond 1.7 percentage points above US treasuries.
Alongside this, the country also managed the sale of $3 billion of bonds of other maturities on Monday, 12 year ($1b) and 40 year ($2b). Shamaila Khan, director of emerging market debt at Alliance Bernstein quoted “Peru has a strong external position and a low level of indebtedness, we expect the country to be a solid investment-grade credit despite the political volatility.” Despite this optimism, there is still warning for investors surrounding the country’s political instability, which may prove costly in the future.
ARGENTINA – Currency Devaluation Threat
The Argentinian government is scrabbing to stabilise the Argentinian peso as it heads towards its 7th currency devaluation in 20 years. Earlier this quarter, with the country only having $1bn of liquid reserves available, investors suggested it was only a matter of time before the central bank was forced to reset the peso at a much weaker level, with the peso seeing a drop of 24% against the US dollar this year. Despite this, moves from the leftist Argentinian government, including rises in interest rates, promises to refrain from government spending with new money printed by the central bank and the issuing of a new dollar denominated peso bonds worth $1.6bn, has increased support for the peso.
However, many investors are still braced for a sudden devaluation. “It’s not going to work. All the measures of late are simply Band-Aids that do not tackle the core problem,” said Alejo Czerwonko, chief investment officed for Americas Emerging Markets at UBS Global Wealth Management, who also warned it was “inevitable” that the peso will have to be reset at a weaker level. Uncertainty still rises from the gap between official and unofficial exchange rates, an indicator of investment confidence, which is at its record highest level in years. Additionally, 15-year maturity bond prices have slipped into “distressed” territory despite the successful restructuring of $65bn of foreign debt this summer. As the country fumble through short term solutions, it is almost certain stronger measures will be required to fix the core issues as the pandemic continues to worsen the country’s three-year recession.
BRAZIL – Looming Recession
The Covid-19 pandemic has ravaged Brazil seeing over 6 million cases, with lockdowns, corporate bankruptcies’ & decreased foreign investment pushing millions more into unemployment. Following global trends, Brazil’s economy has officially entered a recession, with its GDP reportedly shrinking by 9.7% quarter on quarter, a record fall marking the greatest loss in 40 years for Brazil, who has seen 9 recessions in this time. Economists are hopeful the worst of the crisis is over with vaccine hopes contributing to 3% growth forecasts for the year ahead. However, there are calls for fiscal adjustments before the country sees recovery – Luciano Rostagno, chief strategist at Mizuho bank warned “Brazil will have to face painful fiscal adjustments in the aftermath of the crisis, if it wants to put its economy back on a sustainable footing.” Other concerns regarding the country’s history of high inflation and political instability are also triggering uncertainty among investors.
However, despite fears stemming from the recession, Brazil is on track for its biggest year for its IPO market since 2007. A recovery in asset prices and increased investor interest in Brazilian equity has contributed to almost 17 IPOs this year, with 40 more in discussion, with these companies raising $3.6bn this year so far – up 151% from last. The majority of these deals were handled by local banks, spurring on expansion in the Brazilian banking industry. Furthermore, optimism from vaccine hopes and respectively an increase in emerging market interest from the West, specifically in rising interest prices, have all contributed to Goldman Sachs’ bullish view for economic recovery over 2021.
Hopes of vaccines, eased lockdowns and renewed interest from foreign investors, the outlook for 2021 may look more hopeful than originally thought for Latin America. Countries such as Mexico, will benefit from a strengthened US economy, whilst others may benefit from commodity rallying, being home of plentiful precious metals. Additionally, prospects of a weaker dollar, may increase the ability debtors to repay their dollar borrowing and increase the value of exports in their local currency. However, with current political stability and record levels of poverty, it may be a long road of recovery ahead for the region.