While these so-called Brady bonds are now considered to have eased the way out of the debt crisis of the 1980s, they came at a price. Many of these same countries became highly dependant on US dollar-denominated borrowing and on the cyclicality of the global movement of capital, and often suffered at key moments during the last decade. These bonds issued in foreign currencies hampered the ability of many South American countries to adjust during periods of global risk aversion and extensive dollar strength.
Many Latin governments such as those from Brazil, Colombia and Uruguay have learnt from their past experiences by taking advantage of the current virtuous environment for anything labeled “emerging market” by increasingly offering more and more sovereign bonds in local currency to both foreign and domestic buyers. Flexible local currencies are considered to provide a mechanism for countries to respond to a changing economic environment. In 2007, we are likely to see many government debtors joined by their local corporations in a number of domestic bond markets. Such economies are maturing, and behaving more like developed markets.
Many mainstream emerging market borrowers will therefore represent less of a speculative, external debt opportunity for investors as they have in the past, and increasingly be a domestically focused investment where inflation, growth and supply drive bond markets.
Large institutional investors that closely track the established emerging market debt indices, which are typically US dollar-based and composed of government securities, will no longer be able to fully participate in the fundamental developments in the region as these indices become smaller and less representative of the investment universe. This trend will likely favour the smaller to mid-size, niche investors in South America as the size of many local markets is below that demanded by the mega-sized money managers.
Companhia Energetica de Sao Paulo, a company that supplies electrical energy to the state of Sao Paulo, recently issued $300m (€230m) equivalent worth of local bonds to international investors with a coupon approximately 2.5 per cent higher than government Brazilian real bonds, which are already priced at an attractive interest rate relative to other South American bonds.
Strange as it sounds, by going local, South American bond markets are normalising, and both agile investors and South American creditors stand to benefit.
Kevin Colglazier is chief investment officer and Alia Yousuf is senior emerging market debt portfolio manager.
