Economic policymakers and investors sent two starkly different messages last week on the potential fallout from the Iran war on Latin America — and so far, the markets’ optimism seems to be well-founded.
The dour view from policymakers was on full display in Washington, DC last week, as attendees at the International Monetary Fund-World Bank spring meeting grappled with the risk of a global recession and energy crisis if the Iran war continues.
Yet, markets appeared indifferent.
The S&P 500 index hit record highs and breached 7,000 points for the first time. In Latin America, Brazil’s benchmark Bovespa equity index set a new record, while credit spreads narrowed, making it cheaper for countries and corporates to borrow.
And borrow they did, marking a revival in bond market issuances after the war-driven lull last month. The Republic of Brazil tapped the European bond market for a record EUR5 billion ($5.9 billion), while Chilean energy infrastructure firm Sociedad Transmisora Metropolitana, Brazilian state-run lender Banco do Brasil, Colombia’s Grupo Nutresa and Brazil’s Minerva Foods all issued cross-border notes.
“The market is available and open for higher and quality credits, even for some high yield,” said Petar Atanasov, Gramercy’s co-head of sovereign research.
It’s not that the risks have fully gone away. Oil prices rose on Sunday after Iran once again closed the Strait of Hormuz to foreign vessels, while the US reportedly fired on and seized an Iranian-flagged vessel that tried to get past its blockade of the waterway.
Indeed, emerging markets would face a “very, very challenging environment” if oil prices saw a persistent shock, but the probability of that has dropped significantly following the Iran-US ceasefire, Atanasov said.
The outlook for Latin America has remained steady, said Gabriel Casillas, Barclays’s chief economist for Latin America.
“Amid the troubled waters of geopolitical upheaval, Latin America’s outlook remains resilient,” he wrote in a note to clients.
ON GUARD
Policymakers are on guard for the risk of a renewed escalation in the Middle East conflict, with IMF Managing Director Kristalina Georgieva warning on Wednesday that “we must brace for tough times ahead” if the war is prolonged.
Before the war, global growth was likely to be 3.4% in 2026, the IMF said in its latest economic outlook. A severe scenario would mean “a close call for a global recession,” with global GDP growing just 2% this year.
The fund expects requests from several lower-income countries for IMF assistance totaling some $20 billion to $50 billion, Georgieva said.
In Latin America, however, investors have been relatively sanguine about the war’s impact on the region, whose credits have outperformed all others in emerging markets, Atanasov said. Its sheer distance from the conflict and supply chain ruptures are proving to be a tailwind, he said.
The market’s optimism has helped push down the spread that investors demand to hold Latin American corporate bonds rather than US Treasuries. The spread fell below 2.45% last week, according to an ICE BofA index, down from 2.92% at the height of the Iran tensions.
Emerging market bond issuance had come to a virtual standstill in March, Atanasov said, a sharp contrast from the start of the year when the “floodgates were open.” But this month shows markets are quite receptive to deals, he added.
Energy exporters such as Brazil, Colombia and Ecuador have come out ahead. The Brazilian real has gained almost 10% against the US dollar, while the Colombian peso has risen more than 4%. Ecuador’s dollar bonds have also jumped, with its 2035 6.9% bond rising 5.5% so far this year, according to S&P Global Market Intelligence.
In yet another sign of investors’ cheer, Bank of America analysts flagged on Friday that Brazil-dedicated equity funds had their biggest weekly inflows since their tracker started in 2014.
VARYING IMPACTS
But even oil exporters such as Brazil, Colombia, Ecuador, Guyana, Trinidad and Tobago and Venezuela, aren’t immune to crisis, Nigel Chalk, the IMF’s Western Hemisphere director, told reporters on Friday.
“Even in these countries, we shouldn’t lose sight of the fact that while there may be macroeconomic gains, the most vulnerable citizens will be hard hit by higher energy prices,” Chalk said, adding that higher food costs “could be the next leg of that pressure.”
At the same time, officials should be mindful of the risk that those subsidies could get even more expensive if oil prices jump above $90, Chalk said.
“You don’t know what oil prices will be three months from now, so the size of the subsidies you may be creating over time could be quite large and quite unpredictable,” he warned.
FISCAL BUFFERS
Tourism-dependent Caribbean economies are likely to be hardest hit, he said, as travel slumps all while energy imports get costlier. Central American countries could also take a blow, he said.
Central American and Caribbean sovereigns have improved their fiscal and external buffers over the years, which “should enable them to manage a short-lived shock,” Joshua Grundleger, a director in Fitch Ratings’ sovereigns Americas group, wrote in a report Friday.
However, a sustained shock could slow remittances that some economies rely more on, he noted. Central American and Caribbean sovereigns “may face a more difficult path” to credit rating upgrades if that adverse scenario plays out, he wrote.
“But we would expect most sovereigns to resume consolidation after the price shock passes,” Grundleger added.