Latin American sovereign and corporate issuers are facing a trickier path to the global bond market after a US inflation report on Wednesday undermined hopes for a meaningful drop in borrowing costs this year, at a time when the World Bank is warning about stalling growth in the region.

US Treasury yields jumped and Latin American currencies and stocks slid after a government report showed consumer prices rose more than expected in March, casting doubt on expectations the Federal Reserve will start cutting interest rates as early as June.

The renewed uncertainty about the near-term outlook for US rates means that Latin American issuers that can afford to delay their issuance plans will probably do so, Sandra Loyola, senior research analyst at Lima-based Credicorp Capital, told LatinFinance.

At the same time, issuers “with good fundamentals and short-term financing needs” will continue to tap the market, she said.

“New issuance is going to depend on financing needs and windows of opportunity,” Loyola said. Moreover, “there are increased incentives to turn to the local market for those companies that have access and are known in the local market, where they may have the opportunity to sell at better rates,” she said.

SLOWER GROWTH

Weaker-than-expected economic growth is another challenge for issuers in the region. The World Bank said Wednesday that countries urgently need to do more to revitalize their economies, warning that overall growth has stalled.

The multilateral bank’s economists forecast GDP for Latin America and the Caribbean will expand by just 1.6% in 2024, and while growth is expected to pick up to around 2.7% and 2.6% in 2025 and 2026 respectively, “these rates are the lowest compared to all other regions in the world, and insufficient to drive prosperity,” according to the its latest report on the regional economic outlook.

While most countries have managed to control inflation in the post-pandemic era (apart from Venezuela and Argentina), regional growth remains constrained by low capital accumulation and low productivity growth over the longer term, the report said.

MORE COMPETITION

Beyond calls for reforms in traditional areas such as infrastructure, productivity and education, the World Bank said “fostering competition is central to revive the economy and win back investor confidence.” 

“This is a pressing matter. The region has low competition levels, undermining innovation and productivity. Consumers are also penalized, facing higher markups than the rest of the world,” the report said.

The bank says there is “a stark contrast between a few large firms dominating markets and numerous small businesses,” which result in a high degree of informality. On the other hand, “a handful of large companies dominate and influence markets, and businesses have little encouragement to innovate,” it says.

The bank’s recommendations include strengthening competition agencies, supporting innovation policies and boosting managerial skills. 

The World Bank forecast Brazil’s economy will grow 1.7% this year and 2.2% next year, while Mexico is expected to register growth of 2.3% and 2.1% this year and next respectively. Meanwhile, Argentina’s economy is seen contracting 2.8% this year before bouncing back in 2025 with 5% growth, the report said.