The fundraising outlook for sovereign and corporate issuers in Latin America issuers was plunged into uncertainty on Monday as fears the US economy could be heading for a recession rocked international markets, triggering a slump in global equities and leading bond traders to price in steeper cuts in US interest rates than previously had been expected.
The global rout, which saw Japanese stocks post their biggest one-day drop since 1987 and the benchmark S&P 500 index lose $1.3 trillion in value, sapped demand for riskier assets, including emerging market bonds and currencies.
For Latin America issuers, a quicker pace of monetary easing by the Federal Reserve would be welcome after a long spell of high borrowing costs in international and local debt markets, but a hard landing for the world’s biggest economy would be negative for the region, analysts warned.
“A US recession could negatively impact Latin America by dampening exports, FDI, workers remittances, and confidence,” said Todd Martinez, co-head of Americas sovereigns at Fitch Ratings. “And it has already led to a sell-off in currencies in the region, which could prevent their central banks from loosening monetary policy much to cushion the blow.”
Latin America’s biggest equity markets were spared the worst of the global rout, with the Brazil’s Bovespa index sliding 0.5% and Mexico’s S&P/BMV benchmark dropping 0.89%. In Japan, meanwhile, after plummeting 12.4% in trading on Monday, the Nikkei rallied at the opening on Tuesday.
“I would wait a few weeks to see if this is only a blast. I do not see short term impacts. LatAm already has its own volatility and risks,” said Alexandre Pierantoni, managing director corporate finance Kroll in São Paulo. “The big concern is about US interest rates and this looks to be assessed – for a decrease, in the short term. A recession would stimulate that.”
After ending 2023 on a soft note, economic activity picked up in economies such as Brazil, Chile and Ecuador in the first quarter but is projected to have lost momentum in the second quarter, Goldman Sachs analysts wrote in a report last week. Several central banks have slowed or paused rate-cutting cycles given the low rate-differential compared with the Fed Funds rates, while Brazil’s monetary authority could even hit reverse and start hiking in the near term, the report said.
US interest-rate futures contracts ended Monday reflecting bets the Fed will start cutting borrowing costs next month with a bigger-than-usual cut of 50 basis points, Reuters reported.
Should volatility in the markets persist in the days and weeks ahead, fundraising could become trickier for issuers as bond investors become more risk averse, said Lucas Ramos, associate manager at Peers Consulting & Technology in São Paulo.
“In a more volatile environment, investors may adopt more volatile strategies, and there may be limitations to access capital, which would create additional barriers to transactions and reduce risk appetite,” he said. “On the other hand, there may be good business opportunities, which may benefit companies with solid financial records, with good liquidity.”