Convening on Latin Debt

It was inevitable that Argentina, struggling to stave off a financial crisis, should have concentrated the minds of participants at LatinFinance’s first Latin American Borrowers and Investors Forum in Miami, FL. Argentina’s Finance Secretary, Daniel Marx, who probably has the most arduous job in international finance these days, was the first to address the group. He emphasized that Argentina’s difficulties are manageable and mainly short-term. The debt burden is bearable-lighter than many comparable sovereigns-and the government has the luxury of drawing heavily on its local capital markets.

But Richard Madigan, director of Latin American investments at Offitbank, said Argentina, which represents almost a fourth of global emerging market debt, is of great concern to investors. Even though most investors say they are underweight, Madigan noted, “The fact remains that everyone owns some [Argentine debt].”

The rise of local capital markets in the region was an important theme at the conference. Argentina, Colombia, Mexico, Chile and Brazil have all made major strides in strengthening local markets.

Thanks to the growth of institutional investors in the region, local borrowers from both public and private sectors can now approach their home markets for reasonably priced long-term capital. Local private pension and mutual funds have become big buyers of local currency securities although it is mainly public-sector paper.

The benefits to issuers are obvious: access to capital depends less on the whims of the international markets and there is no currency risk. Sophisticated, liquid derivatives markets, especially in Brazil, allow borrowers to better manage interest rate volatility.

Lacey Gallagher, director of emerging market research at CSFB, noted that domestic investors are more stable than global investors-due to regulations limiting their ability to buy foreign assets-and have a different outlook on country risk.

The challenge now is to deepen structural reforms and reverse crowding out by the public sector to lower the cost of capital for the private sector. Jeffrey Kaufman, senior vice president at Putnam Investments, said that in spite of widespread macroeconomic reforms, Latin America has shown no “cyclically-adjusted structural improvements.”

Conference debate included themes such as liquidity and demands of a consolidating financial industry. Participants also lamented the gradual eclipse of dedicated country and regional fund managers willing to analyze smaller markets and issuers, or take positions in illiquid instruments.

Joyce Chang, global head of international fixed income research at Chase, pointed out a related theme, the flight to quality.

Investment-grade and crossover credits accounted for 30% of the $75.5 billion in emerging market issuance in 1998. So far this year, these credits issued over 40% of debt. Changes in the investor base mirror this pattern.

Politics are likely to color the market’s outlook in 2001. The political transition in Mexico, a satisfactory resolution of the US presidential election, unrest in the Andean region and, of course, the outcome of the Argentine crisis are likely to be important market forces. Other factors include the value of the euro, the price of oil and the prospects for the US economy.

Roberto Newell, an economic adviser to President-elect Vicente Fox of Mexico at the time of the conference, gave one of the most impressive presentations at the conference, highlighting some of the incoming administration’s policy priorities, including changes to the labor market as well asderegulation and reforms in state-owned companies such as Pemex.

Newell said Mexico must grow to increase opportunities at the bottom of the social scale. The private sector will be the engine of growth, based less on resource-oriented industries.” He said, microeconomic and social reforms, and a streamlined public sector will enable Mexico to attain a sustainable annual growth rate of 7% toward the end of Fox’s six-year mandate.

On the following pages, LatinFinance reports on some key issues explored by participants in workshops at the conference. LF