From Brazil’s lackluster economic growth to a possible resurgence in green bonds to a showdown over Venezuela’s debt, the second half of the year will be notable for some key events and developments.
VISA AND FINTECHS
What’s the best way to disrupt a deep-seated tradition? Team up with other disruptors. That best explains why Visa is partnering with fintech startups in Latin America to wean consumers and merchants from their dependency on cash.
With an estimated 75% of financial transactions in the region completed with cash, the payments processing company is searching for fintechs with promising technology that promotes electronic payments.
Once it identifies a candidate, Visa shares its know-how or takes an equity stake in the startup to provide additional support, says Eduardo Coello, head of Visa for Latin America and the Caribbean. The company has a M&A team and consults with venture capital firms about possible opportunities. “The name of the game is cooperation,” he says.
In April, Visa announced a partnership with Rappi, the on-demand delivery company. Last year, Visa invested $12.5 million in YellowPepper, which has a smartphone app that allows consumers to make payments electronically and bank customers to access account information. That direct connection to legacy banks is often the biggest obstacle to new electronic payments system, says Coello.
He downplays the competitive tension that often arises between brick-and-mortar institutions and fintech upstarts. “In the end, even if they compete with traditional players, the opportunity to displace cash is so huge in Latin America that it helps the whole community,” he says.
If you’re betting that pension reform alone will reverse Brazil’s economic fortunes, you’re missing the bigger picture, says William Jackson, chief emerging markets economist at Capital Economics. While he agrees reform is imperative, “we should be cautious about thinking how much the reform will achieve.”
He says the outlook for Brazil began to look gloomier way before the current debate over pension reform. The drop in commodity exports and the burgeoning federal government deficit were already taking their toll on the economy.
Photo: William Jackson
True, pension fund spending eats up 10% of Brazil’s GDP, much like it does in more advanced industrial countries. “But I think it’s important to note that any one area of reform isn’t going to do much on its own, it’s going to require a cohesive approach,” argues Jackson.
“I think if pension reform is passed over the next six months, we might see a boost in the financial markets, but we may not see the improvements in GDP growth that some expect,” says Jackson. “I think we have heard from the government that growth may go to 3 or 4%. But I think growth will be stuck at this 1 to 2% rate as we’ve seen in recent years.”
Jackson says restrictive trade policies are another concern. “Brazil still has very high import tariff rates and this seems to diminish competition within the economy and increases the price of the imports,” he says. President Jair Bolsonaro talked about trade liberalization, but “we haven’t actually seen any progress on this yet.”
Sean Kidney sees more green bond activity ahead. “We are having discussions with a number of countries about growing programs and increasing green bond issuance, so I’m optimistic we’ll see an uptick by the end of this year,” says the CEO of the nonprofit Climate Bond Initiative.
Chile became the first country in Latin America to issue a sovereign green bond. “I know Colombia is looking towards a sovereign, in addition to Peru. But I suspect both will wait for Chile to issue.”
A big stumbling block in the bond market has been the lack of preferential pricing for green issues, according to Standard & Poor’s. But Kidney sees that changing.
“Last year, we saw two water utility bonds out of Chile, both of which got an 8 (basis point) advantage over other bond issues. The Chilean sovereign is building on something that is already happening,” Kidney says.
October is shaping up as a pivotal month for cash-strapped Venezuela and global investors who hold its debt. That’s when the state-oil company PDVSA is supposed to make a $913 million payment to bondholders to stay current on its 2020 debt.
Failing to meet its obligations could set in motion a complicated legal duel in US courts as the government of President Nicolas Maduro and bondholders face off over the fate of Citgo, a Texas-based energy company and PDVSA’s US asset. The majority stake in the company serves as collateral for the 2020 debt.
Missing a payment could clear the way for creditors to try to seize Citgo. But it won’t be easy. The Citgo shares also serve as collateral for a $1.5 billion loan that Venezuela received from Russian oil company Rosneft.
Whether Venezuela can scrape enough cash together to meet its October obligation is a big question. “At this point the only options to keep the (Citgo) assets safe are either to ask the US courts for protection or to convince bondholders to collaborate,” says Francisco Ghersi, managing director of the Venezuela-focused hedge fund Knossos Asset Management.
With US sanctions limiting Maduro’s ability to conduct international financial transactions, the decision on what comes next may ultimately lie with opposition leader Juan Guaidó, who has been recognized as interim president by the US and dozens of other countries. Guiadó has appointed a PDVSA ad-hoc board of directors which approved a May interest payment. Recently, the opposition government hired veteran debt restructuring lawyer Lee Buchheit, a former Cleary Gottlieb partner, to advise on restructuring the country’s debt.
One possibility may be that Guiadó opts for a debt restructuring, says Martin Schubert, CEO of European InterAmerican Finance. “They could decide to restructure that debt in the anticipation that they could try to restructure again if Guaidó assumes power should Maduro leave office,” says Schubert. “That may be their best bet for holding onto Citgo.”