Latin Finance - May 2008 - 22

markets outlook changes? I doubt it will be good.” Venezuela, and to a lesser extent Ecuador, is in a similar situation regarding oil. They lack the savings and proper investment that has characterized the Chilean management of copper-related gains, for example. A serious oil retreat would have a devastating impact. But Smith’s bank does not see crude dropping any time soon, with long-range forecasts putting it at above $80 per barrel, at least through 2013, versus more than $110 mid-April. The outlook for commodities across the board is also quite bullish, based on a forecast continued boom in India, China, and even subSaharan Africa. A weak dollar and global turmoil has also lured more investor cash. “I would be surprised to see commodity price forecasts fall rapidly anytime soon,” says Smith. “The outlook for Latin exports is still bright. But that doesn’t mean you shouldn’t save for a rainy day.” A boost in reserves has been a strong point of the pro-market group, allowing better debt management. Brazil’s reserves have ballooned to $209 billion and Mexico’s to $78 billion, according to the IIF. In the past, international disturbances have meant huge capital outflows, but for the first time this is not happening. “The increasing spreads of sovereign bonds in LatAm is much less than the increase in spreads in high yield bonds in the US,” says Guillermo Perry, a consultant who was World Bank chief LatAm economist from 1996 to 2007. “Equities markets have suffered, but less than expected.” Local Money, Local Markets The global credit crisis has virtually shut down international bond markets since late 2007. The high price of dollar funds has served to highlight the development of local debt markets, especially in Mexico and Brazil. Investors predict an issuance spike during the second half of 2008, as several corporates will need to come to market, even if they have to pay high premiums. Appetite should be strong as investors reassess risk. For a long time, they considered the US and Europe to be safe havens. “It should be increasingly obvious that emerging markets’ growth rates are higher and that the capital markets are growing fast,” says Booth. “But more importantly that the US is a risky place to invest. The idea that we somehow price EM debt over treasuries is an anachronism,” adds the investor, who has a lot of money riding on his prediction coming true. “I can make a case that there is a higher risk of sovereign default risk in the next 10 years in Italy than in Brazil,” says Booth, pointing to the latter’s growing reserves, prudent policy decisions, industrial base and willingness to create a fiscal surplus. Booth identifies infrastructure, resources and sectors driven by consumer demand as the most attractive debt investments going forward. “The regulatory environment is clearer, there is a clear sense of the importance of property rights in most countries, and now in the last five years you have low inflation,” Booth says. Perhaps the biggest recent shift has been the ability to borrow in local currency. “Moving to local denomination will be the dominant theme in the currency composition of Latin sovereign borrowing,” says David Rolley, vice president and portfolio manager at Loomis Sayles. “The local capital markets have become deeper and more sophisticated. That is a profound change from most of the last 20 years, and I think it’s permanent.” Corporate Suppliers As local debt comes to dominate the composition of borrowing, Rolley says investors should hope for a similar shift away from governments as the largest borrowers. This would mean a healthy supply of corporate debt and financing for badly needed projects. Natural resources are powerful drivers of growth, but so far, infrastructure spending has fallen short. The challenge is for the region’s economies to decide whether that will come from public or private investment. Infrastructure has generated great interest in LatAm, as evidenced by the 41 billion peso privatization of Mexico’s first Farac toll road that drew bids from around the globe. But getting funds to the vast amount of transportation and power projects needed in the region depends on development of a local investor base. “Latin America is undersaved, and because it’s undersaved, it’s underinvested,” says Rolley, who sees Chile and Mexico as having made the most progress, and Brazil having considerable work to do. Mortgage-related problems in the US have not slowed Mexico’s MBS market, the most developed in the region. Structured finance is expected to proliferate, with some caution. “We see the development of structured 22 LATINFINANCE May 2008

Latin Finance - May 2008

Table of Contents for the Digital Edition of Latin Finance - May 2008