Latin Finance - March/April 2012 - 18

local currency debt

with increased capital flows and the Liquidity has been another concern. exchange and the fiscal treatment of the advantages of accessing a larger market in “This market is five to 10 times less liquid instrument,” Moser adds. their own currency. than other asset classes. It is therefore Mexico was perhaps the best place “Is this incredible volatility sometimes more volatile, and you are adding to start, given it already has a fully driven by foreign investment flows into currency and rate risks,” says Polina convertible currency and a clear policy of your local bond market? Absolutely,” says Kurdyavko, senior portfolio manager at creating one curve for both foreign and Goodell. “But if the government issues BlueBay Asset Management. “If you are local investors alike. The quasi-sovereign increasing volatility, you need to make Pemex was also seen as an ideal candidate 40-year paper in their local currency and a huge chunk is taken up by foreign sure you are increasing liquidity as well.” given it already has a following in the investors, is that such a bad thing?” A local currency corporate index domestic markets and an abundance of For now, however, foreign investors may go some way toward remedying outstanding bonds there. that wish to participate in the market, this situation, says Robert Abad, “This instrument opens doors for a senior analyst at Western Asset private companies and other public sector at least the ones that don’t have a local presence, will have to stick to the global Management, which has $37 billion [issuers] to start convincing foreign under management in EM. “There is investors to start participating,” says Juan local currency format, or in the case of Mexico, GDNs. no local currency index, so no one will Pablo Newman, Mexico’s director of debt provide daily pricing on these issuance. corporates,” he says. “This is Eventually, some bankers EM Local Currency Bond Flows (US$m) very important as a measure see the market outgrowing Investors blow hot and cold on evolving asset class of liquidity.” GDNs, but for this to happen, BlueBay has been working more local securities will 5,000 with a large bank on just have to be cleared through 4,000 this very idea, but finding a Euroclear, and this means 3,000 reliable daily pricing source that Euroclear will have to has proven problematic, says work with local banks, getting 2,000 Kurdyavko. “You can’t create comfortable with operational 1,000 an index if you don’t have and trading risks involved, says 0 liquidity in the bonds, but Citigroup’s Gilfond. once you create it, it would “Over the next five to 10 -1,000 bring more liquidity,” she years Euroclear will expand -2,000 adds. its capabilities as a custodian -3,000 Given the multi-layers of or hire a bank to hold, say -4,000 risks involved, local currency certificados busatiles in corporate bonds still remain Mexico,” he adds. “The local -5,000 Jan-2006 Feb-2007 Mar-2008 Apr-2009 May-2010 Jun-2011 a bull market trade. This currency market will evolve may change as the asset class in much the same way as the Source: EPFR becomes more mainstream, equity space did, where new but for now borrowers must issues no longer involve ADRs, choose their windows carefully. but are simply local transactions.” Liquidity Dilemma Up to now, FX levels have played To bring both local and international However, investors are taking a more a major role in the appetite for such investors under one roof may ultimately cautious approach to local currency instruments. If the currency is recovering mean that countries will have to ease from recent lows as the Mexican peso capital controls and taxes that discourage markets in LatAm after showing considerable enthusiasm for the asset was early this year, accounts are likely to foreign accounts from participating in class, said Jim Barrineau, a senior be more inclined to participate. local markets. portfolio manager at ICE Canyon, at a “Timing has to be right,” says Katia “Governments would like to develop recent LatinFinance event. Bouazza, co-head of global capital their corporate bond markets, but have Investment options remain limited markets, Americas at HSBC. “It is not to have fiscal reforms to do away with the kind of product that will achieve withholding taxes for foreigners. Let’s face in this arena, often resulting in crowded trades that can generate substantial the liquidity you have with dollar it – this is a big issue for investors,” says selloffs during times of heightened risk benchmark bonds, but more and more Tim Goodell, head of emerging market aversion. “When pitched local currency, we are designing it to be more flexible debt sales at BBVA. investors are [now] saying not so fast,” for investors, and more opportunistic for This may be a slow process, admits Barrineau adds, as the buyside learns that issuers so that they can achieve size and Goodell, especially during election years. a market that has offered high returns can bring in a combination of local as well as Ultimately, governments will have to international investors.” LF weigh the cost of the volatility that comes quickly reverse such gains.

18 LatinFinance

March/April 2012

Latin Finance - March/April 2012

Table of Contents for the Digital Edition of Latin Finance - March/April 2012