Latin Finance - September/October 2014 - 14

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take steps to moderate what, for much of the past decade, had been
widely seen as the singular pursuit of economic populism.
Attempts by Latin America's so-called populist governments
towards reengaging with international capital had appeared so
pronounced in 2014 that Wall Street analysts widely hailed the
advent of a newfound "pragmatism" among erstwhile leftist
ideologues.
Populist governments across the region, spurred on in part
by a changing global economic cycle, have in many instances
sought to endear themselves to sources of international capital,
courting investment from strategic funds, private equity firms and
international capital markets.

POPULAR PRESSURE: A demonstrator in
Argentina holds a placard reading "homeland
or vultures", referring to the state's name for
holdout creditors

This has taken different forms. Despite the government's
anti-capitalist rhetoric over the past decade, Venezuela's state
oil company PDVSA has maintained links with the international
financial community, itself evidence of a more pragmatic stance.
The country still faces shortages of food and other basic products, a
scarcity of dollars, and the hangover from a series of expropriations
of private businesses. But since the beginning of 2014, the country
has shown signs of a tilt towards more pragmatic policymaking,
reshuffling top government officials, and adjusting its foreign
currency regime.
Other countries have come further. Paraguay, for example, has
sought to deepen ties with international investors since President
Horacio Cartes, a former businessman, came to power in 2013. The
sovereign has reengaged with international bond investors: under
the previous administration, it debuted in the cross-border market
in January 2013 with a $500 million 10-year note, and returned in
August this year to stretch its maturity profile to 30 years with a $1
billion sale. In contrast to Venezuela, Paraguay's government hopes
the higher profile it gains from tapping international markets will
pique the interest of other investors, encouraging the flow of foreign
direct investment.
Ecuador, too, sought a rapprochement with international markets
this year: its return to the bond markets in June was particularly
striking, marking a comeback since its 2008 default.

14 L ATINFINA NCE.COM - September/October 2014

Changing tides
A number of factors have pushed nations towards a more pragmatic
approach to economic management: the prospect of tightening
global liquidity and weakening commodity prices has accelerated the
process in parts of the region that had shunned - or were shunned by
- international investors, says James Lockhart-Smith, head of Latin
America at investment research firm Maplecroft.
Quantitative easing and low interest rates in the developed world,
as well as strong Chinese demand for commodities, had kept the
financial tailwinds blowing until early 2013. But faced with a less
benign global economic environment, governments in Argentina,
Ecuador and Venezuela, for example, have come under growing
pressure to open up to new sources of capital and financing.
"If you look at the 2000s up to 2008, to the global financial crisis,
this was a period of pretty good growth for most of these economies.
If you were Chávez, or a proto-Chávez, it was possible to play politics
with your economic policy and not pay excessive costs," says
Lockhart-Smith.
Emerging economies have largely escaped the full force of the
global financial crisis thanks to counter-cyclical policy action and
western central banks, which encouraged record capital flows to
developing markets after 2009. That changed in May 2013, when the
US Federal Reserve hinted that it might end its quantitative easing
program, causing portfolio investors to retrench from emerging
markets.
But so far this year, inflows to Latin American capital markets
have rebounded, as companies and governments look to lock in low
rates before the global interest rate cycle turns. Bond markets, for
example, were the busiest they have ever been in the first six months
of the year: Latin borrowers took $85.5 billion from the international
debt markets, nearly $20 billion more than in the second half of 2013,
according to data from Dealogic.
Meanwhile, as investors face up to the prospect of tightening
global liquidity, commodity prices - and the role of China in setting
those values - are also weakening, notes Lockhart-Smith.
"In this new environment, Latin American countries which have
been characterized by loose monetary and fiscal policies need to
be much more proactive in pursuing capital," he says. "They also
have stronger downward pressures on their currencies, so they're
more exposed to the negative consequences of [developed markets]
printing money to finance deficits."
In addition, the role of China in Latin America - so vital to the
region's growth story over the past decade - is also changing, says
Michael Shifter, president of the Inter-American Dialogue, a think
tank.
Some Latin American governments, such as Ecuador's, have
begun to look for ways to minimize reliance on Chinese funding,
Shifter says. At the same time, the Chinese government is concerned
JAMES LOCKHART-SMITH, MAPLECROFT

"IN THIS NEW ENVIRONMENT, LATIN
AMERICAN COUNTRIES WHICH
HAVE BEEN CHARACTERIZED BY
LOOSE MONETARY AND FISCAL
POLICIES NEED TO BE MUCH MORE
PROACTIVE IN PURSUING CAPITAL"
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