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Breakingviews - Latin America debt will hit post-crisis sweet spot

Brazil's President Jair Bolsonaro gestures during the launching ceremony of the Voo Simples program, which are a set of measures to modernize rules and reduce costs in the general aviation sectors, at the Planalto Palace in Brasilia, Brazil, October 7, 2020. REUTERS/Ueslei Marcelino

NEW YORK (Reuters Breakingviews) - Latin America’s luck will change. Pandemic lockdowns caused more regional corporations to default between early May and June. But yield-starved investors will ignore some of these risks.

There’s a lot of bad news to ignore. The International Monetary Fund expects Latin American and Caribbean economies to contract by more than 8% in 2020, the most of any region, with only a 3.6% improvement in 2021. And non-financial companies with foreign debt have seen revenue dented by a combined $200 billion due to the pandemic, Fitch Ratings estimates. The credit ratings company expects sales to rebound by less than half that amount in 2021.

But there are green shoots. The largest economies regained some lost ground in the third quarter. U.S. appetite for manufactured products helped Mexico report seasonally adjusted quarter-on-quarter growth of 12%, and local stimulus contributed to record-breaking expansion of almost 8% in Brazil, led by President Jair Bolsonaro.

More fiscal stimulus in developed countries, especially spending on infrastructure, could further boost commodity prices. That would be good for some of the region’s largest companies by revenue, including Petrobras, Pemex and Vale. Meanwhile, regional companies’ cash piles have grown to around 2.4 times short-term debt in 2020 from less than 2 times in 2019, Moody’s Investors Service calculates. And with a few exceptions, most companies no longer have significant mismatches between dollar debt and dollar revenues.

Country-specific risks remain. For example, Chile is getting a new constitution, and Peru saw two presidents leave office within a week in November. Also, around half of the region’s countries are on Fitch Ratings’ negative watch list for credit ratings downgrades. That will weigh on corporates with close links to states, like Colombia’s Ecopetrol. But the returns on offer in the region may be too alluring for investors to pass up given low U.S. and European yields. The yield gap between Latin American corporates bonds and U.S. government debt has fallen by almost three-fifths since March, to around 370 basis points by mid-December, according to an ICE Bank of America index. Even so, average spreads remain among the widest in emerging markets. That sort of reward may be enough for investors to take on the risks.

- This is a Breakingviews prediction for 2021. To see more of our predictions, click here

Breakingviews

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