The entrance to Ecopetrol’s Castilla oil rig is seen in Castilla La Nueva, Colombia, 26 June 2018Luisa Gonzalez (Portal)
Large companies in Latin America have reduced debt issuance in international markets this year due to high interest rates. A report by ratings firm Fitch Ratings shows that companies in the region issued $6.9 billion worth of debt in international markets in the first half of 2019. That’s down 37% year over year, when they issued $11.1 billion in bonds during the same period. The reduction in corporate debt constrains their plans for expansion and growth and constrains economic activity.
New corporate debt issuance this first half is focused on short-term refinancing, assured Fitch analysts Juan David Medellín and Diego Díaz, authors of the report. “Political uncertainty remains a relevant concern in the region as key legislative proposals in Chile and Colombia face delays and backlash, and the threat of government intervention in Mexico and Colombia’s energy sectors increases. In Brazil, the proposal for an ambitious new fiscal rule aims to limit real spending growth to 70% of real revenue growth, excluding one-off items,” the authors write.
“In summary, the combination of a weak business environment, high interest rates and low investor interest in high yield could deter new issuance in the second half of this year,” the analysts predict. 63% of the bonds maturing in the next few years (between 2023 and 2039) are from “junk” or “speculative” rated companies, which is why they pay investors high yields.
Mexico’s state-owned Petróleos Mexicanos ((Pemex) is the largest issuer with $12 billion of outstanding bonds, followed by Colombian oil company Ecopetrol with $2 billion. “Fitch believes Pemex’s refinancing prospects are good “It is highly uncertain given the lack of clear government support. Should the company succeed in refinancing its maturities, high funding costs would impact cash flow,” the analysts write.
The strengthening of the dollar adds to the risks described by Fitch. Since the Federal Reserve raised interest rates, emerging market currencies have depreciated, making dollar-denominated debt even more expensive. The two exceptions to this trend were the Colombian and Mexican peso. The latter began a strong appreciation series from the end of 2021.
In a recent publication, economists from the International Monetary Fund (IMF) assert that the strengthening of the dollar is leading to lower growth in emerging markets. “We find that the negative spillover effects of US dollar appreciation on emerging markets are disproportionately reduced compared to smaller advanced economies,” write fund specialists Rudolfs Bems and Racha Moussa.
“In emerging markets, a 10 percent appreciation in the US dollar combined with the forces of global financial markets means that economic output falls by 1.9 percent after one year, and this resistance has lasted for two and a half years,” the IMF said -Text. “In contrast, the negative impact in advanced economies is much smaller, peaking at 0.6% after one quarter and largely disappearing within a year,” the economists conclude.
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