Bloomberg News

Panama Debt Tops Emerging Markets as Latin America Is Haven

December 29, 2011

(Updates prices starting from 14th paragraph.)

Dec. 28 (Bloomberg) -- Dollar bonds of Latin American nations from Panama to Uruguay provided the best returns in emerging markets this year, a rally that may extend into 2012 as lower debt and higher foreign reserves limit the effects of the European debt crisis.

Panama’s notes advanced 16 percent this year with annual volatility of 4.5 through Dec. 27, giving them a risk-adjusted return of 3.5 percent, according to data compiled by Bloomberg and JPMorgan Chase & Co. Uruguay’s notes returned 20 percent with volatility of 6.3 for a 3.2 percent risk-adjusted return. Seven of the top 10 bond markets were in Latin America, while debt from Pakistan and Egypt fell the most, the data show.

Latin American nations won 12 credit-rating or outlook upgrades as Panama’s $13.5 billion infrastructure investment plan boosted growth, Colombia pledged to cut its budget gap in half and Uruguay boosted foreign reserves 27 percent in a year. Shrinking debt ratios and higher ratings make the region’s bonds less susceptible to a slowing global economy while Europe’s recession may keep Hungarian and Turkish bonds lagging behind, according to Aviva Investors and Aberdeen Asset Management Plc.

“Latin America, despite the global slowdown expectations next year, is an area of relative calm,” said Jeremy Brewin, who helps manage about $4 billion as head of emerging-market debt at Aviva in London. “It feels like a safe haven.”

Stocks Plunge

The region’s bonds gained 13 percent this year on average, outpacing the 2.1 percent advance in emerging Europe and 8.7 percent increase in Asia, according to JPMorgan’s EMBI Global Index. Latin American bond yields fell 45 basis points, or 0.45 percentage point, on average to 6.53.

Their return to volatility ratio was 2.3 percent, compared with 0.3 percent in developing European nations and 1.7 percent in Asia. The same risk-adjusted return ratio for Latin America debt was 2 percent in 2010 and 3.2 percent in 2009.

Dollar debt handed investors the highest returns with the smallest price swings among developing-country assets this year. Dollar bonds gained an average 8.2 percent with volatility of 4.8, according to data compiled by Bloomberg and JPMorgan. Emerging-market stocks lost 20 percent with volatility of 23, while local-currency bonds lost 1.1 percent in dollar terms with volatility of 11, according to Bloomberg, JPMorgan and MSCI Inc. data.

Debt Reduction

Latin America is the only region that has reduced government debt as a percentage of gross domestic product in the past two years as countries including Brazil reduced fiscal stimulus to contain inflation after economic growth quickened. Gross debt declined on average to 50 percent of GDP from 51 percent in 2009, according to the International Monetary Fund. Eastern Europe’s debt-to-GDP rose to 46.7 percent from 45.4 percent while Asia’s climbed to 35 percent from 31 percent.

Brazil’s debt equaled 65 percent of GDP, down from 68 percent in 2009, according to the IMF, as President Dilma Rousseff cut 50 billion reais ($27 billion) from this year’s budget to help the central bank rein in the fastest inflation in six years. Hungary’s ratio rose to 80 percent from 78 percent in 2009 as slower growth reduced revenue, according to the Economy Ministry. Poland’s increased to 56 percent of GDP from 51 percent, the IMF data shows.

Latin America’s foreign-currency reserves are set to increase 18 percent this year to a record $772 billion, compared with an increase of 13 percent in Eastern Europe, including Russia, according to the IMF.

Chile Upgrade

Improved credit ratings have allowed Latin America’s debt to benefit the most from a rally in U.S. Treasuries, the benchmark for emerging-market assets, as investors shun riskier securities in Eastern Europe, according to Viktor Szabo, who helps manage about $7 billion in emerging-market debt at Aberdeen in London. Colombia won an investment grade rating from all three major rating companies this year while Chile was raised by Fitch Ratings in February to A+, the fifth-highest level.

“The tendency is for Latin America to continue to improve,” said Szabo, who has an overweight position in Latin America debt and underweight in European securities. “There will be more capital flight from Eastern Europe to Latin America.”

Paul McNamara, who oversees $7 billion at GAM Investment Management, said Eastern Europe’s higher yields will make countries such as Poland more attractive than Brazil next year as European policy makers move to contain the debt crisis.

‘Cheap’ Europe

At 4.87 percent, yields on Poland’s dollar bonds due in 2021 were 148 basis points higher than similar-maturity Brazilian notes. The gap has increased 87 basis points since April, when Poland issued the bonds. Poland is rated A- at S&P, two steps above Brazil’s BBB rating.

“You don’t get a lot of upside in Latin American credit,” McNamara said in a telephone interview from London. “It’s time to start to look at central and Eastern Europe. That’s what looks cheap. Europe will have a pretty nasty recession, but we don’t get a breakup of the euro zone.”

Panama’s dollar borrowing costs fell 107 basis points to 4.17 percent this year, compared with an average decline of 10 basis points among emerging markets, according to JPMorgan indexes.

The $44-billion economy is likely to grow 10 percent this year, the fastest pace since 2008, Finance Minister Frank De Lima said on Nov. 30, fueled in part by an expansion of the Panama Canal. Moody’s raised in August the outlook on Panama’s Baa3 credit rating to positive, citing the country’s “favorable debt dynamics.” The government plans to cut debt to 40 percent of GDP by 2014 from 43 percent this year.

Colombia’s Budget

Yields on Uruguay’s benchmark bonds due in 2022 fell 148 basis points this year and reached a record low of 3.81 percent on Dec. 21, after stronger trade with Brazil, Latin America’s largest economy, helped the government reduce debt to the equivalent of 44 percent of GDP from 50 percent in 2008.

Colombia’s bonds rose 14 percent this year, based on JPMorgan’s EMBI Global Index, following a gain of 11 percent in 2010 and 17 percent in 2009. The nation’s debt handed investors a risk-adjusted return of 2.6 percent in 2011, according to data compiled by Bloomberg.

Colombia joined Peru, Panama, Chile, Brazil and Mexico as investment-grade countries after lawmakers passed legislation that targets a central government deficit of no more than 2.3 percent of GDP in 2014, down from an estimated 4 percent this year.

Pakistan, Egypt

“This is an environment where fundamentals prevail,” said Enzo Puntillo, who oversees $1.5 billion of assets as head of emerging-market fixed income at Swiss & Global Asset Management AG in Zurich. “These countries are all higher quality converged or are converging to full investment-grade status. They are at lower risk of Europe banking contagion risk.”

Pakistan’s bonds were among the worst performers in emerging markets this year, falling 9.5 percent with volatility of 8, for a risk-adjusted return of -1.2 percent, as floods and terror attacks slowed foreign investment. Egypt’s debt was the next worst, slumping 11 percent with swings of 11 for a risk- adjusted return of -1 percent, as the popular revolt that toppled President Hosni Mubarak in February shut the country out of international bond markets.

Debt issued by Belize, a Central American country with a population of fewer than 200,000, was the biggest decliner, losing 24 percent with volatility of 16 for a risk-adjusted return of -1.5 percent.

Scarcity Value

Latin American countries including Brazil are reducing overseas debt sales as demand grows for their local bonds. Brazil’s foreign-currency debt fell to 80.9 billion reais ($43.5 billion) in November from 204 billion reais at the end of 2004, while its real-denominated bonds rose to 1.8 trillion reais from 810 billion reais, according to the Treasury.

Latin America’s foreign debt fell to 20 percent of GDP this year from 37 percent in 2004 while Asia’s dropped to 15 percent from 23 percent, according to the IMF data. Eastern Europe’s foreign debt rose to 66 percent of GDP from 50 percent.

The cutback in Latin American overseas offerings is creating a shortage of the region’s dollar bonds that’s helping drive up their prices, said Carlos Legaspy, who manages about $300 million at San Diego-based Precise Securities.

“Diminishing supply, good fundamentals, relatively good liquidity with yields not that low,” Legaspy said. “All these reasons have made it attractive for a fixed-income investor.”

--With assistance from Shin Pei in New York, Ben Bain in Mexico City, Andrea Jaramillo in Bogota and Sebastian Boyd in Santiago. Editors: David Papadopoulos, Laura Zelenko.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net Nathan Gill in Quito at ngill4@bloomberg.net.

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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