Wider Bond Spreads Are Here to Stay Amid Unrest in Latin America

Sydney Maki
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Crisis Is Rocking Latin America. Peru Is an Island of Uneasy Calm.

(Bloomberg) -- A tide of social unrest across Latin America is driving bond spreads wider, and the increased risk premium is likely here to stay, according to investors.

In Chile and Colombia, which had some of the lowest borrowing costs in Latin America, angry citizens are forcing the governments to devote more resources to social welfare programs, even getting lawmakers to rewrite the constitution in Chile. That’s set to strain budgets and may force wider deficits with the risk of lower credit ratings in the future.

“Social unrest and greater demands from voters will probably lead to lower growth, greater fiscal costs, a continued push toward extremes in terms of policy making,” said Aaron Gifford, an emerging-market sovereign analyst at T. Rowe Price Associates Inc. in Baltimore, Maryland. “Inevitably, I think that means higher risk premium. That means wider spreads.”

While the nations faced street protests with unique domestic drivers, investors watched as a contagion effect pushed the currencies of Chile, Colombia and Brazil to record lows last week. The average yield on Latin American dollar-denominated debt rose in the past two months to its highest since 2016 in November, according to a Bloomberg Barclays index.

Even with Argentina’s bonds already trading near 40 cents on the dollar, spreads could widen further if the government fails to strike a deal with creditors in 2020.

In Chile, the extra yield investors demand over U.S. Treasuries is trading 25 basis points wider after violent anti-government protests erupted on Oct. 18, leading to the biggest month-on-month decline in economic output in at least two decades. Officials announced a $5.5 billion stimulus package on Monday to help offset the economic cost.

Election irregularities in Bolivia led to the sudden resignation of Evo Morales after almost 14 years in power, fueling unrest in the Andean nation that didn’t subside until after an agreement to call new elections. The country’s bonds recovered after an initial sell-off.

And in Ecuador, President Lenin Moreno is dependent on congress to push through reforms to meet the terms of an International Monetary Fund program. Bonds tumbled to a record after Congress rejected an initial package, and investors were hit with some of the biggest losses in emerging-market bonds in November.

Of the 11 worst performers for developing nation debt in the last three months, six are Latin American nations, according to JPMorgan indexes.

“These are crazy events that are happening and very unforeseen at least in the typical day-to-day analysis we all do as investors,” said T. Rowe’s Gifford. “We’re having to broaden our horizons and incorporate new risk factors and be a little bit more nimble.”

Maybe craziest of all is Suriname, where the president’s conviction for murder last week fueled a rout in the South American nation’s only dollar bond, which was already suffering from deteriorating fiscal accounts.

All the same, pockets of stability still exist. Peru has low dollar debt and avoided lingering and widespread street protests despite President Martin Vizcarra’s decision to dissolve Congress. Brazil, meantime, outperformed in 2019 on the back of an advancing reform agenda, even after President Donald Trump reinstated steel tariffs.

Mexican assets have generally performed well under President Andres Manuel Lopez Obrador who has run the country for a year. While growth has stagnated along with investment and capital market activity, high interest rates and conservative fiscal management has propped up the peso.

“Protests have had a high success rate, and we should expect to see it across multiple countries,” said Shamaila Khan, the New York-based director of emerging-market debt at AllianceBernstein.

(Updates with Argentina bond price in fifth paragraph; Chile’s spread and fiscal stimulus announcement in sixth paragraph)

--With assistance from Justin Villamil, Tom Lagerman, Scott Squires and Dave Merrill.

To contact the reporter on this story: Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Carolina Wilson at cwilson166@bloomberg.net, Daniel Cancel, Philip Sanders

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