Navigating Sovereign Bonds: Latin America’s 2023 Landscape
In 2023, sovereign bonds of Latin American countries exhibited no major surprises in terms of their overall robustness.
However, there were notable shifts in the rankings of countries with lower credit quality and reputation.
Venezuela persisted as the nation with the lowest quality sovereign fixed income, but Argentina improved its standing, moving away from its previously second-worst position.
This left Bolivia and Ecuador to occupy the lower ranks as of December 28, 2023.
The most universally accepted method to assess emerging countries is by observing the country risk as calculated by JP Morgan’s Emerging Markets Bond Index (EMBI).
The EMBI is determined by comparing the yields of emerging market bonds with those of U.S. Treasury bonds.
The yield difference, known as the ‘spread,’ indicates the perceived risk of investing in emerging market bonds relative to lower-risk bonds.
Venezuela
For several years, Venezuelan bonds have been among the worst globally. In 2023, however, they showed significant improvement.
The country began the year with a country risk of over 44,800 points, ending it with 21,036.55 points on December 28, 2023.
This change was attributed to Venezuelan debt being traded again on Wall Street.
Bolivia
Bolivian debt experienced a challenging year in 2023. From a country risk of 563 at the end of 2022, it climbed to 2,228 a year later, ranking as the second-worst in the region in terms of EMBI.
Market concerns about Bolivia’s ability to meet its obligations grew due to the significant drop in the country’s net reserves over recent years.
Ecuador
By the end of 2023, Ecuadorian bonds were ranked third-lowest in Latin America. The Ecuadorian country risk nearly doubled over the year (from 1,050 to 2,062 points).
This was primarily due to political issues (the institutional crisis leading to Guillermo Lasso’s departure from power) and subsequent financial concerns.
The new president, Daniel Noboa’s critical assessment of the inherited situation raises doubts about debt sustainability.
Argentina
Traditionally following Venezuela in terms of public debt issues, Argentina improved to the fourth position in 2023.
This was partly due to the deterioration of Ecuadorian and Bolivian bonds but also due to its improvements.
Argentina’s country risk ended the year at 1,895 points, down from 2,196 at the start.
The EMBI neared 2,700 points during the year, but pro-market candidate Javier Milei’s election and his pledge to cut the fiscal deficit boosted positive expectations.
Javier Milei, President of Argentina, saw the country’s risk decrease from its 2023 peak following his election victory, with promises to reduce the national deficit.
Brazil, Chile, and Colombia
In 2023, the bond performance in Latin America, specifically for Brazil, Chile, and Colombia, showed a positive outlook with various factors influencing their market performance.
According to Bloomberg Línea, large commodity exporters like Brazil and Chile were expected to benefit from increased demand from China as Beijing moved away from its Covid Zero policies.
This shift in demand was anticipated to have a significant impact on the bond markets in these countries.
Brazil, in particular, was seen as a favorable destination for bond investments, with investors keeping a close eye on the policies of President-elect Luiz Inacio Lula da Silva’s government for fiscal responsibility.
The Brazilian bond market was also influenced by the global economic context, especially in relation to commodity prices and China’s economic reopening.
Improvements in El Salvador
El Salvador ended 2022 with a country risk of 1,839 points. However, in 2023, the outlook for this Central American nation improved significantly, boosting bond prices and leading to an EMBI of 686 points by year-end.
Latin America’s Country Risk Summary
– Latin America (average): 368 points
– Honduras: 365 points
– Mexico: 341 points
– Global (average): 322 points
– Panama: 284 points
– Colombia: 275 points
– Dominican Republic: 250 points
– Costa Rica: 239 points
– Guatemala: 213 points
– Brazil: 201 points
– Paraguay: 190 points
– Peru: 162 points
– Chile: 135 points
– Uruguay: 88 points
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