Uruguay seeks to seduce investors before sustainable bond debut

RIO DE JANEIRO, BRAZIL – According to a senior member of the government’s economic team, Uruguay plans to issue a new type of Sustainability Linked Bond (SLB) as soon as the third quarter of this year, when it accesses global debt markets for the first time.

The SLB will pay a lower coupon to reward Uruguay if it exceeds the environmental targets of the Paris Agreement, in what could be a first for a sovereign issuer of this type of debt, said Marcela Bensión, director of the economic policy unit at the Ministry of Economy and Finance. It will also have a higher coupon if targets are not met.

Bensión said Tuesday in an interview at the ministry that they are already having talks with investors and finalizing the more technical aspects of the bond.

SLBs, which link interest payments to achieving ethical goals, are gaining popularity as issuers have more flexibility in using proceeds than with environmental, social, and governance (ESG) bonds that typically finance specific projects. Chile pioneered issuing SLBs in March when it sold US$2 billion in 20-year bonds with an increased coupon that pays investors a higher interest rate if it fails to meet renewable energy and greenhouse gas targets.

Bensión declined to comment on the size of Uruguay’s first SLB and said it could be a medium-duration bond. She noted that Economy Ministry officials would discuss the U.S. dollar bond with investors in London this month after meeting with investors in the U.S. in April.

Uruguay plans to sell about US$3.7 billion in local and international debt this year to finance part of the deficit, according to the Economy Ministry’s latest estimate. Reducing the deficit to manageable levels is a cornerstone of President Luis Lacalle Pou’s economic program. Spending restraint and a fast-growing economy helped the government reduce the deficit more than it had forecast to 4.3% of the gross domestic product (GDP) in 2021.

The Administration has committed to a deficit of 3.1% of GDP this year, even as it spends more to help families struggling with the highest inflation since 2020, Bensión said.

In recent weeks, the government announced more than US$200 million in public sector wage increases, higher pension, and social assistance payments, as well as tax breaks on essential staples such as meat, among other measures to mitigate the impact of high inflation on households.

These transitional and targeted measures respond to a specific situation caused by the commodity surge exacerbated by the conflict between Russia and Ukraine, he said.

With information from Bloomberg