Unlocking global value

GLOBAL INVESTOR 2.07 Basics — 24
Table 1
External and local leverage ratios
The stock of sovereign external debt as a proportion of GDP in large Latin
American credits is generally lower than that of Eastern European credits.
Nevertheless, Mexico (BBB/BBB) and Brazil (BB/BB) are rated lower
than credits such as Hungary (BBB+/BBB+) and Poland (BBB+/A-), as
investors still perceive a meaningful policy direction risk in Latin America.
Source: Credit Suisse
Sovereign debt
% of GDP
LATAM
1998
External
2000
External
1998
Domestic
2000
Domestic
Brazil 11.7 6.8 33.9 55.1
Mexico 22.0 8.2 9.1 16.5
EMEA
Russia 61.1 4.4 8.7 4.1
Turkey 26.4 22.4 18.5 45.2
Poland 20.3 19.5 20.2 31.4
Hungary 24.1 22.1 37.0 46.4
South Africa 2.2 4.6 46.7 28.7
ASIA
Indonesia 72.2 21.9 47.1 12.9
Philippines 35.3 40.8 32.3 38.3
Table 2
Selected economic indicators
Most credits have been successful in bringing down inflation and continue
to converge to inflation rates observed in developed markets. The notable
exception is Russia where the price level remains relatively elevated at close
to 9%. External performance is not homogeneous with commodity exporters
such as Russia and Brazil exhibiting large and growing current account
surpluse s. The remaining credits show deficits, which can be large as in the
case of Turkey and Hungary. Source: Credit Suisse
Population
(million)
Per capita
GDP
(USD)
General
government
debt
(% GDP
2006)
Current
account
balance
(% GDP
2006)
Consumer
Price Index
(%)
Brazil 179.6 3021 72.0 1.2 3.1
Hungary 10.1 5129 68.5 –7.6 6.5
Mexico 108.9 6125 34.3 –0.5 4.1
Russia 142.8 2116 10.6 10.4 9.0
Poland 38.5 4927 48.8 –1.7 1.4
Turkey 74.1 2101 61.7 –8.7 9.7
South Africa 48.4 2569 31.6 –5.8 5.8
push in the development of local capital markets. Brazil is probably
the most notable example of this effort, which intensified as a result
of the “Lula crisis” in 2002, when Brazilian spreads on hard
currency bonds rose to almost 2500 basis points. As a proportion
of gross domestic product (GDP), local markets now stand at 55%
(see Table 1), or 13 percentage points higher than in 2002. Similarly,
the total outstanding stock of local sovereign debt currently
amounts to an impressive USD 500 billion, most of which is in the
form of fixed-rate bonds or instruments tied to the short-term
benchmark rate (Selic, the Banco Central do Brasil’s overnight
lending rate).
Despite the fact that policymakers have not recently shown
much interest in further domestic market development, Turkey has
experienced one of the fastest growth rates in this space since
1998. In nominal terms, Turkey’s local market is about a third of the
size of Brazil’s market or approximately USD 175 billion. However,
Turkey is a good example for policymakers of how a reasonably
developed and healthy local market does not amount to having an
insurance policy that will completely insulate the credit from adverse
shocks. In the absence of a strong anchor, external imbalances
can and usually do lead to foreign exchange volatility, with
adverse consequences for inflation dynamics. After the speculative
attack on the Turkish lira last summer, local short-term yields rose
by more than 900 basis points to almost 25%, and the currency
depreciated by approximately 35% in less than two months. However,
it is reasonable to make the argument that increased reliance
on local debt protected the fiscal accounts from sharp deterioration,
given the limited impact of external debt service payments on
government expenditures.
Local yield curves normally have a relatively low duration issuance
profile. Issuance has traditionally concentrated on shortduration
securities with the occasional long-duration bond, where
liquid ity is not always available. The need to finance a varied number
of long-term projects and in particular the desire to develop a
mortgage market that allows the rapid development of the housing
sector, has encouraged governments to start issuing longer-dated
securities. To ensure that key maturities develop as benchmarks,
issuance amounts now tend to be larger than in the past, and retaps
of specific bonds are commonplace. Mexico and Russia are
some of the credits with the most established yield curves at the
long end. While the duration extension of the Russian curve does
not appear to be highly related to the development of the housing
market, the Mexican curve has extended partly in response to a
carefully crafted plan by the government to make housing affordable
for the average Mexican over the next few decades. In the last
12 months, Mexico has issued approximately USD 11 billion in pesodenominated
government bonds (MBONOS) with maturities ranging
from 2023 up to 2036. Similarly, Russia has issued a fair amount of
long-duration securities, with the lion’s share of the issuance concentrated
in the 2021, 2024 and 2036 government bonds (RFLBs).
Investors have noticed improved EM fundamentals
Demand for EM domestic bonds has gradually increased as investors
have come to realize that the meaningful improvement in economic
fundamentals may be long-lasting. High growth rates, sound
fiscal accounts and large external surpluses have encouraged investors
to migrate from hard currency debt into local currency instruments.
Credit risk perceptions have improved so much that investors
are now willing to add currency and local regulatory risk