According to the study in question Latin American Reserve Fund (FLAR), the debt in dollars of companies in Latin America deserves to be cause for alert. The prospects for the strengthening of the US currency, combined with lower international liquidity and the rise in returns demanded by investors, show a complex panorama that should be the object of attention.
In this regard, the figures are eloquent. During the period after the financial crisis of 2008, the stimulus measures adopted by the central banks and the authorities of the developed countries led to a investor’s search for higher returns.
In this sense, the bonds issued by the Latin American non-financial companies have become an attractive option, among other reasons because the balance of international reserves in the region became considerable and indicated that there would be no problems in terms of availability of resources for the payment of interest or principal. At the same time, for a firm in the area it was cheaper to borrow in dollars than in their own currency.
As a result, Between 2010 and 2020, credits in dollars doubled, approaching the equivalent of 80 percent of exports. Now that the wind is blowing in another direction, dangers appear that before might have been described as manageable.
In order to assess what these are, Turner and Giraldo took data from 160 Latin American companies who have participated in the debt market and found several striking findings. Although no major disruptions are yet in sight, the study serves as an early warning that regulators across the region should heed.
Key findings based on 160 companies
- The first finding is that currency mismatches of financial companies have increased. In this way, there would be an inadequate coverage that can be very onerous if a strong variation in the exchange rates occurs.
- On the other hand, the researchers show that there is a higher leverage now, which is related to borrowing in dollars, in the case of firms in the tradable sector. The latter, by the way, do not record improvements in the return on capital despite the fact that the devaluation of regional currencies has been constant.
As a complement to the above, it is notable that the risk premiums paid by companies showed a tendency to decrease during the analysis period. Because of this, the authors raise a valid question, in the sense that credit risks are being underestimated.
- Other evidence reveals that even when international interest rates fell, financial interest payments took a very large part of profits. One wonders, then, what can happen now that the cost of money points to be much higher, gradually.
- Fortunately, in the midst of a process of profound change, it is good news that long-term bond financing significantly displaced short-term bank loans, or with variable rate. In practical terms, this implies that the cost of borrowing will be more closely associated with the yield on US government bonds than with the rate on the funds provided by the US Federal Reserve Bank.
However, if the above reduces the sense of urgency, sitting back is not an option. Giraldo and Turner consider that the adoption of macroprudential rules by the authorities is important, aimed at those companies that take loans in dollars in the international capital markets. These tend to be, comparatively speaking, stricter in the case of banks.
What other measures are advisable?
Experts mention the need for greater transparency to understand both the greater weight of non-financial firms in this line, and to examine the destination of the resources collected.
Commenting on the proposals made, during a virtual seminar organized by the Latin American Reserve Fund at the beginning of June, Martín Tobal, director of Macrofinancial Risk Analysis at Banco de México, praised both the methodology and the depth of the analysis carried out: “This is a subject that requires all the attention”, he pointed out.
And it is that, although the eyes are concentrated on the public debt of the nations of the region, it is essential to have the complete picture. Hence, the question raised by Giraldo and Turner is entirely appropriate
“What will happen when monetary and regulatory policy in the United States tightens financial conditions in dollar bond markets?” say the study authors. To avoid future headaches, it is better to start looking for an appropriate response early and on time.
Source: Ambito
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