Capital Flows to Latin America and the Caribbean

Abstract:

In the third quarter of 2015, the downward trend in asset prices and portfolio flows to Latin America and the Caribbean (LAC) persisted, as the economies of the region continued to face weaker external demand, lower commodity prices and a strengthening U.S. dollar.

China’s economic slowdown and the U.S. dollar’s appreciation, as well as weakened domestic growth prospects, especially for commodity exporters, has led to an increase in the burden of dollar-denominated debt in local currency terms.

As a result, after building up leverage to the highest levels in a decade, the region’s corporate sector saw a jump in credit spreads – the Latin component of J.P. Morgan’s Corporate Emerging Markets Bond Index (CEMBI) increased by 226 basis points in the third quarter of 2015 – as the depreciation of most local currencies against the U.S. dollar made servicing the dollar-denominated debt more expensive.

Most sovereigns have seen their financing costs trend upward this year as well, although not as much as the corporate sector, in line with increasing concern over the region’s macroeconomic outlook. There has been significant divergence between countries, however. Among investment grade sovereigns, Brazil has experienced the sharpest deterioration in spreads. The trend in yields has generally coincided with the weakness in currencies, with Brazil and Colombia suffering on both fronts, while Mexico and Chile have been much less affected by recent market turbulence.

The decline in debt issuance accelerated in the third quarter. New international bond issuance fell by 63% compared to the third quarter of 2014, according to ECLAC estimates based on information from Latin Finance and other market sources. More than half of this decline was due to the absence of Brazilian borrowers from the cross-border markets during the quarter. Year-to-date, Latin American bond issuance is down by almost 40% relative to the same period in 2014.

UN Symbol: LC/WAS/L.138