South American debt in local currency has become a painful experience for international investors, with little signals of relief and reversal of the situation.
The growing risks of inflation, the increase in interest rates implemented by central banks and the growing fiscal concerns have added uncertainty to the profitability of regional debt, while currencies overall have suffered the impact of the fall in commodity prices and the Covid-19 resurgence threat.
The political unrest caused by the recently inaugurated Peruvian government, allegedly Marxist oriented, have scared investors and the performance of the country's debt in Soles has been the worst so far this year according to a Bloomberg/Barclays rating that measures results in US dollars. In effect its bonds have plummeted 27%, followed by similar although not so intense situations in Chile and Colombia. Brazil's debt in Reales was also down 5% during August.
The pandemic has hit Latin America harder than other emerging markets regions, which has led to greater financial pressure and more political turbulences. Last week because of a weakening of its currency and an increase in consumer prices, the Peruvian central bank had to increase the basic interest rate for the first time in five years. Chile last month was on the same path and Colombia is expected to follow at the end of the month with the central bank raising the basic rate. But another challenge is that interest rates are increasing when economic activity indicators remain below those previous to the pandemic.
Political turmoil is another factor, with Peru the leading example since so far the new government has only managed to bring more volatility to markets and lower the value of the currency. In Colombia, the frustrated fiscal reform triggered massive protests while in Brazil, the president Bolsonaro administration is trapped in several scandals. In Chile political uncertainty has seen the Peso plunge 14% in three months and investors are more interested in following opinion polls as to whom might be the next president, and his capacity to sort out fiscal problems. The threat is that if the political and economic risks in the region persist, investors might look at other emerging markets with better profits and less exposure.