Latam Local Currency Commentary

Since the start of February, the United States has implemented a more restrictive monetary policy due to persistent inflation, which has led to a reversal in risk appetite and increased volatility in core rate markets. The uncertainty surrounding the path toward terminal rates has intensified in recent days due to concerns about financial stability. These concerns were exacerbated by the intervention and subsequent bankruptcy of Silicon Valley Bank last week, which further fueled anxiety in the markets.

In this extreme scenario, Latin American local sovereign debt has emerged as a safe haven, with rates rallying in parallel with core rates, while foreign exchange (FX) rates have depreciated. As a result, the GBI-EM Broad Diversified Latam index has experienced a decline of -1.2%, with FX contributing -2.1% and duration contributing +0.97% to this figure. We believe that this performance supports our main thesis regarding the asset class's resilience in the current macroeconomic environment, even during periods of significant financial stress.

Monetary policy in Latin America has remained highly contractionary. Of note is the progress of tax reform in Brazil, which is expected to collect close to 2.0% of GDP to meet campaign promises. Colombia has also begun implementing a transformative agenda, with early-stage reforms in health and pensions that aim to increase the State's participation. In Chile, the government's tax reform proposal was rejected, and low presidential approval has led to a moderation of its proposals. This coincides with a correction of fiscal and external macroeconomic imbalances, as well as a reduction in uncertainty, which has provided a significant boost to Chilean assets.

Summary of rates moves from 30-Jan-2023 to 16-03-2023

From the Corporates side, since the financial crisis erupted in March, we have seen evidence that supports our thesis. Despite the turmoil in the banking sector in the United States and Europe, Latin American assets have remained resilient. One reason for this is that banking regulations in the region are more rigorous than those in the United States, with no exceptions for small banks. Additionally, the implementation of Basel III in nearly all countries in Latin America has contributed to the stability of their financial systems. Strict regulations on currency mismatches, loan terms, and interest rates, along with detailed disclosure by banks, provide confidence in the soundness of these systems. Furthermore, Latin American banks have maintained strong capitalization and liquidity ratios, which are well above the required minimums and comparable to those in other regions.