Market perspective

The state of capital markets in Peru and Chile following recent turbulence.

In Peru, the election of President Pedro Castillo last June alarmed markets which feared his left-wing radical discourse. However, Castillo dissipated some doubts after toning down his messaging and appointing Pedro Francke, an academic economist who worked at the World Bank, as Finance Minister. Furthermore, a recent trip in September to the US, in which he highlighted the importance of private investment in the country has allayed most remaining fears.

In this context, on 26 September 2021, the Financial Times reported that President Castillo’s message in the US was so well received that, even if Peru did not need to resort to international markets again in 2021, it was in a position to do so. Although international asset managers agree that a new bond issue would have a fair amount of acceptance, Peru-based investors are less convinced about the attractiveness of Peruvian bonds given the day-to-day political instability of Castillo’s cabinet. Meanwhile, Minister Francke tries to appease doubts saying that financial stability is not associated to left- or right-wing policies but to good economic management. In this context, the IMF forecasts GDP growth of 8.5% for Peru.

What is the reality though? We spoke to a prominent asset manager in Peru, “In the last 3 months, USD 6 million has been placed in the Peruvian capital market, when normally this figure should be USD 500 million. There are no investors. AFPs (private pension funds) are sitting on their hands while the government lets their clients withdraw large sums. Without the AFPs, nothing happens. There is some good news though, the country’s dollar-based products are near all time high production and pricing: fishing, agriculture and mining are all doing well. So market sentiment, tax revenues etc should improve but the real problem for the capital markets in Peru is the lack of anchor investors.”

“In the last 3 months, USD 6 million have been placed in the Peruvian capital market, when normally this figure should be USD 500 million.”

Asset manager, Peru

At the same time, Chile has opted to evade domestic volatility with five international capital market outings throughout 2021. In this context, the July 2021 EUR 1.75 billion eurobond issuance by the Ministry of Finance and the issuance of US 2.1 billion in social bonds in September 2021 as part of the Central Government’s 2021 additional financial plan shows that the country has the capacity to diversity its investor base.

However, political deterioration in the country, currently undergoing a constitutional reform period, and with President Sebastián Piñera facing impeachment after being listed in the Pandora Papers leak, resulted in the yield on the government’s 10-year local currency bonds surging from 2% in May 2020 to 5.5% in September 2021.

“Political uncertainty and COVID now sees Chile priced at a similar level to Peru, even with Castillo, and this has caused the capital markets to slow down and liquidity to dry up.”

VP, international distribution, asset manager, Chile

The VP of international distribution for a large Chilean asset manager commented, “Pension withdrawals have hurt the AFPs and generated inflation. Political uncertainty and COVID-19 now sees Chile priced at a similar level to Peru, even with Castillo, and this has caused the capital markets to slow down and liquidity to dry up. This is the greatest challenge facing Chilean markets right now, a lack of liquidity. Until the constitutional reforms are complete, Chile will continue with slow capital markets but there are opportunities in equity because you have solid companies trading at super discounts.”

 

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