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BofA says buy Colombia, Ecuador bonds even as Latam GDP growth is set to slow to 0.9% next year -Zignox

Mexico and Chile are projected to have negative growth in 2023, while Brazil and Argentina economies will barely expand 1%. Inflation will continue to be the “main theme and the main risk” for the region as a whole, according to the bank.

Logo of the Bank of America in a window at San Francisco, Calf. (BofA)
Logo of the Bank of America in a window at San Francisco, Calf. (BofA) (Jeenah Moon/Bloomberg)

Jose enrique Arrioja, Zignox

EnergiesNet.com 12 16 2022

The tides for most Latin American economies are set to deteriorate in 2023, as the region will confront the effects of tighter fiscal and monetary policies and the ever-present political uncertainty, Bank of America said in a report to investors, forecasting a meager gross domestic product growth of 0.9% for the year ahead.

The performance will represent a substantial deceleration for the region from the expected economic expansion of 3.9% projected by the Charlotte, North Carolina-based private bank for this year. “The deceleration will take place across the board, with some countries entering into a full-fledged recession,” a group of 18 analysts wrote in a report dated December 8. Despite the slower growth, the region will still offer opportunities for investors, with BofA recommending the bonds of Colombia, Ecuador and Guatemala.

As the specter of recession looms large for the global economy, Latin American countries will reckon with “tighter fiscal and monetary policy, coupled with political uncertainty,” the analyst said in the 169-page report. These factors “will start taking a toll on investment and consumption and the deceleration in developed markets will impact on exports. Risks are somewhat balanced depending on how deep is the global slowdown and how fast China reopens its economy,” the report said.

BofA’s view is more pessimistic than a recent projection unveiled by the United Nations economic commission for the region (ECLAC). On Thursday, the multilateral institution estimated that Latin America and the Caribbean nations will register a combined grow of 1.3% in 2023 vs a 3.7% expansion predicted for this year, Reuters reported.

Bank of America report: Latam Thematic, Year Ahead 2023: Surfing the pink wave. December 8, 2022.

Inflation, Commodities

The cost of living in the region will continue to be the “main theme and main risk” entering 2023, BofA said. “We continue seeing pressure in services and wages, which could limit how much central banks can cut rates in 2H23. The risk is certainly for inflation to remain more persistent than expected by most central banks.” Annual inflation is expected to decline to 5% next year compared with an average of 7.8% forecast for 2022.

Countries such as Venezuela, Argentina will endure substantial prices pressures. In the case of Venezuela, the inflation will extend its climb from an expected 205% annual average in 2022 to 252% next year. Argentina’s consumers will have to withstand an annual inflation of 85% in 2023 vs an expected 99.4% increase in the CPI this year, as the South American nation heads for general elections on October 29, to elect the president, members of the national congress and the governors of most provinces.

BofA predicts that Brazil and Chile will start cutting rates in 2Q23, but Colombia and Mexico to continue hiking a total of 200bps and 100bps until the end of 1Q23. “We don’t expect Mexico to decouple from the Fed in what rest of the tightening cycle, but most likely in the easing cycle,” the analysts said.

For a commodity-dependent region, raw materials will represent a “mixed bag” next year. Crude and petroleum products like diesel and gasoline, coupled with selective metals like copper, should perform, the report said, with the bank projecting an average Brent crude of USD100/barrel. “We are also increasingly constructive on transition metals like copper, as infrastructure and grid spending in China combines with rising EV sales,” according to the analysts.

“On a weaker note, we expect Iron Ore to drop to~$98/t in 2023 on avg vs ~$127/t this year. Also, we see a mean-reverting price scenario for agricultural commodities as supply continues to respond to the high prices but expect them to remain high until 3Q23.” the report said.

Fixed-Income Strategy

Bank of America favors dollar-denominated external bonds of Ecuador, Colombia and Guatemala, with and “overweight” rating, while is “marketweight” on Argentina.

“If US inflation proves to be stickier, credits with solid fiscal positions, such as Mexico, Guatemala, Peru, and Costa Rica are likely to become favored,” analysts Jane Brauer and Lucas Martin, wrote in the fixed-income section on the report.  “In addition, there are several idiosyncratic stories in LatAm (Argentina, Colombia, El Salvador), where getting the timing right will be important,” they added.

In Ecuador, “we think that political concerns are detracting too much from Ecuador’s strong fundamentals, including twin surpluses and low debt service after the 2020 restructuring,” the analysts said. “We admit that governability conditions are weak, but we think investors are overstating the probability of early elections or a severe political crisis. Potential positive catalysts include a successor IMF program, execution of a debt-for-climate swap (we recommend buying ECUA 5.5% ‘30s vs ECUA 1.5% ’40s, currently $21), and implementation of the fuel subsidy focalization.”

Protesters protesters march against President Guillermo Lasso’s economic policies and demanding a fuel price cut in downtown Quito, Ecuador, Thursday, June 23, 2022. Source: CNN

The bank recently upgraded its view on Colombia’s external debt to “overweight” on the back of an energy policy U-turn which could provide a near-term upside for the bonds. “Despite the recent recovery in Colombian assets, valuations remain cheap,” the analysts said. “We see a high probability that the following positive catalysts materialize in the next several weeks: backtracking on the ban on new oil exploration contracts, saving some of the revenues from the 2022 tax reform, and scaling back land purchases.” They favor buying COLOM ‘44s vs DOMREP ’45s.

Bank of America report: Latam Thematic, Year Ahead 2023: Surfing the pink wave. December 8, 2022.

Bank of America expects that Latin American nations will issue USD19 billion in debt in the primary markets next year, but excluding amortizations that figure will be reduced to only USD12 billion. The issuance is set to decline vs the ~USD16 billion in new bonds sold this year. 

“We believe that LatAm sovereigns will be able to muddle through, even if primary markets remain constrained in 2023, by relying on domestic markets or multilaterals as needed,” the analyst said in the report.
To contact the journalist of this story: Jose Enrique Arrioja
Email: jearrioja@zignox.com

zignox.com 12 16 2022

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