Latin America's Debt Sale Bonanza Set to Slow in 2025

A record-breaking year for debt sales in Latin America, which saw the region rush to global markets at the fastest pace in three years, is expected to slow down significantly in 2025. The surge in bond issuance was driven by a combination of factors, including government record bond sales, a slew of first-time borrowers, and a pickup in Argentina corporate transactions.

Market Sentiment Remains Volatile

Despite the impressive numbers, market sentiment remains volatile due to various challenges facing Latin America's economy. These include questions over the Federal Reserve's path on interest-rate cuts, Donald Trump's return to the White House, and concerns over China's economy. Political risks are also flaring up in countries like Brazil and Colombia, with elections taking place that could further dent investor confidence.

Impact of US Economy and Rates

The Latin American region is particularly sensitive to the outlook for the US economy and rates. Emerging-market debt has been losing favor among investors, with outflows from global EM bond funds totaling $24 billion in 2024. This trend is expected to continue unless there are significant changes in the economic environment.

Drivers of Issuance

The big driver behind Latin America's issuance activity is how quickly the Federal Reserve will move to lower rates. With traders recently paring bets to just two cuts this year, investors are closely watching for clues on whether measures planned by the Trump administration will fan inflation, translating into fewer cuts and narrowing the window for debt sales.

Changes in Market Conditions

Market conditions have changed significantly since last year when the prospect of the Fed's first cut since 2020 prompted governments and companies to test markets. Back then, investors were flush with cash, and there was strong demand from buyers. Now, however, investors are moving their money out of emerging-market debt.

Impact on Borrowers

The changes in market conditions have affected borrowers' strategies. Many companies that had never borrowed internationally saw their offerings oversubscribed last year, but now they may be forced to contend with higher rates and volatility. As a result, the number of issuers is expected to decline.

Forecast for 2025

Despite these challenges, some big players in the market remain optimistic about Latin America's issuance prospects. Citigroup Inc. and JPMorgan Chase & Co., which led the underwriting business from the region last year, both forecast volumes in 2025 should be roughly in line or even slightly above last year's figures.

Key Drivers of Issuance

The main driver will be borrowers seeking to refinance debt. About $52 billion worth of bonds are set to mature in the next 24 months, according to strategists including Nathan Fabius at Goldman Sachs Group Inc. This presents an opportunity for companies and governments to tap into global markets.

Corporate Debt Sales

Roughly half of the issuance will come from companies. Bank of America Corp. expects corporate debt sales to total $60 billion this year, with nearly one-fourth coming from Brazil. However, sales are likely to slow as the year progresses due to the possibility of higher rates to fight inflation.

Government Debt Sales

Governments, which traditionally come to market first, will be forced to contend with the impact of the Trump presidency on global rates and the dollar. The greenback saw its best year in almost a decade in 2024, with just three out of 23 emerging currencies tracked by Bloomberg ending the year with slight gains versus the dollar.

Key Risks

Investors will also watch for presidential elections in Chile and a legislative vote in Argentina, which could bring volatility and dent sentiment. Growing concern about budget deficits has been plaguing markets from Brazil to Colombia, while Mexico approved a sweeping overhaul of the judicial system that some including Moody's Ratings say risks eroding its checks and balances.

What to Watch

Investors will closely monitor the release of consumer price data in countries including Chile, Mexico, Colombia, Brazil, Thailand, and China. They will also keep an eye on industrial production data from Turkey, India, and Mexico, as well as the first advance estimate of GDP growth for India through March 2025.

Conclusion

In conclusion, while Latin America's debt sale bonanza is expected to slow in 2025 due to various challenges facing the region, some big players remain optimistic about issuance prospects. The key drivers of issuance will be borrowers seeking to refinance debt, with corporate debt sales and government debt sales playing a significant role. However, investors should remain cautious due to the risks associated with emerging markets, particularly Latin America's economy.