beyondbrics

By Matt Kennard

Felipe Larraín, Chile’s finance minister, had a big smile on his face Thursday morning as he talked reporters through his country’s successful $1.35bn bond issue at Deutsche Bank’s offices on Wall Street.

He had reason to be cheerful. The Chilean government has just sold $1bn of 10-year dollar-denominated bond, yielding 3.35 per cent, the lowest borrowing costs in Latin American history for a sovereign issuer, according to Larraín.

This compares to the $1bn 10-year dollar-denominated bonds the country issued last year, which carried a yield of 3.89 per cent. It also compares favourably to Colombia’s 10-year papers which are currently yielding 6.98 per cent, and Peru’s, which is yielding 5.34 per cent.

In addition to the dollar-denominated bond, there was a further $350m issued in a reopening of Chilean peso denominated bonds, which yielded 4.4 per cent. The buyers were – in order of volume – from the US, Europe, Asia and the Middle East.

“We must be humble, we are a small country,” Larraín cautioned. But it will be very hard to beat such a rate, he added. “If we do, it means the world economy will be in dire straits.”

The fact that a big chunk of the issuance was done in US dollars has raised some eyebrows as the trend in recent months has been for investors to invest in local, rather than hard currency bonds. But it looks like a canny move. Issuing in dollars was cheaper and there’s a dearth of other EM dollar issues about.

With debt turmoil in the eurozone and the US, emerging market sovereign bonds are becoming increasingly attractive – in whatever currency. Last month, Mexico successfully placed a $1bn reopening of a 100-year bond on international markets.

“These [Chilean bond] rates are historically low, particularly for the foreign currency rate, which points to the relative scarcity of sovereign issues recently and the positive image abroad of Chile’s fiscal policy,” said BCI Inversiones in a research note.

Larraín himself put the auctions success down to Chile’s “tradition of fiscal discipline” – the country has the lowest level of debt-to-GDP and the government is a net creditor vis-à-vis the rest of the world.

And with such success, Chile is not ruling out coming back to the market in the next couple of years, depending on the market conditions. They may even choose different maturities, although the liquidity of the 10-year bond may retain its appeal in uncertain times. Investors are keen for them to return.

“The response from the market has been very positive, they want us to come back,” said Larraín.

In fact, this time around limits to the amount of debt the government can accrue stopped them capitalising even more on the cheap borrowing terms.

The money will bolster the $21.8bn sovereign wealth fund, which is being grown in the event of any calamitous macroeconomic events. A further cushion comes through that fact that the Chinese market now constitutes a quarter of Chile’s total exports.

But Chile is still anticipating a slowing of its economy. The central bank’s revised growth forecast is now in the range of 6.25pct to 6.75 pct this year, falling to 4.25 to 5.25 per cent for fiscal year 2012. “We’ll clearly see a slowdown, the question is how much of a slowdown,” said Larraín.

Related reading:
Chile to tap bond market for $1.5bn, beyondbrics
Chile Poised for Cheapest Funding Ever in Dollar Bond Sale as Yields Drop, Bloomberg
Mexico lures Chile debt issuers, beyondbrics
Chile: growth cools but what will the central bank do?, beyondbrics
Chile file, beyondbrics