No one would dispute that Latin America has done a remarkable job over the past several years averting the catastrophes that have befallen Western Europe and the U.S. Likewise some countries in the region have sustained a respectable level of securitization activity, a point of pride made by a number of participants at the Securitization and Structured Finance in Latin America (SiLAS) conference hosted by Euromoney Seminars and LatinFinance in late May.
"Technically the region has overcome the problems of the developed world," said Juan De Mollein, the conference chairman and managing director of the emerging markets structured finance group at Standard & Poor's. "Even the first quarter of this year showed better figures than people expected."
But the region's encouraging "new normal" is still tempered by risks that either smack of its troubled past - inflation and the specter of populist politics, for instance - or bear an uncomfortable likeness to recent bubbles in the developed world, such as booming consumer debt and property prices in Brazil.
Still, it would be difficult to imagine many of the gains made in these countries over the last several years being overturned merely by a shift away from market-friendly policies or the bursting of some sector bubbles.
A suprising coda to the recent global crisis, there are now five Latin American countries that are investment grade on all the rating agencies' scales. Colombia is split-rated, with only S&P having lifted the credit to the triple-B range.
What makes this particularly historic is that that region's largest countries have either entered or moved into higher investment-grade ground just as Western Europe has witnessed a few sovereigns tumble down the credit ladder.
The view that governments in the region are on sounder financial footing than ever before is shared by market participants of every stripe.
While not discounting the risks, Violet Osterberg, co-head of specialty investments at Pacific Life Insurance Company, sees a secular shift that bodes well for the region.
"The reason we're so interested in Latin America right now is because it's improved tremendously when it comes to institutions [and] the whole banking system," she said, adding that there is plenty of talent in the conducting of monetary policy as well as in the ministries of economy and finance of various countries. "We are very interested in pursuing more assets in Latin America [and] securitization continues to be a favorite way of investing [there]."
And while markets are stuck elsewhere, issuers continue to churn out deals in the region, especially in the domestic arenas. Brazil in particular has emerged as the region's ABS motor, with the country at last count representing 50% of issuance in Latin America, according to Greg Kabance, managing director at Fitch Ratings. While he characterized that country's environment as "fairly benign," Kabance also warned of the bubble forming in the consumer finance sector (see Brazil article, p. 27.)
Another blot on this otherwise cheerful picture is Mexican housing, with the nonbank originators known as Sofols still struggling to get back on their feet after many of the construction loans they originated went sour and market investors turned their backs on the lenders. Even the large commercial banks embraced by investors have pulled back from securitizing their mortgage portfolios, leaving government agencies Infonavit and Fovissste to carry the full weight of the sector, in an echo of the situation in the U.S.
Politics are also an issue. In some countries, populism may not scare business and finance professionals the way it used to thanks to well-rooted reforms, but its appeal cannot be dismissed. "Political risk was something that people forgot over the last two to three years," said De Mollein. "Everyone was focusing on the economic environment."
With presidential elections in Peru and Argentina this year, and Mexico next year, politics may again shape investment decisions, despite the stronger faith that players now have in institutions across the region.
One of the big concerns is that a presidential run-off election in Peru could be a harbinger of a shift back to populism in other parts of Latin America. It is surprising to some that this would even be a possibility in Peru, given the gains made there in poverty alleviation amid swift economic growth. But reports indicate that many in rural areas have seen little-to-no economic progress over the past several years.
Slated for June 5, the contest between Ollanta Humala on the left and Keiko Fujimori on the right is too close to call. For the financial markets, Humala has been something of a bogeyman. One Peruvian attendant at SiLAS said that while his rhetoric has recently been filled with reassurances of policy continuity in the style of Brazil's Lula, the promises smack of political calculation.
But other participants said advances in areas such as infrastructure would make it difficult for anyone, even a figure like Humala, to abruptly reverse economic course.