El Salvador’s debt troubles serve as a warning sign for investing in other Latin American nations that -- on the surface -- appear to be market-friendly.
New technocratic presidents have come to power over the past 18 months in Argentina, Peru and Brazil, but they did so under a period of heightened polarization that may pose risks to governability, said Sean Newman, who helps oversee $1.5 billion in emerging-market assets at Atlanta-based Invesco Advisers.
Argentina’s Mauricio Macri and Peru’s Pedro Pablo Kuczynski were sworn in with a minority in congress. And while Michel Temer’s PMDB party in Brazil holds the most seats in the senate and lower house, it must contend with more than two dozen other parties. These slim majorities or minorities in the legislature make bipartisan support essential to the passage of financial measures, including those related to servicing debt.
And the case of El Salvador highlights how quickly everything can go south amid gridlock. Fitch Ratings said the missed pension payment constituted a default on its sovereign obligations and S&P Global Ratings warned "selective default" looked inevitable. The government has said the money for its overseas bond payments has already been budgeted.
"This political gamesmanship really boils down to where the parties want to position themselves ahead of the election next year," Newman said. "It’s certainly decreased our confidence in their ability to get rudimentary measures approved."
Putin-Loving Investors
That’s less of an issue in Venezuela. Maduro and his allies have throttled attempts by the opposition-controlled congress to hold a recall election against him. And while the president would be an underdog in national elections next October, some observers question if they’ll even be held. Continuing to service the nation’s debt has been key to Maduro holding onto power and investors who have put their faith in him have profited mightily.
In fact, Venezuelan debt has returned more than 750 percent since the socialist Hugo Chavez was elected president in late 1998, beating the emerging-market average of 450 percent.
Under dictatorships, investors usually have better insight into who the actual policy makers are and how they’ll treat bondholders, according to Steve Hooker, a Hartford, Connecticut-based emerging-market money manager at Newfleet Asset Management LLC, which oversees $12 billion. That’s in contrast to democracies, where investors might need to get into the heads of dozens of politicians and bureaucrats who have a say in policy, he said.
Of the six emerging-market nations to default in the 21st century, none were categorized as full-out autocracies by Freedom House.