Uruguayan Bonds Take Lead Among Emerging Market Countries

RIO DE JANEIRO, BRAZIL – Uruguayan dollar bonds outperform all of its emerging market peers this year, while the country gives neighbors a lesson on how to fight the pandemic.

Uruguayan bonds have a 14.8% return, more than double the yields of China and Russia, according to the Bloomberg Barclays Emerging Markets Hard Currency Index.

The deaths per capita by Covid-19 in Uruguay, with 3.5 million inhabitants, correspond to less than 10% of the number of deaths of its regional neighbors. In addition, Uruguay achieved the feat at a lower economic cost than almost any other country in the region.

The government of President Luis Lacalle Pou also did not let its guard down and decided to keep the borders closed to the annual flow of tourists in search of resorts, as in Punta del Este, in the upcoming summer months.

“Uruguay had to make some difficult choices, like keeping its borders closed,” said Eamon Aghdasi, emerging market debt analyst at GMO in Boston, which has US$7 billion invested in developing country bonds, including those from Uruguay. “It is a country that, in the view of investors, has the capacity to deal with shocks and solve fiscal problems.”

The average yield on Uruguayan bonds as measured by JPMorgan indexes reached a historical low of 2.61% on July 31st.

Uruguay’s GDP shrank 10.6% in the second quarter compared to the previous year, compared to the 19.1% drop in Argentina, 18.7% in Mexico, and 30.2% in Peru. Only Brazil came close to Uruguay’s performance, with a drop of 11.4%.

Five-year plan

Herman Kamil, who heads the Ministry of Finance’s debt management unit attributed the performance of the bonds to Uruguay’s high ranking in ESG indicators and to the pandemic strategy, which kept the economy open but with a low number of deaths, among other factors.

President Lacalle Pou’s five-year budget also helped. The plan aims to cut unsustainable deficits prior to the pandemic that rating agencies signaled as a risk to the country’s investment grade rating.

Still, in a sign that Covid is far from defeated, the number of active cases almost tripled last month, to 1,423 on November 30th, amid the fatigue of social distancing. On Tuesday, the government announced restrictions such as the suspension of indoor sports and limited hours for bars and restaurants between December 2nd and 18th.

In addition, economists consulted by the Central Bank reduced their growth projections for 2021 for three consecutive months, to 3.35%, while pointing to a deeper recession this year, of almost 4.3%.

The government also needs to deal with the highest annual inflation rate of any other investment-grade country in the world, at 9.7%, although the Central Bank’s estimate is that inflation will drop below 7% next year.

Uruguayan dollar bond prices maturing over 10 years have room to rise next year if a successful Covid-19 vaccine boosts the economy, while the short-term part of the interest curve is traded with a “Fair value,” said Marcelo Manteiga, who manages US$700 million at Montevideo’s Gletir brokerage.

“I think that, in general, next year will be a good year for issuers in emerging markets, especially for the more solid ones, such as Uruguay and Chile,” he said.

Source: Bloomberg

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