Uruguay plans to complete its $4.3 billion bond funding program this year by issuing local currency debt on the domestic capital market as slowing inflation helps the government reduce its reliance on US dollar borrowings, Finance Minister Azucena Arbeleche said in an interview.
(Bloomberg) — Uruguay plans to complete its $4.3 billion bond funding program this year by issuing local currency debt on the domestic capital market as slowing inflation helps the government reduce its reliance on US dollar borrowings, Finance Minister Azucena Arbeleche said in an interview.
Uruguay has already raised more than $2.6 billion from local currency bonds sold at home and abroad so far this year including a 10-year fixed-rate global bond denominated in pesos, according to finance ministry data.
“It used to be unthinkable to mention peso bonds” to investors, Arbeleche said. “We’d discuss inflation-linked bonds. From inflation-linked bonds we’ve gone to nominal peso issuances on international markets.”
Arbeleche didn’t rule out selling another global bond during 2023 with the currency to be determined by interest rates and issuance size.
The emphasis on local currency funding coincides with a sharp slowdown in consumer prices. President Luis Lacalle Pou wants to tame inflation that’s averaged 8.5% per year since 2000 with deficit busting austerity and tight monetary policy. Inflation cooled to the slowest pace in almost six years last month, putting it just within the central bank’s 3% to 6% target. However, analysts surveyed by the central bank see 6.6% inflation at the end of 2024.
Uruguay’s peso is trailing the top performing currencies in Latin America with year-to-date gains of 6%, which contrasts starkly with the 35% slide in Argentina’s heavily regulated currency. Uruguay’s peso is also beating a basket of emerging market currencies that has appreciated 2.3%, according to data compiled by Bloomberg.
Read more: World-Beating Currency Rally Spurs Latin America Debt Sales
Uruguay’s global dollar bonds have returned 2% year to date, compared to more than 7.6% for its Latin American peers, according to data compiled by Bloomberg.
Green Finance
Uruguay is a trailblazer in green finance with the issuance last year of the world’s first sustainability-linked sovereign bond, or SLB, whose interest rate will adjust higher or lower depending on whether the country meets targets for greenhouse gas emissions and native forest conservation. The bond maturing in 2034 has gained 6.7% since it started trading in October 2022.
Read more: Uruguay New ESG Bond Comes With Option to Pay Investors Less
Uruguay is eschewing another SLB in the short-term to focus on pioneering a similar concept with multi-lateral loans, Arbeleche said. The finance ministry is working with the World Bank and Inter-American Development Bank to structure loans that would reward Uruguay with a lower interest rate if it meets certain environmental obligations, she said.
Arbeleche, who declined to provide a time line for the first loan, thinks strong environmental credentials in the near future will condition Uruguay’s access to export markets and foreign direct investment.
“It goes way beyond paying less interest,” to borrow money, she said. “It’s important to get ahead of the curve by embedding environmental factors in economic policy if we want to have more investment, growth and jobs.”
Other key points from the interview:
- Uruguayans shopping in Argentina are hurting growth, tax collection in Uruguay
- Consumption, tax collection forecasts in budget incorporate consumer spending in Argentina
- Government’s 2024 growth forecast of 3.7% is underpinned by a recovery in salaries, agriculture exports
- Uruguay is staying in the South American customs union Mercosur, but wants a more modern, flexible bloc
- ”Uruguay sees a lot of value in the Mercosur brand and belonging to the Mercosur bloc,” Arbeleche said.
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