Uruguay’s recent upgrade to investment grade by Standard & Poor’s had been priced in by the market for more than a year according to Franco Uccelli, executive director of emerging markets research at JPMorgan: “The price of Uruguay’s bonds has been trading on a par with some of the regional investment-grade credits like Brazil, so, despite the fact that this will open the door to a new class of investors, I don’t think the spread will tighten significantly,”
However, Charles Moser, executive director in Morgan Stanley’s Latin American fixed-income capital markets responsible for sovereign issuance, believes there is still room for Latin-American investment-grade spreads to tighten. “There’s such a scarcity,” he says. “There hasn’t been much issuance because the sovereigns haven’t needed the money, and so there is still room for the Latin American investment-grade sovereign spreads to compress.”
Uruguay has a weight of 1.3% in the JPMorgan EMBI Global index – one of the most broadly used indices – which means that despite its new investment-grade status it is a credit that many investors can afford not to own without risking portfolio performance issues. As close credit substitutes exist, limited demand-side pricing implications for the credit upgrade are expected.
Investors agree. “As an investor in the emerging market asset class [Latin American investment-grade countries], we think Latin American IG countries’ debt is becoming expensive,” says Javier Murcio, deputy portfolio manager at BNY Mellon Standish. “There is nothing wrong with the sovereign risk profile but they trade too tight.”
Uruguay’s membership of the Latin American investment-grade club comes in stark contrast to investors’ views of the management of the economy of its neighbour, Argentina. In April the Argentine government ended weeks of speculation by annoucing that it would renationalize YPf, the country’s largest oil producer, expelling Spain’s Repsol as majority shareholder.
“[The Argentine government] never fails to surprise us – it’s a sad story,” says Steffen Reichold, chief economist at Stone Harbor Investment Partners. “The potential is tremendous, but they manage to take the wrong decision at almost every opportunity they can.” The move has angered the Spanish government, which is lobbying its European partners to impose sanctions on Argentina.