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Ongoing trade wars with Turkey and other nations, plus volatile FX markets could imperil Latin American firms

The summer has produced plenty of sizzle in the FX markets as nominal currency exchange-rate volatility, trade wars, punitive tariffs, virulent diplomatic posturing, and higher interest rates have pushed the greenback upward since February.

Emerging-market currencies have been routed in the FX market against the US dollar beginning in Q2, especially several legal tenders of various Latin American countries. The Brazilian real; the Chilean, Mexican, Argentine and Colombian peso; and the Peruvian nuevo sol have all declined since April from a variety of factors including political and economic uncertainty in Brazil and Venezuela.

To compound problems, on Friday, August 10, US President Donald Trump vowed to double steel and aluminum tariffs on Turkey, a country that investors worry will struggle with its external debts in light of its external debt to GDP ratio being above 50%, one of the highest among developing economies. For some time now, the plummeting Turkish lira has put downward pressure on other emerging market currency markets. Once news of the new tariffs on Turkey hit the airwaves, FX trading on Friday morning responded with the USD/BRL exchange increasing 1.62% to 3.8621 from 3.8007 in the previous trading session, while the USD/MXN exchange increased 1.71% to 19.0004 from 18.6805 in the previous session.

The ICE Dollar Index hit a one-year high as the DXY index, which measures the performance of the US dollar against a basket of other currencies, has climbed 8% since late January. Investors are betting that trade war posturing and a strong US economy will continue to aid the currency, because trade tensions are seen as beneficial for the dollar as the US is better positioned than emerging markets to deal with protectionism, and tariffs may narrow the country’s trade deficit, reports the Nasdaq news service.

If these trends continue, dollar-denominated liabilities that large Latin American companies carry on their balance sheets will grow, which may engender an uptick in defaults and bankruptcies.

In December, Debtwire will host its annual Latin American Forum where it’s expected that panelists will discuss how volatile FX markets, climbing US interest rates and other macro pressures will present difficulties for management teams around Latin America. Certainly, panelists will share their view on how the new administrations in Brazil, Mexico – AMLO will be sworn in around the time of the conference - and Chile will affect conditions for restructuring balance sheets and organizations amid a daunting macro environment.

Results of the Brazilian election will be well known by the time the Debtwire conference rolls around. But until then market players can only surmise how things will play out. According to current polls, far-right candidate Jair Bolsonaro, of the Social Liberal Party, is in a close tie with investor favorite Geraldo Alckmin, of the Brazilian Social Democracy Party. Alckmin has gained ground since late July. Among the hot political items are pension reform, privatization initiatives, and public spending, all of which loom large for the Brazilian private sector and could sway whether certain firms default or not.

As the conference agenda is currently written, Venezuela will be a major focus. Current events do not bode well for the economically beleaguered state. Debtwire reported on Thursday Aug. 9 that a US federal judge authorized the seizure of Citgo Petroleum Corp to satisfy a Venezuelan government debt. The ruling could set off a scramble among Venezuela’s many unpaid creditors to wrest control of its only obviously seizable US asset. Ironically, despite recent rhetoric, the executive branch of the US government has abandoned oil sanctions to avoid owning Venezuela’s collapse.

“The US has sanctioned individuals in Venezuela, including Maduro; prohibited the purchase and sale of any Venezuelan government debt, including any bonds issued by PDVSA; and banned the use of the Venezuela-issued digital currency known as the petro. But oil sector sanctions are viewed as the most powerful penalty remaining and one the Trump administration is more hesitant than ever to use,” writes Brain Scheid, senior editor, oil news, of S&P Global Platts.

Media outlets have reported that Venezuela and its various state-controlled entities together have USD 62bn of unsecured bonds outstanding, with approximately USD 5bn so far in unpaid interest and principal. Analysts estimate that the government has approximately USD 150bn total in debt outstanding to creditors around the world.

Matt O'Brien Content Editor Acuris Studios

Follow Matt on Twitter @matt_obri3n or connect with him on LinkedIn.

Matt O'Brien is content editor for Acuris Studios, the sponsored events and publications division of Acuris, overseeing the research and editorial input for events. Matt works with the editors and reporters of Acuris' various publications to ensure the company delivers industry-leading conferences. He has spent nearly 13 years in the news and finance industries. Matt has a political science and international studies BA from Rutgers University.

Matt O'Brien Content Editor Acuris Studios

Follow Matt on Twitter @matt_obri3n or connect with him on LinkedIn.

Matt O'Brien is content editor for Acuris Studios, the sponsored events and publications division of Acuris, overseeing the research and editorial input for events. Matt works with the editors and reporters of Acuris' various publications to ensure the company delivers industry-leading conferences. He has spent nearly 13 years in the news and finance industries. Matt has a political science and international studies BA from Rutgers University.

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