Capital Flows to Latin America 2006 Highlights

Global conditions have remained favorable in 2006. Investors continue to be encouraged by abundant global liquidity, as well as improving credit quality in emerging markets, and keep on pouring high amounts of money in mutual funds specializing in emerging market nations. Capital inflows have contributed to compress credit spreads and helped borrowers to increase new bond issuance and engage in liability management. In 2006 capital inflows have broadened by currency, structure and duration, and by asset class, with inflows into local markets being particularly robust, even after the May-June correction in financial markets. Emerging markets debt, in particular, has been increasingly diverse by issuer, region, and credit quality.

In Latin America, concerns that the heavy electoral calendar could increase volatility and lead to less market-friendly policies have not materialized. Local Latin American markets have outperformed external debt, issuance in local currencies has continued, and an increasing scarcity of external debt has fueled investor appetite for corporates. Countries have taken advantage of the favorable financing conditions to pre-fund their borrowing requirements. Several Latin American countries completed buy-backs and exchanges of external debt, in an effort to improve their debt structure and to extend the maturity profile.

Finally, emerging markets countries, particularly in Latin America, have continued to reap the benefits from the commodities boom, while rising oil prices during most of the year continued to be a net positive on oil exporter countries.