After slumping in 2018 amid a wave of economic and political uncertainty, the Latin American green bond market is expected to double this year as investor sentiment gradually improves.
Latin America tapped debt markets for just $540 million in 2018 in order to fuel environmental-friendly projects. The total marks a steep decline from the $3.96 billion raised in the prior year, data from Climate Bonds Initiative shows. The region's represented less than 1% of total global issuances, estimated at $167.3 billion.
Emerging markets have suffered during the year from tighter monetary conditions and a strengthening U.S. dollar. At the same time, political uncertainties in the region's largest economies — namely Mexico and Brazil, both of which held major elections in 2018 — played a substantial role in the capital slowdown, Climate Bonds Initiative CEO Sean Kidney said.
"At the end of the day, it's been tough year for the economy because of political uncertainties in Brazil and Mexico," he said. Heading into 2019, Kidney expects those uncertainties to abate as the new administrations settle in and show that they're not "as scary as everyone thought."
"Presuming I'm right on that, that would settle the markets and therefore we expect to see old issuers come back to markets and a number of new issuers who have been holding back come to market," Kidney said. "I would not be surprised if we doubled last year's very low issuance, and maybe a bit more."
A more stable economic picture could also drive new green bond issues forward. Latin America's stock markets have surged in January to record highs, led by a strong performance in Brazil, and economic conditions are expected to improve marginally in several key countries.
As Maria Netto, a financial markets lead specialist for the Inter-American Development Bank, noted, there is a direct link between the green bond market and broader economic and capital markets expectations.
"While [the green bond market] has been improving and has good prospects over the future, it has been a slow growth," she said. "Brazil and Mexico are the most developed markets, and that is where we have had the best results, especially with the development banks."
A growing market
The early green Latin America issuances in 2014 and 2015 were "low hanging fruits," as Netto put it, driven by large corporations and development banks that already had a pipeline of a green-qualifying projects. As the market develops, she says, the challenge is to open green initiatives to other types of sectors and players, which requires more sophistication in the development and certification of frameworks.
The total amount of outstanding green bonds in Latin America is $6.73 billion, according to CBI. The largest type of issuers have been non-financial corporates, totaling $3.8 billion. Suzano Papel e Celulose, a Brazilian paper pulp company, has been the largest single issuer, with four deals for a total of $1.2 billion.
Moving forward, CBI's Kidney expects to see more green sovereign bond issuance, particularly from Chile and potentially from Argentina once it's economy stabilizes. He also expects to see more development banks come to market in Argentina, Mexico and Brazil.
"While the outlook is still uncertain, we are modestly positive that the backlog of interest will come out," Kidney said.
Importantly, experts note that investors seeking green investments will be taking a hard look at individual issues to ensure their use of proceeds meet international standards.
"More clarity on the use of proceeds and ring-fencing of funds for green projects is actively encouraged in order to provide comfort to investors that green bond structures are robust," Samuel Bevan, an emerging markets investment manager at London-based Aberdeen Standard said. "Inconsistencies in standards, requirements and measuring impacts can create difficulties when making comparisons."
Some experts pointed specifically to Mexico's now-scrapped $13 billion airport construction project, which had raised some $6 billion of green-labelled debt for funding. IDB's Netto called the amount "too large" for the project, which she said "raised some questions as to how green these bonds really were."
While the trust that issued the bonds is looking to repurchase about $1.8 billion of the total following the project cancellation, there are concerns as to how the remaining amount raised under the green banner will be used. Moody's in late 2018 downgraded their green score on the bonds, citing concerns over a potential re-routing of the funds to non-eco friendly projects.
"There has been a valley in the (green bond) market around that event, which left a sour taste for investors," Netto said.