Rates in dollars rise: what will the government’s strategy be like to finance the deficit and debt in 2023

before a scenario of rising interest rates in dollars globally and a most challenging context and costly for emerging countries (such as Uruguay) to finance their deficit and public debt service, the Ministry of Economy and Finance will strengthen its precautionary line of credit with multilateral organizations (easily accessible and without execution risk) by 2023 and does not rule out resorting to the yen market as it did in December last year.

The total funding needs of central government for 2022 they were estimated at US$ 4,479 million and those of US$ 2023 are projected at US$ 4,185 million. For next year, the government estimates a primary deficit of US$195 million, public debt amortizations for US$ 1,850 million and interest payments for US$ 1,773 million. The bulk of these financing needs (US$ 3,710 million) it is expected to be obtained through issuances in the domestic and international markets, while some US$ 350 million corresponds to multilateral organizations and financial institutions.

At the end of the first semester, Uruguay had contingent credit lines with a multilateral organization for US$ 1,865 million and Treasury liquidity for another US$ 2,049 million. For the year 2023, the Ministry of Economy projects a fiscal deficit equivalent to 2.6% of GDP.

The strategy in the current context

The director of the Debt Management Unit of the Ministry of Economy and Finance (MEF), Herman Kamil, reported to The Observer that a new quarterly debt report will be published shortly where the financing projections for 2023 will be “updated”.

“We do not estimate that they will be very different from those that we already have projected in the previous report. We are fine-tuning the numbers. The strategy will continue to be the bulk of financing in the securities markets, whether domestic or international”, announced Kamil. The official stated that It is planned to go out “at least” once a year to the foreign market with the issuance of some global bond and then “back” on the domestic investor base, “which has been very important for Uruguay during the pandemic.”

The director of the MEF Debt Management Unit commented that by 2023 the scenario is changing because after almost 9 years, “everything points to higher rates in dollars”, although he indicated that “divergences” are emerging in the monetary policies of other countries like Japan. Precisely, Kamil considered that the yen market can be an “attraction” and an option to evaluate, since Uruguay already took a step with the construction of a Samurai bond at the time. “Our interest is to continue developing the yen market,” he said.

In December of last year, Uruguay completed the issuance of public offering bonds in the Japanese market for a total of 50 billion yen (US$ 442 million) in terms of between 3 and 15 years and with an interest rate annual rate of 0.71% on average. That was the sixth time that the country issued debt securities in that market. The first was in 1994, then in 1997, 2001, 2007 and 2011.

Secondly, the hierarch indicated that they are talking with the different multilateral organizations to “strengthen” the precautionary credit lineswhich played a central role in financing the Uruguayan government at the start of the pandemic (March-May 2020).

The official also admitted that Today the conditions are not right for reissuing debt in nominal pesos in the global marketbut “not at all” that alternative is ruled out to the extent that inflation begins to subside, and that volatility begins to reduce once the Fed signals a pause in rate increases.

“The problem here is not only that rates are rising, but that we don’t know the peak,” he explained. He added that as that uncertainty clears, appetite for local debt issuance from emerging markets will surely return.

The debt ceiling

The 2020-2024 Budget Law included a new legal framework for net indebtedness, which is defined as the total gross indebtedness (issuance of market securities and loan disbursements), deducting debt repayments, as well as the accumulation of assets government finances. The legal maximum established for indebtedness in 2022 is US$2.1 billion. The accumulated debt during the first semester of 2022 was US$ 207 million.

After that date, Uruguay placed on October 20 its first global bond in dollars indexed to Climate Change Indicators (BIICC) with final maturity in October 2034 —repayable in three annual payments in 2032, 2033 and 2034—, for an amount of US$ 1,500 million. The operation also included an offer to repurchase global bonds in dollars maturing in 2024, 2027 and 2031. From that issue, US $ 1,000 million was in exchange for cash; the remainder (US$500 million) was used to repurchase eligible bonds.

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