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Return to the biggest showcase opens the door to new creditors
BONDS
Portuguese public debt will once again be traded on the world's main bond index, at the same time as the Treasury is trying to attract new investors on a roadshow through Asia. Analysts anticipate a positive impact on financing.
In the midst of the European sovereign debt crisis, Portugal was considered financial "junk” by the three main US rating agencies. Canada's DBRS maintained the country's rating as a quality investment, which allowed national bonds to be included in the European Central Bank's (ECB) purchase programs, but was not enough to remain on the FTSE World Government Bond Index - the largest global debt showcase.
In February 2012, Portugal was excluded from the WGBI, the benchmark index that attempts to measure the performance of fixed-rate, local currency, investment-grade sovereign bonds issued by governments, mainly in advanced economies. Almost 13 years later and already rated A, Portugal is back in the WGBI this Friday, which opens the door to new creditors.
"It's important for the country's financing. The WGBI is one of the benchmark indices for international institutional investors, such as pension funds, insurance companies and sovereign wealth funds. Many of these investors structure their bond portfolios according to the WGBI. It also increases liquidity, improves international credibility, strengthening our financial independence via greater diversification, reducing their dependence on institutions such as the ECB,” says Paulo Monteiro Rosa, senior economist at Banco Carrego sa.
"It should open the door to new investors and therefore have a positive impact, but it's hard to say to what extent, since some investors may have already bought, but it's definitely a positive factor,” says Jens Peter Sørensen, chief research analyst at Danske Bank on the return to the index.
For the senior economist at Banco Carregosa, this return makes the country "more attractive” in terms of financing and accessible to more investors, which is a way of diversifying financing sources. In addition, he anticipates "a reduction in costs with access to a broader investor base, increasing investor confidence and thus reducing the associated risk premium”.
The yield on Portuguese 10-year bonds is currently trading at 2.8% - and has even touched negative territory at the end of 2020 - far from the levels above 12% at the time of the WGBI exclusion. The spread against Germany, on the other hand, stands at just 39 basis points.
It is on this indicator, which acts as a risk barometer for investors, that Paulo Monteiro Rosa expects to see an impact. The economist stresses, however, that Portugal has already benefited from the positive effects of the consolidation of public accounts, with budget surpluses and a reduction in the ratio of public debt to nominal GDP, which has been reflected in lower spreads than those of Mediterranean countries and even France.
Sørensen also points out that the direct impact may be "small”. According to the expert, the most visible impact will be on spreads, where Portugal is likely to outperform its peers. However, "I think part of that impact has already been calculated, since investors who follow the FTSE WGBI can rebalance before inclusion have probably already done so, but for more passive investors, such as ETFs, rebalancing occurs when it is included and we should have an impact.”
Inclusion in the reference index and the A rating will be key factors for Portugal to attract not only more, but also different debt investors. According to the president of the Treasury and Public Debt Management Agency - IGCP, Miguel Martín, the country is attracting the attention of sovereign and pension funds, including those from Norway and the Middle East. And it is preparing to head to Asia for a "roadshow” with the aim of attracting new creditors.
In September, the head of IGCP announced that he would be holding a series of meetings with Asian investors next month. He explained that Norway, the Middle East and Singapore are geographies where pension and sovereign wealth funds are already investing in Portugal, thanks to its A rating. "Japan could also start buying” with its inclusion in the world's main WGBI bond index, according to Miguel Martín.
"It increases liquidity, improves international credibility and strengthens our financial independence.”
PAULO MONTEIRO ROSA
Senior Economist at Banco Carregosa
"Some investors may have already bought, but it's definitely a positive factor.”
JENS PETER SØRENSEN
Chief analyst at Danske Bank