Capital offerings by financial institutions in Latin America and the Caribbean plummeted to historic lows in the second quarter for a total transaction value of about $129.23 million, data from S&P Global Market Intelligence shows.

There were only two financial companies in the region that tapped capital markets during the second quarter this year. Banco Actinver SA Institución de Banca Múltiple Grupo Financiero Actinver in Mexico issued $125.96 million in nonconvertible debt, and Dolla Financial Services Ltd. in Jamaica undertook an IPO for $3.27 million.

This compares to five issuances in the first quarter worth $1 billion, as issued by Corporación Andina de Fomento, LatAmGrowth SA, LIV Capital Acquisition Corp. II, Banco Pichincha SA and Banco de Inversión Afirme SA Institución de Banca Múltiple Afirme Grupo Financ.

Following a peak in the last quarter of 2021, when 19 companies raised capital for a total of $7.7 billion, issuances in the first two quarters of 2022 dropped sharply to multiyear lows. After three years of low interest rates across the region, due to central banks' impetus to provide liquidity and boost struggling economies throughout the COVID-19 pandemic, the trend has now reversed.

Concerns over high inflation levels, often accompanied by currency depreciation, have made central banks more hawkish and companies less willing to issue debt.

As central banks around the world tighten monetary policy, emerging markets — including those in Latin America — have begun to feel the impact of higher rates. In a recent report, S&P Global Ratings highlighted that scarcer and more expensive liquidity could affect riskier markets, "potentially reducing investor appetite for financial institution debt in these countries."

Higher rates, less debt

During the worst of the COVID-19 pandemic in 2020 and 2021, central banks around the world were forced to slash key rates. As countries slowly reopened from pandemic lockdown, international debt from Latin America for full year 2021 reached a record $149 billion across all industries, according to the United Nations Economic Commission for Latin America and the Caribbean, or ECLAC. Commercial banks and financial services accounted for 23.3% of international debt issued in 2021, according to ECLAC.

In 2022, tighter monetary policy and persistent inflation fueled by the war in Ukraine have hampered global debt issuances worldwide, and Latin America has not been an exception. Interest rate curves in most countries in the region are pricing in higher interest rates for the remainder of the year and for much of 2023, according to a recent S&P Global Ratings report on the third-quarter outlook for the region. While Brazil and Chile seem closer to ending their rate hike cycles, this is not likely to happen until next year.

Until then, Latin American financial companies are likely to avoid issuing debt, especially as many were able to tap markets when interest rates were still low and still have more than adequate liquidity levels.