LatinFinance - March/April 2014 - 68

CAFTA-DR
BONDS

As investors tire of more mainstream emerging markets, bonds from
Central America and the Dominican Republic could offer an appealing
opportunity to diversify. By Larry Luxner

Untapped potential

68 l atinfina nce.com - March/April 2014

Source: Larry Luxner

s the recovery picks up steam across the US and the eU, prospects
for economic growth in central america look relatively bright - led by sub-regional free trade
agreement countries costa Rica, Dominican Republic and Panama.
But the prospect of interest rate normalization in advanced economies could "instill a
higher dose of financial market volatility in most countries" at least through the first half of
2014, says Pablo Bréard, head of the international economics Group at toronto-based Scotiabank.
analysts say real output in central america and the caribbean is likely to accelerate to 3.2%
in 2014 and 2015 after growing by 2.2% in 2013.
clearly some countries in the region will perform better than others. "Wider fiscal deficits
will remain of concern in the region, as they will likely stay at high levels," says Bréard, noting
that both costa Rica and the Dominican Republic will continue expanding their fiscal shortfalls.
"el Salvador may also face elevated debt sustainability concerns given the poor economic
performance and low tax collection," he says.
in el Salvador, government public debt came to $14.9 billion last year, up 2.7% from 2012.
of the total, $11.3 billion corresponds to debt taken on by the non-financial public sector, and
the remaining to debt owed by state financial institutions and the central Reserve Bank of
el Salvador. external debt - the obligations assumed by the state in international markets -
came to $8.07 billion, or 54% of the total.
last July, fitch Ratings downgraded el Salvador's sovereign credit rating by one notch to
BB-, leaving its negative outlook in place. likewise, Standard & Poor's rates el Salvador in the
BB- category with a negative outlook, while moody's gives it a Ba2 rating with a stable outlook.
So far this year, the dominant story has been the selloff in emerging market currencies, the
biggest since the global financial crisis. this was the US federal Reserve's announcement of
tapering - a $20 billion reduction in monthly bond buying, from $85 billion to $65 billion a
month. that sparked dramatic currency devaluations in emerging markets around the world,
including argentina, turkey, South africa, and Russia.
Yet nick Rischbieth, executive president of the central american Bank for economic integration (cabei), says that while interest rates have indeed gone up, it's not been as dramatic
a development for costa Rica, el Salvador, Guatemala, Honduras and nicaragua - the five
members of cabei - as it has elsewhere.
"obviously, interest rates are rising worldwide. that's the normal reaction of the markets,

and you've seen central banks in some
cases acting very aggressively to stop outflows - for example, turkey," Rischbieth
tells LatinFinance .
"the central american situation is a lot
different from that in South america, and
more different again than in turkey. most
of that outflow is a result of quantitative easing, so hot money goes to bigger markets.
But just as the tapering discussion commences, hot money starts to leave again.
the question is whether emerging market
countries are as creditworthy as they were

CAPITAL IDEA: Companies like
Costa Rica's ICE offer diversification
appeal

nick rischbieth, cabei

"the CentRAl
AmeRiCAn situAtion
is A lot DiffeRent
to thAt in south
AmeRiCA"

http://www.LATINFINANCE.COM

LatinFinance - March/April 2014

Table of Contents for the Digital Edition of LatinFinance - March/April 2014