Central America’s Serial Standby Alerts
Central American bonds, which feature in the EMBI, remained stymied by hesitant progress in restoring IMF programs after immediate post-crisis precautionary lines expired, especially with lagging fiscal and monetary policy fallbacks compared with larger Southern neighbors. In the Dominican Republic the new Danilo Medina team has continued its predecessor’s refusal to raise electricity tariffs as the state-owned utility owes private generators over $1 billion which will be raised in local debt markets. The oil import bill is again steep and improved collection and anti-theft measures are unmet conditions pivotal to resuming the Fund relationship, which is also endangered by tougher immigration and trade stances toward Haiti where a fresh prime minister from the business community has assumed office. El Salvador is out of compliance on fiscal missteps with its arrangement expiring March of next year as it prepares to launch an $800 million Eurobond to enable redemption of short-term Treasury bills. Debt/GDP in the dollarized economy is 10 percent over the area average of 40 percent and tax revenue must be raised from the 15 percent level in the next budget to reactivate the standby. Holders of the 2023 global bond can exercise a put option at par before year-end with few takers expected at the current 115 price. Only 2 percent growth is forecast through 2013 which could worsen with US slowdown and further criminal gang violence before presidential elections where the rightist Arena party may reclaim power after recent congressional inroads. Foreign investment has preferred safer and tech-oriented Costa Rica which notched first half 5 percent GDP expansion as the government got approval for a 10-year $4 billion external bond pipeline initially to cover an imminent January maturity. A high-magnitude earthquake will aggravate the fiscal gap already at 6 percent of output and the central bank does not intend to change the existing currency band to the dollar. In 2014 president Chinchilla will leave the post as attempts at spending reform have already been defeated several times.
Guatemala is still debating whether to approach the Fund again as it prepares a mix of domestic and foreign bond issuance around $750 billion in the latest budget. Official debt is low and US credit and remittance flows support the balance of payments, but the country has become a hemispheric drug war flash point drawing in unemployed youth. President Perez Molina won on a law and order and business climate overhaul platform where critics note delays. Governance concerns are more serious in Nicaragua where donors may withhold aid on Ortega executive assertions of control over the courts and other institutions. A $25 million claim from the HIPC-related commercial debt buyback five years ago is outstanding and Venezuelan oil collaboration faces political and health tests of aging advocates.
