Central America’s Excavated Canal Ruins

Panama bonds were up 2.5 percent on the EMBI through March as Nicaragua’s groundbreaking of a rival $1 billion Chinese company-controlled passage added to current corruption and fiscal fears. Economic growth moderated to 6 percent in 2014 as the budget deficit hit 4 percent of GDP requiring a higher responsibility law ceiling as the Varela government took power. Previous President Martinelli hiked election and infrastructure spending and he is now under criminal investigation for alleged kickbacks in office and denies the charges as politically-motivated. Public debt, two-thirds external, continues to creep toward 40 percent of GDP as Canal expansion will be delayed until next year with contractors claiming $2.5 billion in cost overruns. When completed a new toll structure should recoup revenue, at half the annual $3.5 billion tourism inflow on steady visitor numbers.  Costa Rica bonds also disappointed after sovereign junk downgrade in 2014 as the new administration’s lackluster fiscal overhaul kept the deficit at 6 percent of output. Growth has slumped to 3.5 percent after Intel’s departure, although financial services activity improved. Inflation should come in at the 4-5 percent target range with lower oil prices offsetting currency devaluation damage. The current account gap is stuck at 4 percent of GDP but FDI will again cover it as officials stress diversification from the US and new industries. El Salvador remains an underweight going into elections which could further entrench the left-right divide as remittances from construction and service workers to the north support 2 percent growth as the sub-region laggard. Deflation has taken hold as public debt/GDP exceeded 60 percent after an $800 million global bond six months ago. Dollarization has created a near 20 percent of GDP structural trade deficit, and bilateral and multilateral donors have backed a host of youth education and training programs for export promotion and anti-crime purposes. Guatemala’s debt ratio is less than half its neighbor’s as commodity and mining-led growth is forecast at 4 percent this year. Remittances are one-tenth of GDP on 2 percent inflation and the 2015 election budget may shift from slight surplus but will not be financed by external borrowing under current plans.

Honduras’ thinly-traded paper has rallied on IMF loan receipt despite lingering drug and kidnapping-related violence spurring waves of family emigration. The budget deficit has halved as a fraction of output under the arrangement, and the Inter-American Development Bank and World Bank boosted grants and concessional credit. Jamaica is another Fund instance where stocks are up 10 percent on the MSCI Frontier index on an above target primary surplus and drought recovery. Reduced fuel costs have cut inflation to 5 percent, and local dollar depreciation shaved 8 percent from domestic debt outstanding although the overall load is near 130 percent of the economy. Tourist arrivals again reached 2 million last year with Europe pickup, and the trade deficit narrowed marginally and may further depend on the oil shipment deal margin with pesky partner Venezuela.