Central America’s Border Bid Blast
As US President Trump threatened to shut the southern border through Mexico to Central American asylum seekers, small bond issuers in the region braced for investor fallout amid otherwise buoyant market conditions with Federal Reserve tightening suspended. After promising immediate shutdown, the President retreated and gave the Mexican government one year to better manage the inflow, as the current policy allows indefinite local humanitarian stay. He brandished tariff re-imposition on car imports with no action, in conflict with the revised USMCA free trade treaty under consideration in Congress. The budget team pared infrastructure and social spending elsewhere to preserve fiscal discipline and a primary surplus, as the ratings outlook is already negative and state oil giant Pemex has been downgraded. El Salvador has been a main “Northern Triangle” exodus source, after former capital city mayor Bukele won a landslide first-round presidential election victory in alliance with a small conservative party. GDP growth is in the 2% range, with a manufacturing slump offset by strong remittances and public debt above 70% of output with the interest bill increasing. A medium term issuance calendar will cover external obligations, but the budget shortfall is stuck at 3% of GDP and despite his market-friendly platform the new President’s specific economic policy and reform agenda is unclear. Looking to neighbors for comparison, after Costa Rica was downgraded to “B” last year, the national assembly debated overdue fiscal changes challenged in the supreme court. They were recently approved, and introduce a value added tax and extend the capital gains charge beyond property. The deficit is still projected above 5% this year, and will be partly bridged by $1.5 billion in global bonds in the pipeline. Unlike El Salvador which uses the dollar, the local currency continues to slip as the central bank keeps a 5% policy rate on inflation half that level.
The Dominican Republic should again be a leader with estimated 6% growth on solid construction and tourism, despite the chronic energy squeeze and a softer peso. The current account is in slight deficit due mainly to oil and equipment imports, and fuel subsidies remain a budget drag after President Medina also hiked public sector wages 10%. He may again attempt re-election in 2020 after an open primary system was agreed, and electricity sector overhaul will be a prominent campaign theme as major areas are still unconnected to the national grid. Panama has congressional and presidential polls in May, with the incumbent party running behind the leftist PRD candidate Cortizo after numerous corruption scandals. Moody’s upgraded the sovereign a notch after fiscal responsibility law refinement, but the stock exchange was a big loser on the MSCI frontier index with a 40% first quarter loss. No party is predicted to secure a legislative majority as the overall business-oriented strategy will continue with likely bribery and tax evasion crackdowns. Growth should be around 5% in 2019 after falling below 4% last year, as the Canal benefits from trade pickup and a new mine begins operation. The debt/GDP ratio has settled at 40%, but the Trump negative Central America effect could further reverberate after his name was stripped from local property over a management dispute.
