Central America’s Botched Succession Sequence

Central American bonds buckled on surprise election outcomes in Costa Rica and El Salvador, with Panama’s next in line as a payment dispute with foreign construction firms overshadowed Canal expansion. Costa Rica’s ruling party candidate was favored despite the abysmal approval rating of outgoing President Chinchilla, but both he and the opposition left representative did poorly in the first round as an anti-establishment academic critical of bold fiscal reform drew their support.  The centrist force advocates budget deficit reduction from the current 5.5 percent of GDP but also wealth distribution, and may change the narrow corridor exchange rate regime of gradual depreciation against the dollar in favor of more ambitious alternatives. In advance of the April runoff ratings agencies have assigned a negative outlook on track for investment-grade loss with most sell-side houses long recommending underweights. El Salvador’s second round resort for early March was predicted, but the former guerilla FMLN ruling party’s 49 percent result almost pre-empted it with a 10 percent lead over the rightist ARENA on a high social spending platform offering education and jobs to gang members responsible for the runaway murder rate and drug trade. GDP growth was again only 2 percent last year on a chronic fiscal gap and weak exports stifled by dollarization which has occasionally surfaced as a campaign issue. Traditional post-civil war political polarization has reasserted itself and will likely extend through 2015 congressional polls according to observers who expect the business community to suspend decisions in response. In Panama the alignment in power will likely lose its legislative majority even if no major economic policy departures separate the ticket heads. Infrastructure outlays are set for the $20 billion range after the Martinelli administration leaves office, with growth staying at a 6-7 percent annual pace to top the area. Alleged cost over-runs of $1.5 billion on the Canal project which is two-thirds complete are under negotiation between the government and overseas contractors and may be referred for arbitration but should not seriously compromise funding and widening plans. Public debt has dropped one-third to 40 percent of GDP the past decade as bond issues increasingly target local investors with all paper soon to become Euroclearable.

The Dominican Republic is past the election cycle and has decided against another IMF program, but resolution of a mining controversy and solid remittances and tourism fostering 4 percent economic expansion have improved bond bids even as another $1.5 billion in supply is authorized for 2014. The budget deficit is under 3 percent of GDP but official debt has increased to 40 percent on stubborn electricity and fuel expenses despite recent tax hikes which aided 4 percent inflation. The citizenship clash with Haiti triggered by the threat of large-scale deportation has dissipated with further clarification, but was evoked by Haitian President Martelly on a state visit to Washington as long-promised parliamentary elections there elude definition.