Latin America/Caribbean


Latin America’s Spoiled Pension Ecosystem

2020 August 12 by

The creation of private pension funds in Chile in the 1980s was hailed as the answer to bankrupt public systems under a free-market economic shift. The model, with worker/employer mandatory allocations as a portion of salaries, was adopted across the region and in more than two dozen other emerging markets.  Fund creation and oversight was guided and paid for by the World Bank, USAID, and other donors. Enthusiasm for the concept was so great that funders even discussed outside guarantees for private systems in countries lacking deep capital markets for investment.

The first country to dismantle its private pension pillar for short-term spending was Hungary in the wake of the GFC in 2010. The dozen year-old system was forced to transfer its USD 13 billion in assets to the state to plug the budget deficit, with the move part of broader populist measures taken then. Soon after, Poland’s system was crippled when the state took over and cancelled all government bonds held by the private funds, wiping out half of their assets, to prevent debt from reaching a constitutional limit.

Today in Latin America, governments are facilitating rather than forcing the end of the private system model to allow savers to survive the Covid-19 pandemic.  Despite an emergency aid package worth 12% of GDP including direct payments to the poor, Peru made the first move. As the country locked down, the government enacted legislation allowing savers to tap up to 25% of accounts. Estimates put withdrawals at some 13% of the USD 50 billion that was under management, as more than half of account holders took payouts.

Pioneer Chile followed, allowing up to 10% withdrawals from Latin America’s largest USD 180 billion, 61.5% of GDP, private pension funds.  The move follows months of protests over poverty and social justice prior to the pandemic’s outbreak, including outcry over lack of a public retirement scheme and high fees/low returns for the private funds. Chile will hold a referendum on re-writing the constitution in October. If approved major pension system changes are likely in proposed amendments. 

Elsewhere in the region, Colombia’s congress is considering a bill to allow the unemployed to withdraw up to 10% of savings from the USD 73 billion managed by private funds. Mexican funds are allowing the jobless to take up to 3 months of their last salary, or 11.5%, of their savings from the USD 191 billion system as the President recently guided a higher future employer contribution formula. A record high USD 823 million was withdrawn in June, according to the regulator. The Senate in the Dominican Republic is debating permitting 30% withdrawals, while Brazil is considering allowing workers to make partial withdrawals under its system’s non-compulsory private pillar.

Early withdrawals will help to mitigate the pandemic-induced devastation for thousands of families in Latin America, but the economic and market impact will be felt for years.  Private pension managers are being forced to sell into weak markets to meet redemption requests. Despite some rebound this summer, stock markets across the region are down between 25-45% in USD terms.  Forced selling of assets is pressuring local bond markets at the same time foreign investors have withdrawn.  In Chile, for example, 20% of funds’ assets are in Treasury instruments and under its emergency program the central bank was only permitted to buy central bank and bank bonds.? As debt and deficits soar, there is rising concern about how governments will find buyers as they borrow record amounts..

Fiscal and institutional investor impacts will be felt into the next decade. The countries which allow international investment by private funds will benefit this year from forced selling. As funds sell overseas holdings, currency pressure will ease and current account gaps narrow, with Chile benefiting as foreign assets stand at more than 40% of portfolios.. Longer-term large chunks of the system may erode or be dismantled with assets transferred to the state to meet the needs of retirees. For countries like Peru with a parallel public pay-as-you-go pension scheme, the government is already considering refunding some worker contributions which could bankrupt the system. Private pension funds have been a standout Latin America success to overcome public retirement scheme weakness and build a solid contractual savings base..  With workers drawing down savings today, their private accounts will be inadequate to meet future needs and the states will have to assume the burden as a proven capital markets catalyst decays. .

Latin America’s Roiled Remittance Remedy

2020 April 30 by

The 2019 Inter-American Dialogue annual survey of regional remittance trends showed slower 8% growth to almost $100 billion, with “political problems” in Venezuela and Central America driving the increase. US migration restrictions will likely damp the 2% of GDP flow, with 40 million households getting overseas money. The tapering will cramp future economic performance as such a large balance of payments component and family and personal income support, the report warns. Mexico’s clip in particular fell from 11% to 7%, and El Salvador, Haiti and Colombia also slid. In the “most unstable” Northern Triangle countries of Guatemala, Honduras and Nicaragua the cash is the biggest share of output, and for Latin America and the Caribbean yearly growth is projected at 5% through mid-decade. Mexico was the leader receiving $35 billion, as more workers sent higher amounts, according to the analysis. They were larger from Florida, New York and Georgia than in California, reflecting a deportation “Trump fear factor.” While volumes and individual transactions rose, principal was flat as savings were drawn down in recent years. In Central America “victimization” is a key catalyst, and leavers typically have transnational connections and a negative domestic economic outlook. The odds jump with households earning less than $400/monthly. In Nicaragua one-tenth of families had a member flee, mainly to Costa Rica and Spain along with the US. Remittances are 15% of GDP, and 10% of recipients reported a one-third annual jump in the sum to $4000. Venezuela’s population has historically not been a major source since the Maduro regime’s humanitarian and social crisis, and channels are limited due to payment system mistrust and preference for “in-kind materials,” IAD comments. It estimates 3 million people already rely on the inflows, second in the current account after oil, in the increasingly dollarized economy. Fragile states like Haiti, where the portion of national income lead at 35%, will soon be joined by Bolivia, Guyana and Paraguay as examples.

Haiti’s earthquake a decade ago has been overshadowed by the continental Venezuela and coronavirus emergencies, with the President unable to gain parliamentary approval for proposed prime ministers as he advocates constitutional revisions to break the logjam. His government has come under violent protests for unaddressed poverty, with half the county living on under $2.50/day, and lacking food and sanitation. A watchdog group calculates that $2 billion in concessional oil aid was squandered, and growth is flat with currency depreciation and inflation in double digits. Haitians have exited to neighbors and throughout the hemisphere since the natural disaster but Venezuela’s collapse has overshadowed the movement. Citizens from debt-defaulters Argentina and Ecuador could soon expand the exodus. The IMF has declared Argentina’s $100 billion in dollar obligations “unsustainable” but the government has insisted on continued social spending that would postpone fiscal balance until mid-decade. The new Finance Minister has promised a quick offer that could entail a 50% haircut according to investment house consensus, but creditors may push back not only on servicing capacity but the Fund’s traditional senior standing guaranteeing full repayment. Outside observers believe the Fernandez Administration’s program will be more credible with far-reaching administrative and supply-side reforms, especially with offshore oil deposits relatively un-bankable at the current price and tender enthusiasm.

Jamaica’s Festive Fund Graduation Jam

2020 January 2 by

Jamaica was a top MSCI Frontier index performer with an over 20% gain after the IMF lauded “exemplary commitment” upon completion of a 3-year $1 billion precautionary facility. The balance of payments backup was untapped with tighter fiscal policy on track to meet the medium-term 60% of GDP public debt target, on low unemployment and inflation, and stronger reserves and central bank oversight. After two consecutive programs spanning six years financial institutions are in better shape, with strides to modernize currency and capital markets and natural disaster risk management. However growth is under 1% with drought and mining company factory renovation, with youth unemployment still at 20% despite new outsourcing, construction and tourism jobs. One-fifth of the population is in poverty, as 4% inflation within the planned range has allowed interest rate and cash reserve cuts. Foreign exchange auctions soon to operate through a dedicated electronic platform reduced local dollar pressure, within a modest 2% current account deficit. Oil import prices remain under control, but weather swings, high crime and plant capacity constraints continue to inject uncertainty. In October S&P raised the sovereign rating to “B” after a successful $1 billion bond liability management operation. Bank lending rates are under 15%, with credit growth at double that pace geared toward mortgages and consumption as the bad portion is just 2.5%. International trade and goods and services taxes support a 5% primary budget surplus, and a fiscal council is in formation. Fuel subsidies and civil service compensation require further overhaul, and state oil refinery loss and exchange rate coverage should be phased out, according to the Fund’s final report. Better household data will help assess system risk for both the central bank and financial services commission as they work on a joint resolution regime and inclusion approaches for poor and rural customers. In the post-program phase supply-side reforms including on land registration, factoring and leasing should be a priority and multi-currency practice can be extended temporarily toward eventual end. Unmet formal and informal small business credit access is estimated at 20% of GDP, and agricultural productivity lags while drug and gang violence run rampant, the review cautions on the unfinished agenda.

Barbados too earned praise under its extended Fund facility in a November visit, with foreign reserves roughly tripling the past year to $600 million. Following domestic debt restructuring in 2018, external bondholders agreed to a 25% interest and principal haircut in October under an exchange instrument with a natural disaster clause. Over the next decade, the debt-GDP ratio should fall to 80% with a raft of additional taxes and reduced state enterprise borrowing. A new law will reinforce central bank independence, and limit currency peg intervention to smoothing only. Regulatory relief is under a strict deadline for banks and non-banks to replenish capital, as credit reporting standards are revamped. With the primary surplus exceeding expectations, another $50 million installment should be available in December. Trinidad and Tobago with a 10% decline on the MSCI frontier benchmark has been an exception to the positive mood as hydrocarbon prices correct, and Venezuelan refugees continue to arrive by boat with no asylum procedures in place to provide durable education and employment solutions.

Venezuela’s Circuitous Sanctions Cycle

2019 October 13 by

Following Venezuela’s removal from benchmark bond indices after US sanctions as rival international coalitions line up to remove and support the Maduro government, investors stuck with exposure have joined Latin American researchers in questioning the endgame of commercial pariah status. The Lima Group and EU also imposed curbs, as Cuba, China and Russia continue to support Caracas as well as opposition talks with National Assembly head Guiado forty countries recognize as the accepted President. Washington’s crackdown began in the Obama Administration with top official asset and visa confiscation, and President Trump added hundreds of individuals and companies and entire sectors before a recent blanket ban. The specific order against state oil monopoly PDVSA went into effect in June as creditors scramble to lay claim to Citgo and other holdings to collect overdue payment. The central bank is on the list as well as Russian banks involved in the petroleum industry, and all US dollar and crypto-currency transactions are taboo. Sanctions are not to blame for the economic, social and humanitarian catastrophe, as hyperinflation, hunger and mass exodus preceded the ramp-up, according to a September Center for Strategic and International Studies note. Oil production accounting for almost all export revenue fell millions of barrels, and a two-decade record of socialist mismanagement and corruption provoked widespread output and institutional collapse. Even when cash was available to import food and medicine, the regime and military tightly controlled distribution, and they never allowed free and fair elections in independent observers’ view. An oil-for-food program as the UN coordinated during the Saddam era in Iraq would require unlikely external access and oversight, amid evidence staple subsidies routinely exclude political enemies. Direct aid through churches and community centers outside government interference is unrealistic and unwieldy, even as citizens demand help though additional channels.

CSIS cites a financial and diplomatic vise on Maduro’s inner circle, but calls for a greater chokehold on criminal enterprise including drug dealing and money laundering. It recommends repurposing of internationally-garnered assets for humanitarian needs, as an estimated 4 million refugees are spread throughout the Andean region. It remarks that Chevron still operates in the country lacking a clear framework, and US banks should identify sound untainted counterparts for future transition. Sanctions have not succeeded in restoring democracy or hastening incumbent exit, and both objectives await a separate design from the expanded global community. Russia’s behavior in Ukraine has not changed from the version there, as the civil war in the east leaves tens of thousands displaced and killed. Washington may soon outlaw bond-buying, as the foreign investor share of ruble issuance stands at one-fifth the total. The fiscal and current account outlooks have worsened for 2020, as regular Moscow demonstrations mobilize anti-Putin sentiment. Overtures toward the new President in Kiev may bring a thaw such as prisoner exchange, but his focus is on restoring the IMF program to bolster the currency and reserves. With legislative curbs on Russian paper US fixed income investors could diversify into domestic 15% yields with the Fund’s sanctioned approval of budget and energy sector reforms.

Argentina’s Repeat Restructuring Recipes

2019 October 4 by

Argentine securities were in free fall after the August opposition coalition primary election wipeout of incumbent President Macri and his party previewing a clean first round triumph, with credit default swaps predicting 85% of default as new Finance Minister Lacunza acknowledged immediate local and external debt maturity extension urgency. Stocks dragged the MSCI Frontier Index into jeopardy after outperformance through July, while the peso plunged 20% toward 70/dollar and ratings agencies assigned CCC blowup status. Treasury bills held by banks and official agencies will be re-profiled before the October contest, with outstanding dollar obligations across all categories over $300 billion, around 90% of GDP, close to the 2005 peak which set off a decade of crisis and creditor confrontation. The initial stage was an imposed 25% external bondholder haircut, but officials vow not to repeat such unilateral action as they face $25 billion in annual maturities over the next three years. The almost $60 billion IMF program was designed to facilitate commercial rollover, but the Fernandez-Fernandez ticket has indicated renegotiation or rejection if they win and previous assumptions must again be recalibrated in any case. International reserves are down to $55 billion and dollarization and deposit withdrawal domestically could inflict further interest and exchange rate pain, threatening to tip the benchmark rate toward triple digits. Planned Fund disbursements this year were over $20 billion and were to tail off to 5 billion in 2020 before repayment starting in 2021. A delegation visited after the poll result and pledged continued support, but Washington decision making will be delayed by the interregnum awaiting proposed Managing Director Georgieva, who must secure an age waiver since she’ll be 65 in the post.

The government debt is just over half market-based, with almost a quarter of the stock owed to development lenders including the Chinese. It is 80% of the aggregate with 20% corporate, and international bonds with collective action clauses are just one-fifth of instruments. Consensus economic estimates project a small current account surplus averaging $5 billion over the medium term, but cash flow relief was a consideration before the election shock and the T-bill restructuring will reduce net present value to 98 cents/dollar. Extrapolating for other forms at this juncture results in a wide possible exit spread range from 500-1500 basis points. Foreign law global bonds trade in the 40 range and a 75% majority is needed for future modification. Since their EMBI return dedicated investors are overweight and control around $25 billion, and distressed specialists resorting to litigation are in that pack. The “pari passu” covenant loophole which Elliott Associates used in the past to press its claims with an eventual $2 billion payout has been eliminated, but peers reportedly are devising other strategies. Quasi-sovereign corporate issuers may be in their sights for recovery value at a multiple of the 30 in the early 2000s episode, with the intent of raising CDS trigger pressure on the $25 billion gross notional sum tallied in DTCC data. Venezuela went through the determination process and verification recently and was then removed from the EMBI benchmark lifting the spread over US Treasuries to 350 basis points. Another “non-investable” blow to Argentina could be a bitter legacy with higher-profile concern for the election winner.

Central America’s Interrupted Integration Intent

2019 September 13 by

The arrival of hundreds of thousands monthly into the US and Mexico from the Northern  Triangle of El Salvador, Guatemala, Honduras and the rest of Central America over the past year is an economic, diplomatic and humanitarian tragedy and specific investor disappointment. Latin America sovereign bond investors entered originally with a dedicated index. Equities joined corporate bonds on stock exchanges, with Panama recently added to the Morgan Stanley Capital International frontier list. Performance suffered amid fiscal and balance of payments woes, crime and insecurity, and lack of competiveness and policy reform after initial enthusiasm following passage of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA).

 Regional banking and capital market integration blueprints were considered but never fully realized, amid notable strides in private pension creation and financial sector regulation. International development institutions and private fund managers offered encouragement and technical support, but focus disappeared long before the refugee and rule of law crises. In the US, the Obama Administration led a broad initiative to improve governance, and before cutting aid President Trump repeated that approach. The new Development Finance Corporation may revisit financial market building with venture capital deals, but the bigger agenda is missing to channel portfolio and remittance inflows.

El Salvador after its civil war had reconstruction and modernization as priorities in line with international standards. The central bank, working with the donors, invited bankers and fund managers to share best practices and recommendations for active credit and securities markets Officials committed to Basel Committee capital adequacy guidelines and diversifying beyond private debt placement. The exchange rate regime provided stability as a dollar peg and then the dollar outright was adopted. The ex-rebel FMLN and conservative ARENA parties alternated in power and promoted manufacturing exports to boost the balance of payments.

They introduced private pension funds as a main institutional investor and regular domestic and external bond buyer, However public debt now over 70% of gross domestic product is a drag on the economy projected to grow 2% this year, and it jeopardized the core social security system as benefits were delayed. The new President, former San Salvador mayor Nayib Bukele, took office in June after a landslide victory and promised to clean up the mess through “market-friendly” methods. He campaigned on increased social spending within a 3% fiscal deficit, and fresh funding alternatives to lift domestic demand, which could include a second generation private retirement contribution scheme.

Guatemala and Honduras are smaller in frontier bond markets, with lower debt levels and more commodities dependence. Honduras’ debut issue several years ago coincided with a fight over presidential removal for corruption, as dueling chief executives laid claim before snap elections. It previously received debt relief from bilateral and multilateral lenders under the low-income Heavily Indebted Poor Country program, mirroring a commercial access path more common in Africa.

While the Northern Triangle has pronounced “junk” credit ratings, the Dominican Republic, a small component in JP Morgan’s bond benchmarks, is BB and Panama is investment-grade BBB. Both register faster 5% growth, and have enacted tax and spending changes for greater budget balance. Before its recent tourism scare with unexplained visitor deaths the DR was a rare buy recommendation. Remittances combined with foreign residential and hotel investment for a minimal 1.5% of GDP current account gap, and President Danilo Medina in his second term backs public-private partnerships to remedy chronic electricity shortage. Panama received ratings upgrades the past year, with the incoming Cortizo government intent on combatting corruption and expanding mining and financial services to offset Canal revenue decline.  It was a top MSCI performer in the first half, with a near 25% gain.

Central America’s positive economic and financial sector elements that once comprised the DR-CAFTA spirit have been forgotten with the current migration and security pressures and cross-border business and political recriminations. Bank and broker associations and chambers of commerce can reprise credit and capital market strengthening advocacy, as dedicated multilateral lenders like the Inter-American Development Bank and Andean Development Corporation (CAF) emphasize these themes within good governance and sustainable investment priorities. The CAF held an annual conference in Washington last week, and speakers cited hemispheric displacement and social and physical infrastructure crises new bond issues and indices and investor outreach policies could help overcome.

Mexico’s Misplaced Missionary Zeal

2019 August 23 by

Mexican stocks lagged peers with a MSCI Index outcome through July, one year after President AMLO was inaugurated, after the Finance Minister resigned in protest over lack of “evidence-based” policies, possibly referring to $20 billion in tax and investment relief for state oil behemoth Pemex relentlessly downgraded by credit rating agencies. His successor and deputy Herrera is another nominally orthodox pick with World Bank background, but the President’s “fourth transformation” anti-economic liberalism stance routinely overrules his team with arbitrary moves. A new $15 billion Mexico City airport was cancelled leaving bondholders in the lurch and government planes and perks have been offloaded, at the same time Pemex already saddled with $100 billion in debt gets an $8 billion refinery. Next year’s budget plan foresees a slight surplus analysts challenge since government contingent liabilities are masked, and the latest GDP figures narrowly skirt recession. Bureaucracy has been slashed in favor of direct cash payments for social spending, with civil servants demoralized the absence of longer-term education and health reform strategy. The peso has dipped toward 20/dollar with investor backlash, but as a general emerging market proxy these effects are offset in industrial world low interest-generated risk-on sentiment.  Members of the President’s party, which has no Senate majority, urge a compromise legislative agenda and warn against individualized power. They united with the opposition on beefing up Central American immigration control, after US President Trump threatened special tariffs despite renewed free trade agreement. Mexican lawmakers are expected to back the accord, which faces tougher sailing in Washington heading into an election year. Democratic presidential candidates advocate stricter environment and labor provisions and to reopen negotiations even with ratification this year. Auto supply chain relocation from China has been notable with that bilateral tiff, and executives note that neighbors like Brazil, which recently signed a pact with the EU as Mercosur’s powerhouse, could be a fallback as treaty and refugee frictions resurface.

Brazil stocks rose 15% despite growth forecast cuts toward 1% and continued corruption allegations surrounding President Bolsonaro’s family and close allies, including famous Car Wash prosecutor Moro who may have interfered in investigations. Nepotism is another complaint with his son reportedly tapped as US ambassador despite lack of credentials, and a 30% favorability rating reflects the anemic economy as well as discontent over ultra-conservative military and social positions. Courts have defied anti-minority rhetoric to enshrine ethnic and sexual preferences in law, but conference tourism has suffered with boycott incidents. Banks have 3% bad loan ratios but credit is expanding just above that pace as the policy agenda focuses on social security reform passage to rein public debt, with initial lower house approval. Argentina (+25%) was the surprise stock market winner before primary election results come in mid-August handicapping President Macri’s second term chances. He picked a Peronist running mate in an attempt to neutralize the “Fernandez 2” ticket which could bring Christina back as Vice President. In early voter surveys the two camps are roughly even as the peso has rebounded on lower inflation since May’s near 60%. The IMF’s $55 billion rescue is largely on course, and the European successor to managing Director Lagarde will likely embrace its largest program coming on board right before the October poll.

Argentina’s Stretched Intervention Band

2019 June 2 by

Argentina’s peso as the worst emerging market performer, down 12% through April, continued to drag stocks and bonds with it as runaway political fears about the return of former President Christina Fernandez joined 50% inflation to force the central bank to abandon the IMF-agreed no-intervention zone. The peso veered toward the low 50s/dollar, as tighter fiscal and monetary policies could not dampen consumer price increase expectations or instill business confidence, amid relentless capital flight and banking system shift to short-term deposits for immediate access. Current President Macri, has fallen behind Christina in opinion polls before the October elections, even though she has not declared and faces corruption charges from her tenure. Her memoir was published at the same time as the popularity surveys and contained anti-IMF diatribe investors cite as the basis for repeated debt default after last year’s $55 billion rescue. In June, the major party contenders will be chosen in primaries to clarify the race, with former Economy Minister Lavagna in the mix from the center-right as a preferred financial community alternative. To tame inflation, the benchmark interest rate was hoisted above 60% and controls were imposed on staple items and quickly provoked shortages. The government has leeway to raise budget social spending, but poverty hits one-third the population and only minimal economic growth is projected this year. The much-promised foreign investment boom never materialized as offshore energy was whipsawed by US fracking competition, and multinational companies faced huge valuation losses in currency translation under standard accounting rules. With cumulative inflation above 100% the past three years, the dollar must now be used in balance sheet statements as the “functional” unit.

Brazil in contrast is positive across financial assets despite recent pullback, as the Bolsonaro Administration’s twisted economic and social strands create conflict and confusion. The President glorifies the pre-democracy military junta but has been at loggerhead with his vice president, a noted former general, over foreign and security policies. As a mainstay in the campaign platform, he denounced immigration, but Venezuelan refugees from socialist Venezuela are now a notable exception. In schools his early emphasis is on purging curricula with untraditional family values, while the business community urges skills and technology training. The manufacturing PMI is above 50, and FDI is on track to recover to $70 billion annually, but industrial output remains slack on 12% unemployment. Corporate profits are up from previous recession to bolster stocks, and bellwether state firms like oil giant Petrobras and development bank BNDES are under dynamic new management. They are under the influence of the University of Chicago free-market approach championed by Economy Minister Guides, who founded a private equity house and a think tank reflecting the philosophy. He is leading the charge for overdue reform of public pensions swallowing the budget, and has battled with lawmakers for a majority to fix the “doomed” system. The effort has been bogged down in internal government fighting over content and strategy, and complications from the relentless Car Wash investigations with parliamentarians and their allies in their sights. With estimated GDP growth under 2%, the 6.5% benchmark rate should not budge, and with $300 billion in reserves and a stronger real intervention is unlikely unless central bankers are accused of unconventional social behavior.

Central America’s Border Bid Blast

2019 April 28 by

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.

China’s Latin America Litter Litany

2019 March 17 by

China’s MSCI Index comeback, with double-digit gains through February, continues on strong foreign investor inflows. Morgan Stanley and Citigroup predict over $100 billion in allocation this year, even if “A” share weightings only increase incrementally. According to data trackers, around $10 billion went into equities in January, and the Shanghai exchange this week notched the biggest daily rise since 2015 and is up almost 20% for the first two months. Lunar New Year retail sales climbed only 8.5% on an annual basis, the worst performance since coverage began in 2005, and with US trade tensions the current account surplus was barely positive in 2018. However gross domestic product growth is expected to continue in the 6.5% range as the government again opened the fiscal and monetary spigots short of “flood-like” stimulus. It will likely widen last year’s 4% of GDP declared budget deficit, and total social financing hit a record RMB 4.5 trillion in January with a raft of new state bank facilities directed at small business in particular.

The enthusiasm sloughs off research such as respective Morgan Stanley and China Beige Book criticism that the economy is in “long-term decline “ and published national account numbers are “garbage.” It ignores the first offshore state company bond default in 20 years when Qinghai  Provincial Investment Group failed to pay $10 million due in Hong Kong, and stock exchange price-earnings ratios tipping again into double-digits toward recent averages. Retail investor margin loans have resurfaced as a catalyst, and any Beijing- Washington trade truce may prove short lived as President Trump extended the March negotiating deadline. With Venezuela’s eruption spilling over into neighbors, emerging market investors increasingly are wary about China’s large Latin American footprint as a new risk. Bilateral policy bank loans to Caracas totaled almost $70 billion the past fifteen years, according to a database compiled by the Washington-based Inter-American Dialogue. Internationally-recognized President and opposition head Juan Guaido pledged to honor outstanding obligations estimated at $20 billion for principal alone, and Ecuador as another major recipient just agreed on an International Monetary Fund program to be able to settle its own oil for credit ledger, but both contingencies could further erode Chinese financial system and fiscal discipline commitments.

In 2018, the China Development and Export-Import Banks lent over $7.5 billion to Latin American and Caribbean governments and state-owned firms, outstripping activity through the World Bank and Inter-American Development Bank. Venezuela took $5 billion, around two-thirds the sum, and Ecuador and Argentina, which received a record $50 billion IMF rescue last year, each got $1 billion. The Dominican Republic’s electric utility borrowed $600 million, with the regional sector focus as in the past on energy and infrastructure. The arrangements do not attach policy conditions but require Chinese contractors and equipment, as in Argentina’s railway and Ecuador’s earthquake reconstruction. In Venezuela its stake increased in oil output, as the Maduro administration announced the drilling of several hundred wells and a joint venture between the state monopolies CNPC and PDVSA.

Chinese facilities are on commercial terms, but in Ecuador’s case the interest rate was half the 11% through standard global bond issuance. With Venezuela’s additional funding last year, Beijing stipulated an end to a previous principal payment grace period, implying a country exposure limit even before the confrontation between National Assembly leader Guaido and incumbent Nicholas Maduro over presidential legitimacy. Elsewhere dams in Argentina were caught in corruption allegations, and a Bolivian one was halted after lack of local community consultation, the Inter-American Dialogue finds. These projects are under pressure to improve risk assessment and preparation, especially since they were rejected on environmental and social grounds by other development lenders. Latin America’s relationship to the multi-trillion dollar Belt and Road Initiative is also an open question, as Beijing emphasizes closer strategic areas geographically. Argentina and Ecuador reportedly wish to renegotiate loan terms, and Brazil’s new President Jair Bolsonaro campaigned on a platform of reducing oil company Petrobras’ Chinese bank ties. The big four state commercial banks at the same time have been more active in co-financing transactions and specialist funds, as the Asian International Infrastructure Bank also considers regional participation. The review suggests Chinese finance will turn more cautious, and investor sentiment as well, under near-term mounting losses.