The monthly arrival of hundreds of thousands of people into the US and Mexico from the Northern Triangle of El Salvador, Guatemala and Honduras and elsewhere in Central America over the past year is an economic, diplomatic and humanitarian tragedy – and a specific investor disappointment.
Investors in Latin American sovereign bonds 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 competitiveness 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 administration of then-president Barack Obama led a broad initiative to improve governance, and before cutting aid, President Donald Trump repeated that approach. The new Development Finance Corporation may revisit financial-market building with venture-capital deals, but the bigger agenda, to channel portfolio and remittance inflows, is missing.
After the civil war, El Salvador’s priorities were reconstruction and modernization in line with international standards. The central bank, working with donors, invited bankers and fund managers to share best practices and recommendations for active credit and securities markets. Salvadoran 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 US dollar outright was adopted. The ex-rebel Farabundo Martí National Liberation Front (FMLN) and conservative Nationalist Republican Alliance (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. A 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 had 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
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 the removal of its president 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 programs of the International Monetary Fund and World Bank, mirroring a commercial access path more common in Africa.
Dominican Republic and Panama
While the Northern Triangle has pronounced “junk” credit ratings, the Dominican Republic, a small component in JPMorgan’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 over the past year, with the incoming government of President Laurentino Cortizo intent on combating corruption and expanding mining and financial services to offset a decline in revenue from the Panama Canal. It was a top MSCI performer in the first half, with a nearly 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 advocacy for credit and capital-market strengthening, as dedicated multilateral lenders such as 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 that new bond issues and indices and investor outreach policies could help overcome.