January 27, 2022

Caribbean Market Overview – 2019 Q1

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From CIBC First Caribbean

Caribbean Market Review

Summary: Emerging market credits benefitted from a quick change in investor sentiment, as ambiguous Fed signals in December prompted the market to diminish expectations of one to two rate hikes in 2019 to almost zero. Moreover, difficult Brexit discussions in Europe pushed the breaks on expectations of a gradual tightening cycle on that side of the world. This situation provided an excellent environment not only for stocks, but also for emerging market credits in January, prompting a new round of issuance during the first weeks of 2019.

In line with the diminished expectation of monetary tightening around the world, the Caribbean and Central America enjoyed an impressive rally since our last publication, with most of the positive moves concentrated in January. Without a doubt the outperformer of the region was ELSALV, as the 2019 budget and financing discussions reached a positive outcome in December, limiting the uncertainties behind the presidential race in the short term. DOMREP and PANAMA also took advantage of the favorable conditions, as both countries maintained their house in order with growth rates well above the regional average and low fiscal deficits. JAMAN maintained its strong performance as locals continued to support the curve and Fitch upgraded its credit rating to B+. On the other side of the spectrum, COSTAR continued to lag credits in the region as fiscal concerns remained in place, despite the approval of the fiscal reform late in 2018.

In El Salvador, despite Bukele’s victory and the return of complicated dynamics to congress, we do not expect this outcome to significantly impact asset prices in the short term as the uncertainties regarding 2019 debt issuance and budget approval are now out of the way. With this result, we expect the GANA party to start looking for alliances in congress, especially with FMLN as it tries to obtain the veto power against ARENA’s coalition holding 49 out of the 84 seats in congress. If this occurs, we are likely to see the return of slow budget and debt issuance approval discussions into next year, but also expect ARENA to keep GANA and the FMLN in check, preventing them from implementing measures that could put the fiscal account in further jeopardy, hence maintaining the status quo.

DOMREP tightened -50bps on average since our last publication, driven by spectacular growth in 2018 and favourable external conditions. For 2019, we expect the Dominican Republic to maintain a solid growth pace and to take advantage of favourable financing conditions early this year. The government will need to finance DOP231.8bln (US$4.6bln), including DOP75.5bln for budgetary purposes and DOP156.4bln to meet amortizations during 2019. Moreover, from the debt issuance approval granted in late 2018, we know that the government could issue up to DOP190bln in bonds and the remaining DOP40bln should come from loans with international organizations; hence, maintaining the same ratio of external vs internal sources of funding as per the 2019 Budget. We expect to see around US$2.6bln in external issuance this year.

Fitch upgraded JAMAN to B+ (stable outlook) with little impact on prices, as it was already trading in line with credits three notches higher. Fitch cited a record of large primary surpluses that has cut general government debt/GDP significantly. Moreover, they argued that there is cross-party support for the economic reforms that began with the IMF program six years ago and that they expect this would be maintained when the current stand-by arrangement ends in November 2019.

In Costa Rica, S&P, Moody’s and Fitch downgraded Costa Rica’s credit rating with a negative outlook. The credit rating agencies were aligned in their view of the credit with both S&P and Fitch, and Moody’s assigning BB- and Ba3 ratings to COSTAR. All rating agencies point to the government’s optimistic numbers on the actual adjustment coming from the fiscal reform which we agree on. The government seems to rely heavily on its ability to comply with the fiscal rule in the near future. Given the constitutional mandate of some of the expenditure items, this is still doubtful. More importantly, they highlight that delays in the discussions of external debt issuance could trigger further reviews. A key date to watch is the end of April, which is the government’s target to achieve some progress in congress towards issuance approval.

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