The Big Idea
Latin America sovereigns | Relative value
This material is a Marketing Communication and does not constitute Independent Investment Research.
There was no sovereign credit in Central America immune to risk aversion in March. But all are now riding the rebound in April. Better relative value still favors oil exporters like Ecuador and other select credits that can defend their economy against the oil shocks. They have policy flexibility to support growth and upside to credit ratings from things like re-opening of Minera Panama or activist reform in Costa Rica. Guatemala has maximum counter-cyclical policy flexibility through both monetary and fiscal stimulus, high assets and low liabilities.
Across Latin America broadly, the best relative value looks like it is in Argentina, Ecuador, Panama and Costa Rica with some relative value opportunities such as Costar/Paraguay or Panama/Peru. The region is not prone to either crisis or rating downgrades with ‘BB’ ratings reflecting conservative policy management or ‘B’ credits benefiting from active IMF programs, strong US diplomatic support and liquidity influx from workers remittances.
El Salvador and IMF relations
El Salvador was most sensitive to risk reversal as the notable underperformer last month. The IO macro test came and went without much notice – probably because markets have been discussing this risk event since early January and wide valuations more than compensated for weak IMF relations. The more dominant risk driver is the threat (external risk) and not the response (policy response under the IMF). This is why El Salvador was able to partly recovery despite unresolved IMF relations.
Now the context shifts to positive event risk with the IMF spring meetings and the opportunity to reassure investors about IMF relations. The March data released month end should also provide the opportunity to reassure investors and comply yet again with another quarterly fiscal target. It will require aggressive spending cutbacks in March. There is still room for asset spread recovery with wide valuations relative to ‘peer group’ of Bahamas, Honduras, and Colombia.
The Panama mine re-opens
Lower external tensions provide some relief for Panama, but also important are the policy responses to high oil prices and the uncertain external backdrop. The Industry and Commerce Ministry (MICI) just authorized the re-opening of Minera Panama for the processing, removal and export of stockpiled ore that was extracted before the suspension of operations. This should provide 1,000 new jobs and incremental revenues and a reminder of the economic benefits from the mining operations. The soon-to-be-completed mining audit has also shown no environmental issues except for the stockpile of unprocessed ore. This technical document should provide the Mulino administration arguments for open debate about permanent re-opening. This should be the main policy priority to counter the downside risks to growth from high oil prices and also sustain Panama’s investment grade rating. Next to monitor is the public debate and shift in voter sentiment across polls. There is already a draft legal framework for the re-opening that doesn’t require congressional approval. This positive shock to growth is the obvious policy alternative and the rational for tighter credit spreads relative to Peru and convergence back to levels before the mine closed in 2023.
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