The Big Idea
Central America and the Caribbean | Supply and demand
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With emerging markets valuations tight, issuance and supply take on a little extra meaning. This is especially true for Central America and Caribbean sovereigns heading into the region’s 2026 budget debates. But there should be little if any supply risk with most of the CAC region issuing infrequently and with solid investor support for the average ‘BB’ credit. Panama is the only credit that may and should shift back toward the Eurobond market after a long absence, strong emerging markets demand and heavy funding needs for this year and next.
It’s a new issuance market from an issuer perspective. Funding programs for 2025 are all complete for CAC credits except for Panama. Regionally conservative fiscal management and smaller country size translate into small annual $1 billion to $2 billion external financing needs with Panama the exception. Guatemala and the Dominican Republic have finished their $1.5 billion to $2 billion annual Eurobond issuance. There is still a window for Costa Rica to seek legislative approval during ordinary sessions from September to November, but there is now less momentum with the turnover of the Finance Ministry, the conclusion of extraordinary sessions and the fast-approaching campaign cycle. Issuance from Costa Rica is probably delayed until next year and still depends on congressional approval of the Eurobond law.
New issuance is mostly opportunistic among these CAC countries with El Salvador fully funded through the International Monetary Fund until 2027 while both El Salvador and the Bahamas prioritize debt liability over any specific external funding needs. The next few months kick off the budget debate for 2026 and the subsequent funding programs. This allows for an opportunity to pre-fund for next year. However, this isn’t typically the funding strategy for mid-sized countries with smaller funding programs. The Dominican Republic has a larger funding program, but the shift to develop their local markets has sharply reduced annual Eurobond issuance. Small funding needs and stability of ‘BB’ credits like Guatemala and the Dominican Republic allow for maximum flexibility and opportunistic funding to target ideal market conditions.
There shouldn’t be much if any surprise in the 2026 budgets with $1 billion to $1.5 billion in issuance for Guatemala and $2 billion for the Dominican Republic. Honduras may re-enter for $700 million in quasi-sovereign issuance next year. Costa Rica’s external issuance remains constrained for excessive regulations as one of the least frequent issuers. These favorable supply-and-demand dynamics typically minimize the new issuance premium for CAC credits with high over-subscription ratios. Investor inquiry about new issuance typically reflects motivation to add exposure and not a concern about a supply premium in the secondary markets.
Panama is the unique exception with the largest gross funding needs. Diversification away from Eurobond markets and towards bank loans provided some important relief this year with a net decline in Eurobond issuance. Is avoiding the Eurobond markets a sustainable strategy? The short tenor bank loans are not a viable long-term option with the build-up of short-term debt. There has been minimal success in broadening the local markets, with local banks mostly focused on short tenor treasury bills. Panama’s 2026 funding program remains entirely focused on external credit with the 2026 budget referencing $8.6 billion in external funding needs. Panama still has to close the funding program for this year maybe for another $2 billion in external market issuance if multilateral loans fall short of expectations.
It’s a good opportunity to shift to Eurobond issuance after a lengthy absence from Eurobond markets and with strong emerging markets demand, continuing crossover support attracted by the investment grade rating and more favorable positioning risk on the unwind of the overweight positions. The supply-and-demand tradeoff should be favorable in the near-term for absorption of multi-tranche issuance that not only completes this year’s funding but also could partially pre-fund for next year. This is the funding strategy that could sustain supportive near-term supply-and-demand technicals with strong demand likely enough to offset the initial Eurobond supply with a minimal new issuance premium. This is also a logical funding strategy to relieve the rollover risks after the dominant short-term issuance and large 9% to 10% annual gross funding needs over the next few years. Worse supply-and-demand technicals are mostly a risk for next year assuming heavy Eurobond issuance and less crossover demand.
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