The Big Idea
Latin America | Relative value trends
This material is a Marketing Communication and does not constitute Independent Investment Research.
The persistence of the oil shock from the US-Iran war continues to stress test sovereign credits across Latin America. There is a clear divide between the net oil exporters of South America and the importers of Central America. However, the debate goes beyond simplistic oil trade status. Fundamentals are increasingly important, with diversification requiring buffers from either credit ratings or policy reduce risk from external contagion. Panama may be a surprising safe haven for its investment grade rating and the potential for a lift from the reopening of a critical mine. Costa Rica is another credit with resilient fundamentals and potential gains from an active reform agenda.
The intensity of the oil shock should separate credits with active or passive policy management. The benefits of active policy should become increasingly relevant if the temporary shock gives way to concerns about a permanent shock and global economic slowdown. The oil exporters will also experience a reassessment under a higher-for-longer scenario for oil prices. There has been a recent de-coupling between Argentine domestic and external assets.
Panama risk drivers
The fiscal data for Panama is still relevant to reassure the market that the non-financial public sector deficit stays below 4% of GDP this year. The January data came out with the first preview of fiscal performance this year. The extraordinary revenues from ACP land purchases went to finance capital spending, leading to a slight uptick in the deficit compared to the same period last year. That’s probably okay since one month doesn’t make a trend. Next month there will probably be a retraction in capital spending without the benefit of extraordinary revenues.
There is clear motivation to keep the deficit below 4% of GDP ahead of the April and November Moody’s rating reviews. Cyclical revenues look robust with GDP growth at 4.4% in 2025 and upside risks on ACP capex this year and next year. There should also be efforts to reopen the Cobre Panama mine with focus on the environmental audit released next month. This is what could provide the structural revenues to comply with the fiscal rule and sustain Panama’s investment grade rating. This will probably also delay Eurobond issuance until later this year so Panama can take full advantage of lower funding rates after reaffirmation of the investment grade rating. Meanwhile, there has been success in rolling over local treasury bills and diversifying towards multilateral funding. This should soften external shocks and explains the recent outperformance relative to the Dominican Republic. There is optimism on further spread compression, especially on shorter tenors relative to Peru with favorable technicals and fundamentals—namely, positive event risk ahead on the mine re-opening and scarcity of bonds.
Argentina resiliency
Argentina’s oil exporter status is no longer offering a buffer against the worse phase of external contagion. The benchmark liquidity is a technical constraint that increases sensitivity to a worse phase of global financial contagion. Eurobonds have been underperforming this past week. However, there hasn’t yet been any obvious contagion to local markets. This de-coupling is quite interesting and reflects the recognition of the economic benefits of higher oil prices. The central bank has been buying US dollars almost every day and rebuilding foreign exchange reserves. The funding strategy only in local markets lowers the vulnerability to external risks. There is not the same risk of a sudden stop with lower funding needs (fiscal balance) and dependence on local funding. The foreign exchange reserve accumulation of $3.3 billion year-to-date and optionality for innovative funding seems a reasonable strategy for servicing the $4.2 billion US dollar bond payments later this year. Despite these buffers against economic contagion, the weak technicals have been a constraint heavy overweight positions in the market and with the liquidity penalty increasing sensitivity to the overall market. The longer tenors have underperformed on the curve. The 29s/30s look like the best relative value (still YTD positive returns) even without the debt liability optimism as the economic team downplays the return to Eurobond markets. The external financial contagion may persist; however, Argentina should be the first to rebound on any external relief so long as domestic markets remain resilient.
Costa Rica’s many buffers
On the recent upward spike in oil prices, diversification matters. There are quite a few buffers for Costa Rica:
- Most of the country’s financing program is domestic with deep local markets that are now deeper on EUR issuance
- The program already prefunded almost half through February,
- Record treasury deposits
- Import coverage of 10 months with highest relative foreign exchange reserves in the region next to Guatemala, Uruguay and Peru
- Exports resilient and tourism accelerating despite tight foreign exchange valuations,
- Still strong economic activity at 4.8% year-over-year in January 2026
- No contagion to local markets (CRC stronger),
- Potential for rate cuts (IMF recommended on stubborn deflation), and
- Now entering into new congress with active reform agenda.
The market beta has been slightly higher compared to other illiquid ‘BB’ credits like Guatemala, but Costa Rica remains an outperformer against liquid ‘BB’ credits. The resilient fundamentals and positive event risk on the reform agenda should provide an anchor against external contagion. The success on the reform agenda could also allow for a trajectory of credit rating upgrades and the convergence trade with Paraguay.
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