EMTA Forum Focuses on Central America and Caribbean
EMTA’s first Central America and Caribbean (CAC) Forum was held on Wednesday, June 9, 2010, in New York City. Scotia Capital hosted the event, which drew 100 interested EM debt market participants, at its downtown Manhattan office. Both sell-side and investor specialists discussed their views on tourism, remittances and investment opportunities.
EMTA Executive Director Michael Chamberlin opened the session with a reminder that after recent financial market scrutiny of Eurozone countries, including EMTA’s own seminar on the beleaguered currency zone a week earlier (see Eurozone story by selecting back on your browser), the trade association was pleased to return the focus to Emerging Market countries, and in particular to an often-overlooked area.
Joe Kogan (Scotia Capital) moderated the event’s panel discussion. Kogan noted that with tourism accounting for 10% of GDP in Caribbean countries and 5% in Central American nations (excluding indirect effects such as construction), the session should logically start with a discussion of the hospitality industry’s outlook.
Royal Bank of Scotland’s Boris Segura pointed out that tourism would depend on consumer spending, and voiced particular enthusiasm for the Panamanian tourism industry. “Panama is where Costa Rica was ten years ago,” he suggested. As a frequent traveler to the country for many years, he observed that hotel rooms were becoming increasingly scarce as interest in the country expands. He also singled out the Dominican Republic as a “bright spot” attracting investor spending.
Carl Ross (Oppenheimer and Co.) expressed concern on the increasing dependence by CAC countries on tourism, with increased reliance most notable in the Caribbean. “Countries that get tourism right will be ok, but there is not a lot else for many of them to hang their hats on,” he stated, calling attention to unfortunate decline of the manufacturing sector. With US consumers tightening their pocketbooks, value will play a stronger role in vacation decisions; this will favor Jamaica and the Dominican Republic at the expense of Bermuda, Barbados, the Bahamas and the Cayman Islands, he reasoned.
Ross added that retirement home construction, which had boomed during 2004-07 in countries from Costa Rica to Grenada “has come to a complete stop,” and interest in new homes for both North American retirees and CAC diaspora was now in jeopardy. This was due to both a lack of financing from reluctant-to-lend Caribbean banks and the increasing attractive pricing of homes in rival Florida. The eventual opening of Cuba will also, at least initially, take market share away from other CAC neighbors.
The panel discussed what sectors in which CAC countries could potentially be competitive. Sean Newman (GE Asset Management) reminded attendees that remittances and agriculture also play major roles in CAC countries. In addition, some countries have mineral resources, Trinidad and Tobago has its natural gas industry and Belize will benefit from recent oil discoveries.
TIAA-CREF’s Karina Bubeck emphasized that Trinidad and Tobago also has a presence in the petrochemical sector. She also expressed interest in additional sectors; the Costa Rican telecom sector is likely to be privatized, opening a potentially lucrative opportunity in licenses, and the dependence on food imports also means improvements in that sector would be attractive to investors.
Following up on remittances, which account for as much as 17% of GDP in El Salvador, participants discussed the outlook for cash inflows from CAC nationals working abroad. Ross voiced “reasonable optimism” for their recovery, underscoring that the 10% drop in 2009 vs. 2008 was actually much an improvement over his original forecast of a 25% decline. “The main themes are that remittances are resilient, they have recovered since late 2009, they will probably rise 5% in 2010, and I expect they will be back to 2008 levels next year,” he summarized.
Bubeck concurred, while arguing that academic studies which conclude that remittances are countercyclical were not in fact supported by the data emanating from the most recent economic cycle. She also observed that many CACs did not benefit from the currency-depreciation effects of the Tequila Crisis. Bubeck pushed the audience to also consider social factors. “Kids raised without their parents working abroad could have undesirable social effects, such as them finding their ways into gangs in El Salvador, etc., so these factors should also be considered,” she advised.
Given the current market environment, the panel did not expect many new issuances from the region in 2010. According to Ross, Barbados was preparing an issue that got shelved because of market conditions; and while countries such as the Dominican Republic, Jamaica, Panama and Guatemala were all potential issuers, “bottom line is that they probably won’t.”
Segura noted that, in many countries, government approval for debt issuance is needed. He hoped the Dominican Republic would do a “no-brainer” Brady bond liability management operation.
Franco Uccelli of JPMorgan reviewed the performance of CAC countries in 2010 since January. Total return on CAC bonds was approximately 8% year-to-date, outpacing the EMBI Global’s 3% return. “Paradoxically, as the world focuses on other countries, CAC credits have outperformed,” he stated. Uccelli specified that CAC returns have been driven by lower-rated high-yielding credits such as Jamaica and Belize. Strong local sponsorship of the bonds (locals sell based on local factors rather than on global financial factors, he explained), and the lack of liquidity (international investors sell more liquid bonds from larger countries to meet redemption demands, for example) have also proven supportive of pricing levels.
Kogan solicited views on the outlooks for several CAC nations. Newman expressed a near-term constructive view on his Jamaican homeland, citing the completed domestic debt restructuring and improved fiscal discipline, while acknowledging long-term structural challenges such as over-reliance on tourism, a contracting agriculture sector, and recent international headlines on crime (although the latest episode has boosted the government’s confidence in attacking similar criminals, he opined).
Ross agreed, and recommended that investors view Jamaica opportunistically rather than as a long-term play. His recommendation of Jamaican paper earlier this year, when yields stood at 12%, was no longer valid, with yields at approximately 9%. Domestic debt was well-supported, he commented, with no new supply expected (as funding is available from multilaterals), and banks, reluctant to lend to “real businesses” sit on cash. Yet the current “aggressive IMF program has a significant probability of failure…if this doesn’t work, Jamaica will then have to restructure its foreign debt, making it hard to look at Jamaica past the next six months,” he cautioned.
Segura stressed that the Dominican Republic, often used as a regional benchmark, was attractively priced, and praised the country’s decision not to issue the full $1 billion authorized in the recent over-subscribed bond offering. Segura questioned official government statistics, “but you can feel the growth in the DR, and they are actually benefiting from the earthquake in Haiti.” Bubeck also saw growth, and commended the Central Bank for improving disclosure.
The DR’s outlook is “stable” according to Uccelli and the credit was “fairly valued.” Structural issues (e.g. the electrical industry) remain, and there is a tendency to miss fiscal targets. “However, we forgive them because they always seem to outperform on growth,” he noted, while calling attention to investor skepticism of official growth statistics.
“Unfortunately for the DR, whenever things seem to be going well, something happens, and often that is due to internal mismanagement,” he warned. Sadly, “only a couple of people really know what they are doing.”
What CAC corporates should investors investigate? Bubeck noted her interest in companies such as Cable and Wireless in Panama and AES El Salvador in El Salvador as well as the Caribbean wireless company Digicel. Newman spoke positively on Trinidad’s quasi-sovereigns Petrotrin and National Gas of Trinidad and Tobago.
The panel concluded with speakers discussing their most bullish regional recommendations. Uccelli liked market-darling Panama (which had just received its third investment grade rating) on a long-term fundamental basis, while viewing the bonds as rich at current levels. He offered his assessment that, “if you want to sleep at night, buy Panama, or possibly Costa Rica…if you want high-yield, buy Belize which is reasonably safe, or for the more adventurous, Jamaica short-term.”
Ross largely agreed, preferring Costa Rica over Panama based on price. He ventured that that the Bahamas, Barbados and the Cayman Islands appeared cheap relative to their ratings. Newman viewed Aruba and the Cayman Islands as “single A credits at BBB prices.” Belize, Grenada and Air Jamaica should appeal to those with strong stomachs. Segura spoke enthusiastically that Costa Rica “no longer just manufactures computer chips, but is now designing them.”
The panel also took questions from the audience, with speakers admitting their concern for the political future in the Dominican Republic, and debating what scenario would be “the lesser of evils.”
In addition to host Scotia Capital, support from JPMorgan, Oppenheimer and Co., and the Royal Bank of Scotland also made the CAC Forum possible.