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Central America and Caribbean Forum - June 1, 2011

Speakers at Central American & Caribbean Forum Discuss Investment Opportunities

Speakers at EMTA’s Central American and Caribbean (CAC) Forum believed that, despite tightened spreads since last year, investment opportunities in the region remain.  The event, sponsored by Oppenheimer & Co., was held on June 1, 2011 in New York and attracted 100 market participants.

Moderator Carl Ross provided a brief summary of the region.  The CAC asset class includes both highly-rated and single B credits; countries with GDPs from $2 billion to $40 billion; “tourism plays” as well as “energy plays”; island paradises with regular elections and more violent societies with a shorter history of democratic institutions.  As for performance, “we should have all bought CAC bonds at last year’s event-- almost every issue has tightened an average of 100 bps, including downgraded sovereigns such as Barbados and El Salvador,” Ross noted.

Speakers addressed the economic situation in individual sovereigns.  Barclay Capital’s Alejandro Grisanti spoke positively on the Dominican Republic, acknowledging that his 7% growth forecast was above consensus.  The country should benefit from investments related to the rebuilding of Haiti, its “value tourism” and the Pueblo Viejo gold mine that should start production this year. 

Costa Rica offered a more stable, less volatile growth history.  In contrast, Grisanti admitted he was “really worried” about El Salvador, with key economic sectors all owned by foreigners.  The source of future economic growth was not obvious to him, he stated.

JPMorgan’s Franco Uccelli noted that Jamaica has made a lot of progress, with the 2010 domestic bond restructuring a success for the sovereign.  “They devised a plan to exclude external debt, and they stuck to it,” he affirmed, and, while there was still a question of whether Eurobonds would eventually be restructured, “we are somewhat more confident in the government’s ability to service the debt in the near future.”  Jamaica’s main weakness was 15 years of annualized 0.5% growth, according to Uccelli.  As for Guatemala, it was “boringly stable,” with a low public debt burden; however drug – and gang-related violence would likely dominate the headlines for the foreseeable future.

Karina Bubeck (TIAA-CREF) observed that countries such as the Bahamas and Barbados, where tourism accounts for 15 to 30% of GDP, are still recovering from the 2008/9 tourism decline.  However, GDP growth of 2% was possible, assuming 2% growth in the US and 1.4% for the UK (the main sources of arrivals).  Trinidad & Tobago, where oil accounts for as much as half of GDP, hasn’t reaped the same rewards as Russia from the oil price increase due to decreased production, although Bubeck expected 2% GDP growth there as well.

CAC countries were technically supported, reasoned Sean Newman of GE Asset Management, with little planned issuance for CAC countries this year, although opportunistic issuances were possible.  Newman expressed a more optimistic viewpoint on El Salvador than Grisanti and echoed Uccelli’s sentiments on Jamaica.

The panel also debated key risk factors.  “Nothing will really change in Guatemala on the economic front, regardless of the Presidential election victor, as there is wide national consensus on economic policy,” reasoned Uccelli.  In contrast, El Salvador’s congressional elections next year could be pivotal, its outcome unpredictable.  Market participants should monitor discussions of de-dollarization and how it could occur, he advised.

The EuroZone crisis posed no direct threat to CAC, Newman commented, as there are few direct financial system linkages to the EU and limited foreign bank ownership.  On the other hand, a contraction in EuroZone growth would be likely transmitted via reduced tourism arrivals and would not be offset by increased North American visitors.

Grisanti noted that rising commodity prices were mitigated in some cases.  Costa Rica was less vulnerable to oil spikes because of widespread use of hydro-electrical power.  Other countries received oil subsidies from Venezuela (“a very expensive way to buy their UN votes”), with the Dominican Republic probably most exposed. 

Investment opportunities were highlighted in the panel’s third section.  “A lot of people ignore Belize, but it is the only credit in the Americas in the EMBIG with a double-digit yield, and its fundamentals are improving,” Uccelli noted.  He liked El Salvador but would underweight the credit due to its tough structural challenges (“but we are not expecting a default.”)  The fully-dollarized economy suffers from foreign-owned banks’ focus on consumer loans at the expense of corporate or industrial loans which would help the country’s long-term growth.

Bubeck favored quasi-sovereigns in the oil and gas sector such as the Trinidad & Tobago national oil company and the Salvadorian electricity sector.  “We also like the telecom sector, and there are plenty to choose from in the region,” she added.  She would consider the Dominican Republic “at the right entry point” and, in contrast to Uccelli, expressed interest in El Salvador’s sovereign debt, “in a scenario of remittance growth, as well as growth in construction and consumption.”

Newman believed current levels on Cayman Islands and Bermuda compensate for risk, and the fiscal sustainability rule (and resulting manageable debt burden) also make Barbados an interesting credit.  Metal and mining issues, as well as airlines, offer spread pick-up opportunities.

Grisanti favored the Dominican Republic, “an underperformer compared to its peers” with limited political risk, and the market over-reacting to commodity vulnerability.  He urged portfolio managers to watch for signs of a new IMF program when the current package ends two months prior to the presidential election.

Ross seconded an overweight on Belize, if only as a diversity play from the high-yielders Argentina and Venezuela.  He was neutral on Jamaica following record prices on its bonds and agreed with positive comments on the Dominican Republic and neutral recommendations on Panama.

Following the formal presentation, the panel took audience questions ranging from remittances (“most important to El Salvador, Guatemala and Jamaica, but geared to short-term consumption rather than investment,” noted Bubeck), to relative lack of CAC corporate bonds (“issuers can often access local markets or export-related credits” according to Newman).  The possibility that Costa Rica, now investment-grade  rated, might access the market to take advantage of its new credit status, was also discussed.

The event concluded with a cocktail reception.  In addition to host Oppenheimer &Co, EMTA thanks JPMorgan and Barclays Capital for their additional support of this program.