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CAC Forum - June 13, 2012

Costa Rican Vice President Discusses His Country’s Achievements and Challenges at EMTA Forum

Costa Rica’s Vice President Luis Liberman delivered the keynote address at EMTA’s Central America and Caribbean Forum, held in New York City on June 13, 2012.  In his remarks, Dr. Liberman stressed the economic and social achievements his country had made, while recognizing challenges for the future.  The event drew a crowd of over 125 EM professionals, and was sponsored by Nomura.

Vice President Liberman opened his presentation with an overview of the current economic and social situation in his country.  Liberman highlighted Costa Rica’s history of political stability and its social progress.  He also emphasized that the county’s economic activity is again on a rise after the 2008 crisis, led by trade liberalization and structural changes.

Costa Rican GDP (based on PPP) stood at $12,795 per person in 2011, which Liberman observed placed it in the upper half of Latin American countries.  Costa Rica also has high ranks on the UNDP’s Human Development Index and the World Economic Forum’s analysis of educational systems (with a literacy rate of 96.1%), he remarked.

Turning to economic achievements, the Vice President observed that GDP growth has returned to the average growth rate of the past decade, with a 4.5% forecast in 2012 and 4.1% growth expected in 2013.  Exports have become more diversified over the past two decades, while Costa Rica has reduced its reliance on the US following the successful conclusion of a variety of free trade agreements (with a new one soon to be negotiated with Colombia).  Central Bank reserves have risen to close to US$5 billion, and Costa Rica maintains one of the highest levels of FDI per capita in Latin America, he pointed out.

Liberman stressed the positive trends in the economy.  “When Intel started operating in Costa Rica, it was set up as strictly an assembly plant that later became a manufacturing facility.  Now 40% of the chips are designed in Costa Rica!”  This was, he proclaimed, illustrative of a general trend of export sector maturation.  Exports were “growing at Chinese rates,” he stated, adding that Costa Rica now hosts a cluster of medical instrument firms, exports software and back office services including some that are moving from Asian countries.

“The financial system remains sound and stable,” the Vice President affirmed, discussing improved capital ratios decreased non-performing loans, the increasing credit available to the private sector and low local-bank exposure to the Eurozone.  Liberman also underscored FX rate and price stability in Costa Rica.  “We are a bi-currency country, you can have a dollar account in Costa Rica,” he reminded attendees.

Liberman also reviewed improvements in the country’s fiscal deficit.  Last year, the government took steps to sharply reduce expenditure growth, including reducing government employment via attrition.  This has lead to success in reducing the fiscal deficit to 4.1% of GDP, vs. 5.2% in 2010.

On dependence on external financing, “we are as afraid of foreign debt as Germans are afraid of inflation,” Liberman declared, then continuing to describe improvements in Costa Rica’s debt profile, including reduced exposure to foreign debt, and the extension of debt maturities.  He informed the audience that, by law, Costa Rica needs approval by two-thirds of Congress to issue external debt.

The Vice President concluded his formal presentation by addressing the risks and challenges for the Costa Rican economy.  Domestically, the country must continue to make strides to continue improving its competitiveness, and he expected good results from the opening of 90 new technical high schools designed to further develop the country’s human resources.  Costa Rica must also achieve greater fiscal consolidation by improved tax collections, decreased spending and reduced interest expenses; and by monitoring exchange rate appreciation.

Liberman also spoke at length about infrastructure challenges.  “We get a bad grade in infrastructure compared to our high ranking in human development,” he conceded.  The Vice President called investment in roads, ports and airports as “non-negotiable,” while acknowledging it would be difficult to go from years of underdeveloped infrastructure to a large public plan.  External risks include oil price hikes, volatile international capital markets and a slow down in the global economy.

Following his formal presentation, Vice President Liberman took a variety of questions from the audience, including queries on potential foreign debt issuance.

The event also included a panel discussion on prospects and challenges for Central American and the Caribbean (CAC) led by Nomura’s Boris Segura.  Carl Ross of Oppenheimer presented a brief overview of the region’s Anglophone countries, noting “they are still stuck in recessions with 0-2% growth.”  Ross noted that generally these countries have high debt/GDP ratios, high current account deficits and are constrained in their use of monetary policy to spur growth because of fixed or pegged FX rates.  “While a rebound in tourism is helping, spending per tourist arrival is actually down,” he added.  Ross pointed out that two small islands—St Kitts and Dominica—had both recently restructured local debt, with Belize likely to follow.

In contrast, “the outlook is sunnier for Spanish-speaking Central America,” observed JPMorgan’s Franco Uccelli, who maintained a regional growth forecast of 5.8% for 2012.  “This is impressive in light of the fact that US and European growth estimates are being lowered,” he noted.  Uccelli predicted that Panama would grow at 10% this year, with Costa Rica and Guatemala also performing well, albeit on a second tier.

Katherine Renfrew (TIAA-CREF) discussed risks facing would-be CAC investors.  Renfrew summarized that the region was comprised of resource-constrained small countries, often with high crime rates and bureaucratic delays in doing business.  The reliance on tourism as a source of income could be a significant concern in the sluggish global economy, she reasoned.  As for the debt instruments themselves, Renfrew highlighted that issue sizes were generally small, with new paper often brought to market by only one dealer.  However, Renfrew acknowledged that risks in investing in the region had decreased since the onset of the current economic malaise, and that there was much individual variation within the area.

GE Asset Management’s Sean Newman seconded Renfrew’s call for CAC countries to consider larger multiple-dealer issues.  In reviewing general economic conditions in CAC sovereigns, Newman noted that FDI had yet to recover to pre-2008 levels.  However, in a potential Eurozone meltdown, Newman argued that remittances were less dependent on Europe than the US, and that CAC banks were relatively insulated from European countries.

Turning to a discussion of relative performance, Uccelli noted that CAC performance has lagged the EMBI Global so far in 2012 (4.8% through the date of the event vs. 5.7% for the EMBIG), and also on a 12-month rolling basis, returning 6.7% vs. 9.8% for the EMBIG.

Investors on the panel were lukewarm on CAC corporates.  “There just aren’t a lot of opportunities,” according to Newman.  He did, however, express interest in the oil and gas, utility and telecom/media sectors.  Renfrew affirmed that liquidity posed even a greater issue for her with regards to CAC corporates.  She ac knowledged that she had been involved in some quasi-sovereign energy and utility deals, while “generally we have found few opportunities in high-yield corporates in the region and tend to avoid them.”  She emphasized the importance of good management teams.

In the sovereign sphere, Belize was sending signals that it would propose “reasonable” terms in its anticipated restructuring, Uccelli argued.  He reaffirmed his company’s “overweight” recommendation on Belizean debt, while also speaking constructively on Panama and Costa Rica.

“The El Salvadoreans always try to do the right thing,” declared Ross, in advising attendees to consider the country’s sovereign debt, especially at the long end of the curve.  He voiced disappointment that growth wasn’t higher, but “we have no concerns of refinancing risk” for El Salvador.  He also recommended Guatemala’s 2022 bond on a “tactical basis” and considered yields on Dominican Republic local debt as “generous.”  Finally, Barbados looked cheap for those who believed it would remain an investment-grade rated sovereign, although Ross admitted he was not in that camp.  He thought that a better time to consider Barbados would be after a potential downgrade.

Uccelli also spoke positively on the Guatemala 2022 bond, highlighting that it would be added to the EMBIG at the end of June and as a result would become more widely-owned.  He reasoned that the Dominican Republic’s 2021 issue seemed to be seen as a regional proxy with decent liquidity.

Newman announced that Grenada was among his top sovereign picks, and expressed interest in a variety of corporates from Trinidad & Tobago, Panama and El Salvador.  Renfrew noted her interest in El Salvador, as well as her curiosity “on whether Jamaica can bring a deal.”  Finally moderator Segura signaled his contrarian view on Panama (“my top underweight”) cautioning that “low spreads do not reflect downside risks.”  He preferred local Dominican Republic debt and Belize, while acknowledging restructuring concerns.

The panel ended with a short discussion of Belize.  “There seems to be a difference of opinion between pragmatists and others, but so far dialogue has been constructive,” stated Newman.  [NB: A statement from a Coordinating Committee of Belize’s bond holders can be found on the EMTA website at

“Belize is more of a willingness to pay issue…if they tightened their belts, they could pay,” declared Ross.  He suggested, in contrast to other speakers, that a restructuring deal could be “more severe than market expectations.”  Ross reasoned that a deep haircut wouldn’t have much local effect, because most bonds were held by foreigners, the government had limited reputational concern, and that having previously restructured recently, Belize’s leaders might wish to “do a big one and be done for a while.”

The panel concluded with a question and answer session, and with a cocktail reception attended by Vice President Liberman.