Central American bonds set for strong 2003

Reuters, 01.10.03, 11:14 AM ET By Robin Emmott

PANAMA CITY, Jan 10 (Reuters) - With major Latin American bond markets looking volatile in 2003 and markets hungry for higher yields, debt from the small nations of Central America could catch the eye of investors.

Panama, Costa Rica, El Salvador and Guatemala, whose small economies are dominated by coffee, bananas, sugar and tourism, plan to issue dollar-denominated sovereign debt on international markets this year, with Costa Rica and Guatemala leading off this month.

Costa Rica's Finance Ministry said it will launch a $450 million bond offer in January, led by Deutsche Bank, but declined to give an issue date.

Guatemala, the biggest economy in Central America with gross domestic product of $45 billion in 2001, said it aims to sell $500 million in new paper on Jan. 20, although it has yet to set to the terms of the offer.

Panama hopes to issue around $250 million later this year, according to Deputy Finance Ministry Domingo Latorraca, while El Salvador's Finance Ministry has set either June or July as the date for its bond sale.

Analysts put the El Salvador offer at some $300 million. There will be takers for debt, analysts say, despite rising fiscal deficits in the four countries, as investors look for higher yields and assume more risk.

Yields are around 7 percent to 9 percent on Central American bonds, seen as medium risk, compared with 3 percent to 4 percent on dependable U.S Treasuries.

"Central America looks good in the context of Latin America right now. The majority of countries in the region have a negative outlook," said Richard Francis, sovereign risk specialist at ratings agency Standard & Poor's.

A five-week-old general strike has brought Venezuela's economy to a halt, while Argentina appears hard pressed to prepare for elections in April amid economic malaise.

Uncertainty in Brazil over the direction of the new government makes the relative stability of Central America look attractive. This for a region that in the 1980s was known more for its civil wars and death squads than its credit ratings.

Mexico debt, however, remains in high demand. On Thursday Mexico milked market optimism, doubling a planned sovereign bond sale to $2 billion.

According to Rafael Barraza, former president of El Salvador's Central Bank, Central America should benefit from the pick-up of the U.S economy in 2003.

"Negotiations for a free trade pact between Central America and the U.S. will also give investors confidence," Barraza said. The United States and five Central American nations, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, launched free trade talks on Wednesday.

PAST SUCCESSES Central American issuers are also riding on the back of last year's success, analysts say.

In April, El Salvador sold $500 million in 30-year international bonds, the first Central American country to issue a 30-year bond. El Salvador again went to market in July, issuing $300 million in nine-year bonds.

El Salvador is one of Latin America's few investment grade issuers. Fitch and Moody's both rate it investment grade, but not Standard & Poor's, which rates it BB, giving the same rating to Costa Rica, Guatemala and Panama.

The popularity of Central American debt may not last beyond 2003, however.

Still seen as an exotic credit popular for its scarcity value, continued issues of the region's debt could damage that image and snap off demand, analysts say.

Typically the bonds make up around 1 percent of a fund manager's portfolio.

"The more that issuers sell, the more closely investors pay (attention) to economic fundamentals. Looking carefully at Central America could scare off some buyers," said Francis Rodilosso, who oversees $200 million for hedge fund Van Eck Capital.

Costa Rica is currently running a budget deficit of 4.4 percent of gross domestic product, while El Salvador has a fiscal gap of 3.3 percent.

Panama recently disappointed investors with a weak tax reform, bringing in only half of the $120 million initially projected. Guatemala is struggling with the three-year-old collapse in world coffee prices, dealing a severe blow to its export base.

Copyright 2003, Reuters News Service