Never a dull moment in Central America – be it on the political or economic front. The past few weeks have been no exception, with the Bank of Guatemala (Banguat) confirming the new President of the Central Bank and announcing plans to issue new bonds, and the tax bureau (Superintendencia de Administración Tributaria – ‘SAT’) falling short on its tax collection goal. El Salvador also priced USD800m in bonds, despite IMF concerns raised regarding the country’s indebtedness just three months prior. Further concerns from the IMF are expected to be published later this month following the deployment of a review team to neighbouring Honduras, with an expected extension of USD170m of credit under favourable terms. However, with high budget deficits and an overvalued currency, the subsequent recommendations should come as little surprise.
Julio Suarez has now been appointed as the new President of Banguat, taking over from Edgar Barquin on 1 October. Well-credentialed and currently the Bank’s Vice President, Suarez’s appointment marks a continued era of macroeconomic stability in Guatemala. Whilst Barquin has been successful during his four year term in driving stable monetary policy, ongoing issues surrounding tax collection continue to undermine the country’s macroeconomic achievements. The SAT has revised down the annual tax collection target from GTQ51.3bn (USD6.7bn) to GTQ49bn (USD6.4bn) – also making the 2015 target of GTQ52.4bn (USD6.8bn) less credible. Given the shortfall in tax revenue, the Finance Ministry is thus in a precarious position, awaiting Congress approval of GTQ4bn in bond issuance.
The IMF and Fitch have raised concerns over the country’s tax collection issues, underscoring a credit rating downgrade in Fitch’s case, and a cautionary note on the IMF’s assessment in July 2014. Strengthening of the SAT is essential in ensuring the agency delivers on tax collection forecasts, reinforcing the nation’s public finances – with implications for Guatemala’s standing in credit markets and cementing a stable economic environment in integrating fiscal and monetary policies.
El Salvador issued USD800m in bonds during September, pricing at 6.375%, 50 basis points higher than issuance in 2012 for the same amount, and both for a 12 year duration – making the 2014 issuance effectively replaces a short term facility. Effectively, the imposition of the higher rate results in an additional USD48m per annum incremental funding cost, reflecting the country’s higher level of indebtedness and deteriorating public finances. Interestingly, the TED spread (i.e. the difference between the interest rates on interbank loans and on short term US government debt) has reflected this deterioration, spiking from 200 bps 10 years ago to 400 bps today. Fitch raised concerns in the 2013 downgrade to BB- with a negative outlook, due to economic underperformance as well as uncertainty over fiscal consolidation prospects – with other concerns around the country’s reliance on short term debt and overall indebtedness. Moody’s also downgraded the country’s long term debt in 2012 to Ba3 with a stable outlook.
Honduras’ widening budget deficit spurred Moody’s to cut the nation’s credit rating in February 2014 from B2 to B3 – in line with DR Congo. With an increasingly widening deficit – growing from 5.9% of GDP in 2012 to 7.7% in 2013 – combined with higher short term debt issuance (average maturity of just 2.6 years since 2009), Honduras’ outlook is far from glowing. According to the President of the Central Bank Marlon Tabora, the National Electric Energy Company (ENEE), accounts for 30% of the country’s annual budget deficit and is estimated to lose approximately HNL8bn per annum – or USD1m per day. Whilst Tablora indicated that the IMF is not imposing criteria for credit on ENEE reform, given the level of losses in the Group, ENEE clearly represents the elephant (or one of them) in the room. The current IMF discussions surrounding provision of USD170m flexible duration facility for up to 36 months is expected to reduce refinancing risk to replace expiring facilities, and reduce the country’s risk rating. Whilst the decision is expected by mid-October – the challenge to cut government spending, review subsidies, reduce energy costs, adjust tariffs and cut government staff levels remain topical – with the latter two not yet covered by government initiatives. Although the IMF loan provides some breathing room for Honduras on refinancing its debt, underlying problems and significant restructuring (or all out privatisation) of ENEE remain longer term issues. Contingencies surrounding IMF involvement in the country’s finances could possibly extend to putting pressure on the country’s Central Bank to devalue the currency – this would have an adverse impact on the nation’s poorest via the imputation of higher import costs (particularly impacting energy consumption and food).
Tax collection continues to be challenging across Central America, with the impact of this revenue shortfall exacerbated against elevated levels of debt – and adverse implications particularly for El Salvador and Honduras which continue heavy reliance on short term debt issuance. Given the precarious position of Honduras’ public finances, particularly being concentrated in the dysfunctional ENEE – significant restructuring with potential privatisation of the electricity provider could eventuate in an attempt to strengthen the country’s balance sheet. The IMF’s comments surrounding the country’s financial position will come as little surprise, although to be a fly on the wall…