Yearly Archives: 2011

S&P has cut El Salvador to BB minus from BB owing to political noise. “The political environment is deteriorating because of a growing and more evident divide between President Funes and the FMLN party,” says S&P analyst Olga Kalinina. “This is expected to continue to impede progress on a number of crucial reforms and ultimately weaken fiscal flexibility and economic growth prospects,” she adds. Funes supports a market-oriented policy and the president remains popular, notes the agency. However, the government has been unable to find support in the assembly, dominated by the FMLN, to pass fiscal and structural reforms. “The distance between the executive and legislative branches on key issues is raising uncertainty among investors and in the private sector about the course of policymaking. The growing political frictions undermine the perception of political stability and increase fiscal risks,” says S&P. It projects GDP per capita growth in El Salvador to reach 0.1% in 2011 and 0.8% in 2012, much less than the median rate of about 3% per annum for BB rated sovereigns. S&P does not expect El Salvador to sign a fiscal pact with the private sector – to create a foundation for a broad-based tax reform – in the near future. Government debt was 46% of GDP in 2010 on a net basis (versus a BB median of 27%), up from 35% in 2008. S&P expects El Salvador to come to the international markets in early 2011 to raise capital to refinance a $653m bond due June 2011. The country has an election next year.

Fitch has raised the outlook of several banks in the Dominican Republic following a similar action on the sovereign. Fitch raised the long-term foreign currency rating outlooks for the following issuers to positive from stable: Banco Popular Dominicano (AA minus), Banreservas (B) and BHD (B). Fitch recently boosted the sovereign’s B rating to positive from stable.

Venezuela has authorized the sale of VEB45bn ($10.5bn) in its domestic market, according to decrees published in the government’s official gazette. Although conditions for issuance could be changed, the move is seen as part of a shift toward greater fundraising in the domestic than international market, according to Barclays. “As a consequence of these restrictions, most external issuance by the Venezuelan public sector will likely come from PDVSA, starting with a private placement to the central bank,” Barclays says. It expects a private placement to the central bank – an operation that was supposed to take place last year – in Q1, at $2.5bn-$3.0bn in size.

International LatAm sovereign bond issuance will drop 31% to $15.7bn this year, from $20.6bn in 2010, covering just 4% of total needs, according to Fitch. Overall borrowing will be 2% lower this year, at $398bn, the agency adds, and close to 90% of financing will come from domestic sources. About 70% of the needs represent amortization payments on long and short-term debt, most of it local. “This decreased reliance on foreign lending and external issuance reduces vulnerabilities stemming from external market volatility, financial shocks and foreign exchange rate risks, while contributing to an improving debt structure,” says Fitch. Jamaica has the largest financing needs (16.3% of GDP), followed by Brazil (10.8%), although the latter has much lower refinancing risk. Peru (1.2%) and Chile (1.7%) come out ahead of regional peers with the lowest funding requirements. Argentina (5.7%) and El Salvador (7.8%), along with Jamaica, have the highest refinancing risk due to limited financing options, debt sustainability questions and concerns about meeting IMF program targets, says Fitch. It expects El Salvador to issue abroad in 2011 to meet a Eurobond maturity. Panama, the Dominican Republic and Uruguay will finance themselves primarily overseas in 2011, and financing needs for all 3 will be below 5.0% of GDP, adds the agency.