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The need to reverse Central America’s reliance on fossil fuels is expected to spur an investment boom in renewable energy.
Foreign companies have responded, but challenges lie ahead.
Guatemala’s central bank expects remittances to increase 5.3% to an all-time high of $4.35bn in 2011. The growth expectations are encouraged by recent strong performance for the first 5 months of the year and an improved US labor outlook, where most remittances to Guatemala originate, according to a JPMorgan report. May remittances to Guatemala surged 16.3% to $415m from $357m the year before, when remittances grew by only 7.3%. May’s favorable performance brings total remittance volumes up $1.76bn for the first 5 months of the year, up 10.5% from the corresponding period of 2010. Given projected growth in nominal GDP, however, remittances as a percentage of GDP will likely fall below 10% for the first time since 2003, closing 2011 at 9.8%. Guatemala remittances totaled $4.13bn in 2010, $3.91bn in 2009, and $4.31bn in 2008.
Despite welcoming conditions in the DCM, countries and corporates in the Caribbean and Central America aren’t expected to offer much in the way of new issuance in the next 6-12 months, speakers on an EMTA panel say. With El Salvador, Panama and Jamaica having issued this year, only the Dominican Republic – with $700m approved and Barclays and JPMorgan mandated – appears close to issuing. “Trinidad has $300m in the budget, but whether it does it or not depends on oil revenues,” says Franco Uccelli, senior economist at JPMorgan, noting that oil prices are much higher than the $65 level Trinidad anticipates in its budget projections. Costa Rica has also mentioned issuance following last year’s ratings upgrade, though the panel notes the benchmark-sized deal it would like would still require congressional authorization. Though cross-border corporate issuance is accelerating in other parts of LatAm, panelists don’t expect the trend to reach CentAm and the Caribbean. “The corporate sector is not as developed in these countries, and those that need to fund themselves are able to do so in the local markets,” says Sean Newman, EM portfolio manager at GE Asset Management. The local offerings of commercial paper, bank loans and multilateral financing are usually enough for large Caribbean and CentAm companies, many of whom have operations only in their domestic market. “There is not that great of demand from CEOs to establish international benchmarks or diversify their funding needs,” Newman says. All spoke on an EMTA panel in New York Wednesday.
Remittances to Guatemala increased 7.8% in April, to $371m from $344m the year before, when they grew by only 1.4% from 2009, according to a report by JPMorgan. April’s favorable performance, which extended the streak of monthly gains to14, took the tally for the first 4 months of 2011 to $1.34bn, up 8.8% from the corresponding period in 2010. Remittances totaled $4.13bn for the full year 2010, 5.5% higher than 2009. Remittances as a percentage of GDP actually fell to 10.0% in 2010 from 10.4% the year before. The central bank expects remittances to increase 5.3% to $4.35bn for the full year 2011 due to increasing US growth. Given projected growth in nominal GDP, remittances as a percentage of GDP are likely to fall to 9.8%, marking the first time since 2003 that it has dropped below below 10%.
Guatemala is unlikely to go to the international debt markets in 2011, according to a report by Citi. Guatemala’s congress rejected a proposal to issue $420m in external debt. The government needs to raise $280m to pay down amortizing debt, equivalent to 8% of the 2011 budget, according to finance vice minister Marco Livio Diaz. Citi has said that potential spending cuts are possible and that it does not expect repayment problems. External debt up to March 2011 was $5.5bn, while net internal revenues were almost $6.4bn. Guatemala is expected to increase local debt issuance as a result, which has already been approved by congress, adds Citi.
Three major telecom companies are slugging it out in Central America. With growth starting to plateau, the player with the best technology may prove the winner.
Rapid growth is still predicted, but the country is encountering speed-bumps along its way. Maintaining fiscal discipline and inflationary pressures will be among the challenges.
The financial benefits to Costa Rica of diplomatic ties with China may spur others in Central America to follow. Those recognizing Taiwan still get Chinese energy dollars.
Guatemala’s central bank tightened its rate by 25bp to 4.75%, the first revision since September 2009. The bank cites stronger-than-expected recoveries in advanced economies, favorable domestic growth, and the belief that the spike in international commodities prices reflects a long-term trend. JPMorgan believes the central bank is prioritizing inflation containment over fostering growth and curbing ongoing FX appreciation pressures.
The Dominican Republic’s power generation sector is highly exposed to rising oil prices, according to Fitch. The vast majority of the country’s power, 82% of installed generation, comes from fuel oil and natural gas-fired thermoelectric plants, it says. That makes it the most highly exposed country in the CentAm and Caribbean. El Salvador comes in second place, as nearly 70% of power generation comes from fossil fuels, Fitch says. Less exposed to rising energy prices are Costa Rica, where 72% of power comes from renewable resources, and Panama, where 50% of total capacity is provided by hydroelectric sources. On average, the power generation system in CentAm generates more than half (54%) of its electricity is generated by thermoelectric sources, says Fitch. This exposure could translate into higher expenses this year. “Prices could briefly surpass $140 per barrel within the next 3 months,” Bank of America Merrill Lynch says. It expects the price of oil to average $108 per barrel for the year.
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