Category: Caribbean

The global financial crisis has reversed the typical relationship between Central America/Caribbean credit and the bigger LatAm economies, which are beating the former on a returns basis. CentAm/Caribbean has historically been a diversifier that outperforms in a bear market and underperforms the rest of the region when markets go up. However the JPMorgan CACI index, which tracks CentAm/Caribbean sovereign and corporate credit, is down 18.7% in the year to December 18 on a USD total returns basis. This compares to a loss of 12.1% during the same period for the EMBIG, which tracks the bigger sovereigns. “The market is upside down. It’s not really fundamentals driving the market, it’s technicals,” Franco Uccelli, a VP for strategy in the LatAm research group, tells LatinFinance. “Once the market goes back to normal, we’ll return back to the normal trading performance of Central America and the Caribbean,” he adds. According to the analyst, this temporary dislocation will likely not be corrected until mid-2009 or H2. In the year to date, CentAm/Caribbean corporates have lost 28.8% and sovereigns declined 17.0%, according to the CACI. Grenada is down 51.9%, Belize off 46.0% and DomRep dropped 42.6%. The best performers were Costa Rica (-2.7%), Barbados (-6.9%) and Trinidad & Tobago (-7.0%), amid a flight to quality. Despite 2008 losses, investors should still consider CentAm/Caribbean credit for its typically low beta performance and the fact that it is less correlated to the wider market. “It’s a nice way to diversify your investment portfolio,” says Uccelli. A leading gripe from the buyside is lack of liquidity, and the last two months have been thin, but there is improvement. “We’re starting to see some liquidity coming back . . . that’s a good sign,” says Uccelli. The CACI was up 7.55% last year and returned 12.63% in 2006.

In an attempt to stabilize the local currency, the Bank of Jamaica says it has increased interest rates for certificates of deposits. Rates for CDs with 30-day tenors increased to 17.00% from 14.65%, 60-day CDs to 17.50% from 14.85%, 90-day to 20.00% from 15.05%, 120-day to 20.20% from 15.15%, 180-day to 21.50% from 15.35% and 365-day to 24.00% from 16.70%. The BoJ says a sharp rise in the yields on bonds issued by the local government and Jamaican companies has increased demand for foreign exchange by securities dealers to meet margin calls from overseas creditors, to which the BoJ responded by providing dollars as needed. “This has triggered a disorderly depreciation in the exchange rate, which if allowed to persist, will only precipitate higher inflation and greater macroeconomic instability,” says the bank. It also notes that domestic financial institutions hold significant amounts of its securities that are due to mature over the next three weeks and the resulting increased JMD liquidity could add further pressure on the exchange rate. JPMorgan notes that the relatively low level of FX reserves – $1.7bn-$1.8bn – prompts the BoJ to use rates rather than direct FX intervention to contain currency pressure. “The latest rate hike should help stabilize the Jamaican dollar in the coming weeks, which should also benefit from seasonal FX inflows (remittances) and lower FX demand from a falling oil import bill,” JPM notes. On December 2, the JMD closed at 78.00 per dollar. So far this year, the JMD has reached a low of 68.80 and a high of 80.00 per USD.

S&P has revised its outlook on the Bahamas to negative from stable, citing the impact of US contagion on the tourism and construction sectors, which is causing job losses and undermining banks’ asset quality. The ratings also cut its GDP growth expectations for 2008 and 2009 to 1.1% and 1.0%, respectively, from previous projections of 3.0% and 4.0%, respectively. Efforts to boost growth may also end up increasing government debt levels, says credit analyst Olga Kalinina, adding that the government has recently announced countercyclical policies, including a robust capital-spending program, new unemployment benefits, and relief for low-income households.

Cap Cana, the high-end Caribbean resort, has put a thin band-aid on a worrisome situation surrounding a $100m bridge loan that came due November 19. Miguel Guerrero, Cap Cana’s director in corporate finance and IR, tells LatinFinance the company has extended the maturity date of the bridge by six weeks until December 29, thereby avoiding a default that would have triggered cross default clauses on the company’s outstanding bonds. The group of lenders holding the bridge has also changed, says the executive. At least one of the six asset managers – understood to include five hedge funds and one larger mutual fund – said they wanted to sell down their position in the bridge loan, preferring to take a haircut today over holding their portion for an indefinite period of time, say executives familiar with the process. The new composition of the lending group is unknown. “This is positive news because it demonstrates willingness on both sides to remain at the table,” says one executive familiar with the company but away from the talks. Market participants have in the past weeks come to question Cap Cana’s willingness to meet its debt obligations, which has helped keep its bonds trading in the low 20s. The company warned on November 12 it was preparing itself for a cross default event thanks to worsening market conditions that have made it impossible to refinance the bridge. Cap Cana has hired Weston Financial Group to advise it on its debt negotiations.

The central bank of Trinidad & Tobago slashed its real 2008 GDP growth forecast to 3.5% from 5.6%. It also lowered expectations for 2009 to 2.0% from 5.0%, mainly because of the drop in oil prices. Since energy revenues made up 64% of total government revenues in 2007, JPMorgan and, separately, an IMF mission that visited the Caribbean nation, say they believe the government should cut spending. JPMorgan says the government is expected to announce this week a review of its $7.8bn 2009 budget, which assumes an average price of $70 per barrel of oil and $4 per million BTU for natural gas. The IMF mission says that it is encouraged by the government’s intentions of adjusting fiscal spending in the face of lower energy prices. It also recommends maintaining nominal spending at its fiscal year 2007-08 level, which would translate into spending reductions of some TTD3bn.

Fitch has downgraded Clarendon Alumina Production, which the government of Jamaica owns, to B minus from B. It also revised the outlook to negative from stable. The cuts follow the downgrade of the sovereign by Fitch to B with negative outlook, Fitch says. “CAP ended the financial year with a negative $34.7m operating Ebitda position, primarily a reflection of high production costs in relation to caustic soda and fuel inputs and CAP’s inability to pass them through to end customers, largely due to inflexible long-term supply contracts with its main customer Glencore, ending 2010 and 2012 respectively. As a result of these long-term contracts, CAP was unable to benefit from the high spot prices seen for alumina during the last two years,” Fitch explains.

MasterCard has reported a 15.5% hike in LatAm/Caribbean volume to $48bn equivalent for the third quarter, and sees general improvement across the board. “Despite the challenging times facing the global economy, MasterCard’s Latin America and Caribbean region has once again reported double-digit growth,” says Richard Hartzell, president for LatAm/Caribbean at MasterCard. Purchase volume reached $26bn in Q3, up 18.9% on a local currency basis, including purchase volume plus cash volume and includes the impact of balance transfers and convenience checks. The number of MasterCard-branded cards increased 19.3% as of the end of the third quarter of 2008, totaling 110m cards. “Unlike many other industries, the payments industry, particularly in Latin America, is still in very early stages of maturity and we continue to see a rapid uptake of card-based electronic payments,” says Hartzell. “As the secular shift from paper-based payments to electronic payments evolves we remain focused on delivering value to all parties involved in the payments chain,” he adds.

Jamaican remittances will hit around $2bn in 2008, in line with the government’s recently revised 6%-7% projection for remittance growth this year, but half the average 12% pace seen over the past 5 years, says JPMorgan. The original forecast was for 10%-11% expansion, it adds. Most recent central bank data shows money flows hitting $1.5bn in the first 9 months of the year, 8.8% higher than in the same period of 2007, but slower than the 11.1% pace of the first 9 months of 2007. In full-2007, remittances rose 11% to total $1.96bn, or 17% of GDP, coming in as the country’s top foreign exchange earner, JPMorgan adds.

Moody’s has put Jamaica’s B1 rating on review for downgrade amid rising pressure on the external and fiscal positions, which are expected to intensify and could further deteriorate credit risk relative to peers. “Given the severity of the ongoing global adjustment, Moody’s believes that Jamaica will be seriously tested by the severe global-crisis headwinds,” says Moody’s senior analyst Alessandra Alecci. “The public debt burden and the resources needed to service debt leave Jamaica’s small, open economy with limited leeway to cushion adverse exogenous developments.” The country’s debt burden exceeds 125% of GDP and the current account deficit could reach 20% of GDP this year as the economic slowdown in Jamaica’s key markets such as the US worsens, likely lowering remittances and tourism inflows as the year closes, adds Alecci. “The reliance on market funding at a time when the credit markets are under stress for an undetermined period of time could present Jamaica with a very difficult situation and spark a loss of confidence in the ability to access financing,” she adds. “There is a deterioration of reserves relative to imports and to the country’s external debt, leaving the authorities with limited means to prevent a potentially sharp depreciation as has occurred in other emerging markets.” In addition more than 50% of Jamaica’s public debt is exposed to foreign currency and interest rate movements. The review period could last up to three months.