Fitch has raised its outlook on El Salvador to stable from negative, and affirmed its BB rating. The revision reflects the government’s progress on fiscal consolidation, the expected stabilization of its public debt burden, and its commitment to comply with the precautionary IMF Stand-by Agreement (SBA). The country recorded a deficit of 4.2% of GDP in 2010, significantly lower than the 5.6% 2009 deficit and below the 4.8% benchmark set under the IMF’s SBA.
El Salvador will receive a $100m loan from the World Bank. Proceeds will be used to expand the government spending for basic social services in rural and urban areas. The loan will address shortcomings in tax administration and is expected to bridge a shortfall in revenues of $98m. The goal of the program is to increase the country’s total tax revenues to 14.8% GDP from 13.3%, a nominal increase of $368m by 2012. Tax revenues as a percentage of GDP are low in El Salvador and represent a constraint on expanding public services and social aid. In 2008, tax revenues were about 27% of GDP on average in OECD countries, while they were about 16.1% in LatAm and 13.0% in El Salvador. The loan has a 30-year maturity period, including a 5-year grace period.
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.
M&A activity in Peru’s healthcare industry is heating up. The expansion of state-sponsored healthcare insurance will be a major factor contributing to the sector’s growth.
The IMF says it has completed its second review of El Salvador’s economic performance as part of its 3-year stand-by arrangement (SBA). The arrangement was approved on March 17 for SDR513.9m, equivalent to 300% of the country’s quota in the IMF. “The decline in the overall fiscal deficit envisaged for 2011 will continue to support the economic recovery and stabilize the public debt,” the IMF says. For 2011, it adds, improved prospects for external and domestic demand are expected to lift output growth, although high global fuel and food prices will increase inflation and the external current account deficit.
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.
Markets are likely to shrug off a Moody’s downgrade of El Salvador to Ba2 from Ba1, according to debt analysts. Boris Segura, a debt analyst with Nomura Securities, says the bonds have been trading as a low double B for months. “There shouldn’t be much of a reaction,” he says. Citi says in a note that the movement is not a surprise, and envisages a further downgrade by Fitch. S&P downgraded the sovereign to BB minus from BB on political developments in January.
Colombian insurance conglomerate Suramericana is on track to acquire El Salvador-based insurance company Asesuisa from Bancolombia, a company spokeswoman confirms. The spokeswoman confirms estimates by Colombian equity analysts that the deal will cost around $100m. She expects the deal to be announced in the next few weeks. Suramericana announced January 31 that it was buying Dominican Republic-based property and casualty insurer Proseguros for $22.5m from NY-based PE shop Palmfund.
Bargain basement fees on El Salvador’s upcoming dollar bond issue have driven away potential bookrunners, leaving Deutsche as sole lead, according to DCM bankers familiar with the process. Deutsche is heard having accepted just 1bp to win the mandate. The issuer wanted additional leads at the same price, but other banks refused. “No other house would do it jointly for those fees,” says a banker close to the process. The Central American sovereign has a history of awarding bond deals for very little commission. It typically saves thousands of dollars in fees only to lose multiples of that in cheap pricing. Deutsche has had a good run in the LatAm debt league tables this year, so it appears not to be making a desperate bid for volume credit. However, it is understood to be keen to start a relationship with El Salvador, which is heard considering a $700m 10-year. Bankers say El Salvador is not leading a general trend of lower DCM fees, and that frequent sovereign issuers will still pay. “There have been a few tightly bid contests this year, but it’s not a widespread trend,” says a banker who pitched El Salvador. He adds that banks can still count on 25bp-35bp from a typical low investment grade frequent issuer in the region on a 10-year plain vanilla deal. Average fee per transaction is up sharply in 2010, according to Dealogic. Total LatAm DCM revenue was $243.00m for the year to October 15, on $84.13bn volume from 153 transactions. This compares to $244.00m for the corresponding period of 2009, coming from $66.11bn volume from 287 transactions.
El Salvador is heard readying a new dollar bond for next year, according to DCM bankers. The sovereign, which returned to the markets in December 2009, is heard looking for about $700m at a 10-year maturity. Deutsche Bank and Citi are rumored to have won the mandate for a 1bp fee. El Salvador, rated Ba1/BB, raised $800m last year, paying 7.735% yield on a 2020 bond through Citi and JPMorgan.