Euromoney Country Risk

Risk survey pinpoints variable trends for Central American borrowers

El Salvador dives, while Panama copes as trade buckles, remittances drop and fiscal pressures intensify.


Investors in Central America are facing up to the same threats posing problems for other world regions this year with reduced trade, tourism and investment in a global economy in peril from the coronavirus pandemic.

Euromoney’s risk survey nevertheless shows the region is generally holding firm, with Panama, Costa Rica, Honduras and Nicaragua all improving, which with Guatemala worsening very slightly leaves El Salvador with the biggest deterioration in risk score.

But that only paints half the picture.

Take one of the improvers, Nicaragua. Its higher score has enabled the country to move up from tier 5 (the survey’s highest default category) to tier 4. Yet it remains the region’s riskiest, ranking 134th on Euromoney’s global rankings – a similar score to other higher risk country investments such as Belarus and Bangladesh.

ECR cen am jul 20

Lofty Panama

At the other end of the scale, however, is Panama now at a relatively lofty 47th, having climbed 28 places since December into tier 3 alongside Peru and Oman. Its gains come from political stability after last year’s elections.

The country is not without its risks. Apart from the economic pain caused by the coronavirus pandemic, there have been some tensions between the executive and legislative branches of government, including a cabinet shuffle that led to the ouster of health minister Rosario Turner.

However, president Laurentino Cortizo of the Democratic Revolutionary Party (PRD) is backed by a majority in parliament after his party struck up an alliance with the Nationalist Republican Liberal Movement.

Government stability, and hence regulatory and policy environment factors, is consequently upgraded, with a massive improvement to political risk outweighing downgrades to the economic-GNP outlook and employment/unemployment situation.

These latter two are the main factors feeling the weight of the coronavirus lockdowns in most countries.

The economic effects are quantified in the IMF’s World Economic Outlook, which foresees declining real GDP across the whole of Central America this year, although Panama gets off rather lightly with a predicted 2% contraction compared with a 5.4% drop for El Salvador.

Survey contributor José Miguel Infantozzi, co-founder of TodoCalculado Real Estate, notes that predicting the global economy in such a volatile and uncertain situation is difficult, but his optimism for the region is backed up by improving long-term (10-year) score trends for Costa Rica, Honduras and Panama.

“Certain investors feel that with Covid rearranging the supply chain, and consumer behaviour, several opportunities arise for Central America,” he says.

“Latin Americans are displaying their countries as a solution to firms with operations in Asia that could be exploring new opportunities to reduce production and logistic costs by moving there.

“Central America offers residential projects that blend the convenience of living in an urban house or apartment with all the benefits of living surrounded by nature. This is an opportunity to upgrade quality of life for a reasonable price and comply with social distancing space and measures to enjoy family time and improve work-life balance with more interesting activities.”

El Salvador the Achilles heel

But Infantozzi, as with other risk experts, recognises substantial variation among countries, notably when comparing Panama with the current plight of El Salvador.

The latter’s declining risk score suggests there are dark days ahead for investors in Central America’s smallest, but most densely populated country, now ranking 128th on Euromoney’s global risk scale, with its trade, remittance income and inward investment all negatively affected by the coronavirus crisis.

“Exports fell by 23.6% year on year between January and May, with exports of the maquila sector [textiles, garments and other products] down by 42.4%”, says survey expert Julián Salinas, vice-president of Fudecen, a local research foundation.

He explains how the economy will be affected: “Family remittances, worth around 20% of GDP, fell by 11.6% year on year between January and May.”

He adds that the rate of Hispanic unemployment has risen sharply and will increase poverty – and extreme poverty – and weaken demand.

Exports fell by 23.6% year on year between January and May, with exports of the maquila sector down by 42.4% - Julián Salinas, Fudecen

It is estimated that El Salvador’s formal employment may fall by almost a quarter, or around 191,000 workers in the worst scenario.

“That is a high rate comparing with the other countries in the region,” Salinas says, “but is realistic considering the Salvadoran economy is one of the most affected countries by coronavirus”.

Infantozzi meanwhile paints a similarly bleak picture, noting that as employment indicators declined in the US, there was a direct impact on Salvadoran workers there: as a result of lockdown measures, most companies shut down totally or operated in reduced conditions, causing an increase in unemployment.

“Additionally, Hurricane Amanda hit El Salvador in May, causing floods and landslides,” says Infantozzi. “Different sectors of Salvadoran society left the lockdowns behind to offer needed Salvadorans a hand through food, medicines, and basic needs but unfortunately causing Covid infections to increase”.

As of July 20, the country had more than 12,000 registered cases and 352 deaths from the disease in a population of 6.4 million, but with both tallies are still climbing.

Salinas also notes that the cost of measures implemented by the government to address the crisis is the highest in Latin America, citing figures that show the average cost of Covid-19 policies is 3.9% of GDP for the Latin American region, but is 11.1% of GDP for El Salvador.

His foundation predicts the fiscal deficit will widen to 12% of GDP and the debt burden to 90% of GDP, heightening default risk.

As for the banking sector, it has been one of the healthiest in terms of performance with bank deposits unexpectedly growing by 13% year on year in May.

A number of measures have been implemented by the government to increase liquidity, including lowering banks’ reserve requirements for new loans; reducing banks’ reserve requirements for various liabilities; amending provisioning for non-performing loans through freezing credit ratings; imposing a temporary moratorium on credit risk ratings; and temporarily relaxing lending conditions with a grace period for loan repayments.

However, these may generate an implicit risk that could be negative in future when the impact of the macroeconomic contraction affects the banking system, given the increased amount of lending.

Salinas also mentions issues affecting the transparency and institutional risk factors that form part of Euromoney’s survey, citing the fact transparency is becoming weaker, with many decrees suspending the ordinary processes of the Institute of Access to Public Information and making procedures of government procurement opaque.

“The measures implemented by the government and the relationship between other powers of the state have been disrespectfully crossing the line into illegality,” Salinas says. “That affects the perspective of legal certainty and social cohesion among the population”.

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