From CIBC First Caribbean

Caribbean Market Review

Summary: Emerging market credits
benefitted from a quick change in investor sentiment, as ambiguous
Fed signals in December prompted the market to diminish expectations
of one to two rate hikes in 2019 to almost zero. Moreover, difficult
Brexit discussions in Europe pushed the breaks on expectations of a
gradual tightening cycle on that side of the world. This situation
provided an excellent environment not only for stocks, but also for
emerging market credits in January, prompting a new round of issuance
during the first weeks of 2019.

In line with the diminished expectation
of monetary tightening around the world, the Caribbean and Central
America enjoyed an impressive rally since our last publication, with
most of the positive moves concentrated in January. Without a doubt
the outperformer of the region was ELSALV, as the 2019 budget and
financing discussions reached a positive outcome in December,
limiting the uncertainties behind the presidential race in the short
term. DOMREP and PANAMA also took advantage of the favorable
conditions, as both countries maintained their house in order with
growth rates well above the regional average and low fiscal deficits.
JAMAN maintained its strong performance as locals continued to
support the curve and Fitch upgraded its credit rating to B+. On the
other side of the spectrum, COSTAR continued to lag credits in the
region as fiscal concerns remained in place, despite the approval of
the fiscal reform late in 2018.

In El Salvador, despite Bukele’s
victory and the return of complicated dynamics to congress, we do not
expect this outcome to significantly impact asset prices in the short
term as the uncertainties regarding 2019 debt issuance and budget
approval are now out of the way. With this result, we expect the GANA
party to start looking for alliances in congress, especially with
FMLN as it tries to obtain the veto power against ARENA’s coalition
holding 49 out of the 84 seats in congress. If this occurs, we are
likely to see the return of slow budget and debt issuance approval
discussions into next year, but also expect ARENA to keep GANA and
the FMLN in check, preventing them from implementing measures that
could put the fiscal account in further jeopardy, hence maintaining
the status quo.

DOMREP tightened -50bps on average
since our last publication, driven by spectacular growth in 2018 and
favourable external conditions. For 2019, we expect the Dominican
Republic to maintain a solid growth pace and to take advantage of
favourable financing conditions early this year. The government will
need to finance DOP231.8bln (US$4.6bln), including DOP75.5bln for
budgetary purposes and DOP156.4bln to meet amortizations during 2019.
Moreover, from the debt issuance approval granted in late 2018, we
know that the government could issue up to DOP190bln in bonds and the
remaining DOP40bln should come from loans with international
organizations; hence, maintaining the same ratio of external vs
internal sources of funding as per the 2019 Budget. We expect to see
around US$2.6bln in external issuance this year.

Fitch upgraded JAMAN to B+ (stable
outlook) with little impact on prices, as it was already trading in
line with credits three notches higher. Fitch cited a record of large
primary surpluses that has cut general government debt/GDP
significantly. Moreover, they argued that there is cross-party
support for the economic reforms that began with the IMF program six
years ago and that they expect this would be maintained when the
current stand-by arrangement ends in November 2019.

In Costa Rica, S&P, Moody’s and
Fitch downgraded Costa Rica’s credit rating with a negative
outlook. The credit rating agencies were aligned in their view of the
credit with both S&P and Fitch, and Moody’s assigning BB- and
Ba3 ratings to COSTAR. All rating agencies point to the government's
optimistic numbers on the actual adjustment coming from the fiscal
reform which we agree on. The government seems to rely heavily on its
ability to comply with the fiscal rule in the near future. Given the
constitutional mandate of some of the expenditure items, this is
still doubtful. More importantly, they highlight that delays in the
discussions of external debt issuance could trigger further reviews.
A key date to watch is the end of April, which is the government's
target to achieve some progress in congress towards issuance
approval.

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