Political Instability Knocks Confidence In Costa Rica, Panama Bonds

by Mike Godfrey, Tax-News.com, Washington

11 August 2003

High yielding government debt has lured international investors to buy some $1.37 billion in government-backed securities from Costa Rica, Panama, El Salvador and Guatemala recently.

However, as elections approach in Panama, Guatemala, and El Salvador, and the Costa Rican government faces mounting opposition to fiscal reforms designed to rein in spiralling debt, political uncertainty in the region is rocking investor confidence.

"We're concerned about the region's outlook," Francis Rodilosso of hedge fund Van Eck Capital told Reuters, adding: "The fundamentals don't add up. If things start falling apart, everyone will try to exit at once."

Despite representing a higher risk, global investors have been attracted to Central American debt by yields of up to 9%, way above the 3% offered on US Treasuries. Enthusiasm for the region's bonds is beginning to wane however, especially in the light of a pledge by the Panamanian opposition PRD party to abandon an $80 million tax reform.

A large fiscal deficit in Costa Rica is also fuelling doubts over the country's ability to service its debt. Costa Rica sold $450 million worth of paper in January this year, and currently has a budget deficit equal to 5.4% of GDP, forecast to hit 6% by next year.

Similar concerns are being raised about Panama, which sold $275 million in bonds in February this year.

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