Selling securities

A Central American debt market is a promising idea – institutional disparities could make it hard to implement.

A Central American debt market has long been mooted. For the first time there are real prospects that it could be established. The Central American Bank of Economic Integration (“CABEI”) has indicated that the value of the market stands at around USD 120 billion. A debt market would allow for the sale of both public and private debt and could give the region a competitive edge where the requirements, not to mention expense, to make international debt issuance are often higher and more complicated abroad.

A former president of El Salvador’s Central Bank said, “A new debt market would lower transaction costs whilst the creation of a new regional stock market would create more liquidity. The strongest regional candidate to function as the centre through which to facilitate transactions is likely to be Panama – the country already has a sophisticated stock exchange and stringent financial regulation.”

“A new debt market would lower transaction costs whilst the creation of a new regional stock market would create more liquidity.”

Former president of El Salvador’s Central bank

Thus, a new regional secondary market could make Central American government securities significantly more attractive. Regional administrations have a vested interest in ensuring that such a market becomes viable. Moreover, Central American nations have compelling reasons to bid to become its central hub. The Dominican Republic knows it would be a boon for the country, and El Salvador – whose market reputation has been sullied by its short-sighted love affair with bitcoin – believes this could be an opportunity to show its institutions remain resilient and trustworthy.

CABEI has indicated that it could contribute USD 250 million to give liquidity to the securities issued in this new stock exchange. It is not yet known if other institutions, such as the World Bank – that have a much greater financial capacity – would be willing to support greater liquidity.

An executive from the Instituto Centroamericano de Estudios Fiscales – a Guatemala-based economic research foundation – said, “The first challenge is to establish in which country the exchange is going to be developed to see if there is institutional and technical capacity, alongside sound regulatory frameworks, for this project to become successful. The extent of success in this regard will then influence investor decision-making.”

“The first challenge is to establish in which country the exchange is going to be developed to see if there is institutional and technical capacity, alongside sound regulatory frameworks, for this project to become successful.”

Executive, Instituto Centroamericano de Estudios Fiscales

Transparency could prove to be an Achilles heel. Administrations across the region desperately need to service high sovereign debt – the market, if successful, will help administrations to reduce this debt. More enticing still, the opportunity to reduce the transaction cost fees to make the issue. Of course, there are risks inherent in each issuing country of which El Salvador and Costa Rica are the most indebted.

Naturally, international investors may feel less confident buying in a Central American country than in say New York or London. Investors may be reassured by CABEI itself – the institution is supported by countries including South Korea, China could become an extra-regional partner in the future whilst other non-regional partners include Mexico, Colombia and Argentina. These countries could attract more investors from outside the Central American region to invest in sovereign bonds or private debt.

This may be an opportunity for effective collaboration in a region where economic cooperation is rare.

The key challenge lies in the institutional capacity of the country that will be chosen to be the regional centre. In this respect, Panama and El Salvador are poles apart. The choice of an eventual hub could create political tensions and jealousy. Better to put these to one side to advance a project that could produce meaningful and mutual benefit in a region too often overlooked.

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