Walter Molano | Central America 101
Jammed in-between North America and South America, Central America is more of an afterthought for most emerging market investors.
However, with a combined population of 48 million, an aggregate GDP of almost US$250 billion and US$36 billion in sovereign bonds, it would qualify as a large emerging- market economy.
Moreover, as a bloc of seven sovereign nations, as much as all of South America, it constitutes a sizeable voting group in any multilateral organisation, such as the United Nations or Organization for American States, OAS.
The region’s cultural identity is similar, but not the same. The northern countries, such as Guatemala, El Salvador and Honduras, had heavy indigenous influences, having been part of the Olmec and Mayan Empires. All but two, Belize and Panama, were part of the New Spain Viceroyalty and more specifically, part of the Captaincy of Guatemala.
Belize was established as a pirate outpost on the Guatemalan coast, mainly for British buccaneers, and Panama was part of Colombia, formerly known as the Viceroyalty of New Granada.
Despite these small differences, most of them share a common language, religious beliefs and traditions. These similar traits were apparent when the countries coalesced into political and economic unions, such as the Confederation of Central America and the Central America Customs Union. Again, Belize and Panama were the only regional countries not to be part of the confederation. Unfortunately, the narrowing of the vast mountain chains that traverse North and South America into the tiny isthmus created a torturous geography that complicated communication and trade, and led to its separation into smaller governing units.
Central America has always been a collection of client states for the United States. In 1823, as Latin America was finally breaking free of Spanish rule, the US declared the Monroe Doctrine, which precluded further colonisation by European powers.
However, this did not prevent US intervention in the region. The reverie of Manifest Destiny, which was used to justify the westward expansion of the US into Indian and Mexican territories during the 1840s, was later expanded into the concept of the Golden Circle. This was a proposal espoused by the South to expand into Mexico, the Caribbean and Central America, and it was one of the aims for the Confederacy, had they succeeded during the Civil War.
Indeed, the US invaded and occupied several Central American and Caribbean countries during the 19th and 20th centuries. This included Guatemala, Panama, Honduras and Nicaragua.
However, the most flagrant abuse of the region was economic. This was started by Samuel Zemurray, of New Orleans, through the expansion of the United Fruit Company, which converted the region into a collection of so-called banana republics. These were governments completely dominated by his companies and organised almost exclusively for the exploitation of bananas.
Through his operations, the countries became virtual vassal states that soon came under the domain of other US corporations in services, finance, retail and infrastructure. They also became loyal states that voted in unison with the US in international organisations.
Today, the region is coming under the influence of a new US movement. Evangelical missionaries, particularly from southern states, have been displacing the Catholic Church and hijacking the social agenda. This has fuelled the propagation of right-wing moral issues regarding marriage, right to life and lifestyle issues, along the way introducing the region to the ‘take no prisoners’ political tactics they have used to great success in Washington. The result has been the formation of political gridlock and the inability to respond to the various shocks that been sweeping Central America.
In regard to economics, there are some differences between the various nations. Agriculture tends to be a common denominator across the region, with a great deal of reliance on bananas and sugar. Tourism is also important, given that the countries are located in the tropics and have access to the Caribbean, Pacific or both. Except for Costa Rica and Panama, remittances are an important source of foreign currency for all of the countries. That makes them vulnerable to economic shocks in the United States and Europe.
Last of all, they do not produce oil, at least on a meaningful scale. They are sorely dependent on external sources for hydrocarbons, which make them hypersensitive to positive and negative energy shocks. A spike in oil prices usually triggers a regional recession; while a collapse in oil prices boosts the level of economic activity.
This is the reason the region’s credit metrics tend to move in the same direction. Credit quality ranges from investment grade to CCC, but there is a great deal of correlation within the region.
Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.