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Abstract
This research explores causes and implications of the foreign indebtedness of Central American countries in the 2010s, that is, during what has been defined the second phase of global liquidity, marked by the quantitative easing (QE) of central banks in developed economies. Looking at their balance of payments and their contemporary sources of funding, we find that the international bond market became an important source of debt for Central American economies during that decade. We also find that non-financial corporations’ foreign bond issuance has been increasing in some of the countries under study, even though less than in larger emerging economies. Classifying these countries’ international debt securities by residence and nationality of the issuer, we identify another peculiarity with important implications about financial fragility. In fact, as opposed to what occurred to larger emerging economies, the general governments issuing foreign bonds has been a more relevant source of risk than the issuance by financial and non-financial corporations.
Acknowledgements
I am grateful to Esteban Perez Caldentey, Mark Setterfield, two anonymous referees and the editors of this journal for comments and suggestions. I am thankful for the comments received at the 1st UNCTAD Summer School in Geneva, in particular to Daniel Munevar. I am also grateful for the comments by Ugo Panizza in the context of the visiting research fellowship at the Center for Finance and Development of the Geneva Graduate Institute. All errors are mine.
Correction Statement
This article has been corrected with minor changes. These changes do not impact the academic content of the article.
Notes
1 Global liquidity generally refers to the ease of financing in global financial markets (BIS Citation2011). “It encompasses both funding liquidity (the ease of raising cash by selling new obligations to investors) and market liquidity (the ease of raising cash by selling assets)” (BIS Citation2015; Tarashev, Avdjiev, and Cohen Citation2016, 5). In the context of QE, it is linked to monetary policy spillovers from developed economies (Shin Citation2013).
2 Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, and Panama.
3 This raises the question of the desirability or not of coordinated macroeconomic policy between nations (see McCallum Citation1996).
4 See, for example, Obstfeld and Taylor (Citation2017). The authors explain how the need for international coordination of bank regulation appeared after the collapse of the Bretton Woods system.
5 The HIPC Initiative was launched in 1996 by the IMF and World Bank. Both Nicaragua and Honduras were part of it. As of 2018, countries in Central America that present external debt stocks (as percent of GNI) above fifty per cent are Nicaragua (97); El Salvador (70); and Costa Rica (51) while in Honduras and Guatemala it represents 42 and 35 percent, respectively (World Bank WDI Database, accessed July 2021).
6 Tourism services are relevant for both economies. ICT services are particularly important in the case of Costa Rica while insurance and financial services are more relevant in the case of Panama.
7 Remittances include both personal and family transfers and the compensation of employees (IMF Citation2009). Compensation of employees is most relevant in the liabilities side of the current account in the case of these countries.
8 Statistics. Accessed: August 2021.
9 Other countries that started issuing foreign bond debt during the period of the second phase of global liquidity were, among others, Angola, Armenia, Bolivia, Tanzania, Paraguay, and Namibia (see Feyen et al. Citation2015; Guscina, Pedras, and Presciuttini Citation2014).
10 In the graph, these are represented under “non-government.”
11 The government of Nicaragua has issued negligible amounts of IDS occasionally and for that reason, we do not include it here.
12 The figure shows the issuance by residents and nationals. The implications regarding residence and nationality are considered in the following section.
13 There are approximately 120 banks in total in the region. They hold more than 90% of total financial assets (see also SECMCA Citation2015). Most commercial banks are foreign owned with the exception of those in Guatemala. Most foreign banks are located in Panama given its status as an offshore financial center. Costa Rica has four state banks, which at least duplicates the number of state banks in other Central American countries. The financial system also includes other financial institutions such as pension funds and insurance companies.
14 Two of the least developed financial system of the region is the one in Nicaragua and Honduras. During all the period considered, and from the data compiled by the BIS, Nicaragua only issued five million USD of debt between 1974 and 2001.
15 Financial fragility is understood here as exposure to financial problems. There is more than one way of identifying financial fragility. For an example of how the mortgage boom may have increased the financial vulnerability of households in the United States, see Weller and Sabatini (Citation2008). For an example of the financial fragility of firms within the electricity sector in Brazil, see Torres Filho, Montani Martins, and Miaguti (Citation2017).
16 It is important to note that financial dollarization in most countries in Central America is relatively high. According to Swiston (Citation2012) deposits dollarization have continually increased since the 1990s in all countries. El Salvador and Panama have been officially dollarized and use the US dollar as legal tender. In the case of the other countries, they have experienced a spontaneous or partial dollarization (Rodlauer and Schipke Citation2005); see also IMF Citation2010 and SECMCA Citation2015).
17 Morales and Schipke 2005 (in Rodlauer and Schipke Citation2005). Besides external policies these countries are frequently affected by natural disasters, for instance.
18 According to these authors, for instance, GDP volatility in Costa Rica and Honduras tend to be explained mainly by external shocks while in Guatemala and El Salvador by regional ones. In Nicaragua, both external and regional shocks have been equally important, according to the same source.
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Notes on contributors
Monica Hernandez
Monica Hernandez is an economist and a consultant to the Research Department of the Internationoal Labor Organization. She has also been a research consultant to the United Nations Conference on Trade and Development (UNCTAD); the Global Development and Environment Institute (GDAE); and other academic and international development organizations. She holds a Ph.D. in economics from The New School for Social Research.