After seven years of interest rates at historical lows, signs of recovery in the US economy have led the Federal Reserve to announce the first upward adjustment in the federal funds rate, the main reference rate for structuring interest rates in the United States and around the world.

What will happen in Central America?

Dollar rates in the banking systems in the region will tend to rise, with a consequent increase in the financial cost of loans incurred in that currency. Added to this will be increased pressure on interest rates in local currency, which tend to be adjusted upward to compensate for the higher risk that the market will demand from alternatives investments in riskier markets such as Central America, versus safer options, such as US Treasury bonds.

The gradual increase in rates in US dollars will result in an outflow of capital from emerging markets and those where the risk is greater, which will be felt in debt securities issued by countries such as those in Central America.

One example is what has started to happen with Costa Rican foreign debt bonds, which in recent days have dropped in price, in reaction to the higher yield that the market is demanding in the context of rising rates in dollars.

External financing in dollars will also be more expensive, both for the private sector as well as Central American governments, whose delicate fiscal situation leaves them, in most cases, very little room to negotiate low rates, forcing them to pay higher rates to raise the necessary resources.

See press release by the Federal Reserve of the United States.

More on this topic

S&P Downgrades Nicaragua

November 2018

Arguing that the country's fiscal and financial profiles have weakened, Standard & Poor´s downgraded from B to B- the negative outlook for Nicaragua's foreign currency debt.

The negative outlook reflects a greater than one of every three probabilities of a downgrade in the next 12 months because of possible additional pressure on the balance of payments or the domestic financial system in dollar terms, given the government's limited foreign exchange financing options.

Costa Rica: More Warnings Over Fiscal Deficit

February 2018

Lack of fiscal reform continues to erode Costa Rica's public finances, constraining its long-term growth prospects and highlighting its vulnerability to external shocks.

From a press release by Standard & Poor's.

El Salvador Issues $600 million in International Market

February 2017

The issue of external debt was placed at 12 year terms and with an interest rate of 8.625%.

From a statement issued by the Ministry of Finance:

February 21, 2017. The Government of the Republic of El Salvador, through the Ministry of Finance and the Central Reserve Bank reports that today a successful issue was made of sovereign bonds (Eurobonds) in the international market for the sum of $600 million.  

Moody's: Negative Outlook for Costa Rica's Debt

February 2016

The agency has changed the outlook from stable to negative, warning that there is still a lack a political consensus for approving a fiscal adjustment to reduce costs and improve the debt / GDP ratio.

The lack of political consensus to reduce the fiscal deficit will continue to put pressure on the government's rising debt burden.