Costa Rica plans to launch market-maker programme and SLBs

DMO preparing for a momentous year of bond issuance

Costa Rica’s sovereign debt management office is preparing for a pivotal year. It will launch a primary dealership programme for its domestic government bond market and issue its debut environmental, social and governance-labelled debt with sustainability-linked bonds.

‘The main reasons for launching the market-maker programme are to increase liquidity and to help with the price discovery process,’ said Melvin Quiros-Romero, general director at the debt department in the ministry of finance of Costa Rica. ‘We have strong benchmark bonds in the primary market but the price discovery process – especially in the local currency – is pretty hard.’

Liquidity challenges are at the forefront of sovereign DMOs’ concerns, which was highlighted in the survey of public sector borrowers by OMFIF’s Sovereign Debt Institute in the Public Sector Debt Outlook 2023 report. The survey also showed how many sovereign DMOs are looking to provide more incentives to their dealers to boost the liquidity of their bonds.

‘We have already submitted an executive decree to establish a market-maker programme and right now we expect to pilot the programme in July 2023,’ said Quiros-Romero.

The primary dealership programme will only be for Costa Rica’s local government bond market with around five to seven dealers. The plan is to launch the programme in the summer with the DMO monitoring how it works before slowly adding more obligations and incentives for its dealers.

In addition to launching a primary dealership programme, Costa Rica’s DMO is looking to make its debut in the ESG bond market this year with plans to issue SLBs.

‘We have plans to issue some labelled bonds and we expect some of this issuance as part of the approved issuance programme to have ESG targets,’ said Quiros-Romero.

Only two sovereigns have issued SLBs to date, with Uruguay and Chile bringing such deals to the market last year. While sovereigns from the Latin America region and emerging markets have shown interest in SLBs, developed market sovereigns are yet to follow, with these issuers preferring use-of-proceeds and project-based bonds to those linked to key performance indicators.

Quiros-Romero said Costa Rica is looking at Uruguay’s two-way pricing structure, which the sovereign introduced for its SLB last year, but no decision has been made on the final structure. Costa Rica’s SLB will be issued in the domestic market as a way of attracting international investors to its local debt. However, Costa Rica will tap the international bond markets this year with its first deal in the external market since 2019.

‘We know Costa Rica already has access to ESG investors due to robust ESG public policies adopted as a country,’ said Quiros-Romero, but he added that the use of explicit ESG labels will create even stronger demand.

But even without ESG labels, Costa Rica’s government bonds have been attracting strong demand due to the improvement in the macroeconomic backdrop of the country.

‘Costa Rica has had an extraordinary performance this year,’ said Quiros-Romero. ‘We have seen how Costa Rica’s spread has been getting tighter and even coming inside some of our peers with a better credit risk.’

‘We believe most investors are looking at Costa Rica as a better credit than a single B and more in line with a double B, added Quiros-Romero. ‘We have moved from a deficit of around 3.4% in 2020 to a fiscal surplus of 2.1% in 2022. Another factor is the economic growth in Costa Rica is good – we are expecting growth of around 3% for this year and 3.5% in 2024.’

On 16 February, the SDI is hosting the Latin America and Caribbean public sector debt outlook broadcast. Tune in to hear funding plans from Brazil, Jamaica, Uruguay, CAF and the Central American Bank for Economic Integration, along with senior portfolio managers from Pictet and Santander Asset Management.

Burhan Khadbai is Head of Content, Sovereign Debt Institute, OMFIF.

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