A critical year
Guatemala performed better than its regional partners in 2020. Though the COVID-19 pandemic affected the global economy, its intensity differed from country to country. In Guatemala, temporary restrictions on economic activity were compensated for by positive external results in merchandise exports and foreign remittances. Healthy public finances and the conservative management of financial policies made it possible to ramp up public spending programs without compromising fiscal sustainability. That favored a V-shaped recovery, with real GDP forecast to grow 3.3% y/y in 2021, and 3% in 2022. The main driver would be the external sector, along with banking credit to the private sector. Dynamism of foreign remittances and, to a lesser extent, of merchandise exports, would allow enough liquidity to reinforce the solvent position of international reserves, with only a marginal variation of the exchange rate. Both the fiscal deficit and the inflation rate are expected to moderate during the outlook period.
Costa Rica faces critical weeks ahead, to keep the recently approved IMF agreement on track. The IMF Board’s decision on March 1st was followed by the submission of a draft bill to Congress for authorization to accept the loan. More importantly, several initiatives in Congress should be approved by May-June, including the Public Employment Act. That is a short time for legislative processes in Costa Rica. Economic activity continues improving slowly, driven by the impulse of dynamic free-zone exports, as well as by the gradual removal of restrictions for coping with the pandemic. Given the high pre-pandemic indebtedness of families, and the low expectations for growth and unemployment reduction, the demand for credit to the private sector shows meager growth rates. Fiscal discipline seems to continue being a permanent pain in the neck, as expenditures in the first months of the year have not moved in the desired direction for fulfilling mid-year commitments with the IMF.
El Salvador is living the overwhelming victory of President Nayib Bukele and his New Ideas party in the February legislative and municipal elections. Bukele’s ample majority in the Congress to be seated on May 1st gives the president strong power, with a qualified two-thirds majority that allows any kind of legislative decision to be made without the need to negotiate with other parties. In fiscal matters, one positive sign of these new political conditions was the widely-expected decision to advance talks for an adjustment agreement with the IMF, as anticipated back in May 2020, when El Salvador got an RFF IMF loan. Little is known as of today about the quantitative objectives and possible fiscal adjustment measures. In terms of revenues, the finance minister has only advanced that increasing taxes like the VAT is not on the agenda – but that actions to fight tax evasion will be the focus instead. Economic activity has performed erratically since October, with the only impulse a better-than-expected evolution of foreign remittances. Fiscal trends look so far more expansive than appropriate, since conditions call for an aggressive adjustment.
Now read on...
Register to sample a report