Bearing up
Costa Rica’s economic performance has been affected by negative external conditions, but results in some areas looking better than expected. Short-term economic activity indicators suggest that real growth this year could be around 4% y/y, vs. the low 3.3% of our July revised forecast. The nature of growth drivers does not suggest lower unemployment than projected. The fiscal deficit and primary surplus presented better results in both September and October. Inflation is falling gradually and could arrive to our forecast this December. The FX market has behaved all year in a way hard to understand in terms of the fundamentals of the market and the exchange rate. The political environment looks now less belligerent than in Q2 and Q3. The presidential style remains similar to previous months, but political will has been constructed to advance some important initiatives, such as the authorization to place Eurobonds in the international market. Although the first authorized issue won’t be ready before the next bonds maturity date in January, we don’t expect troubles in complying with that obligation, as we mentioned in our November report.
El Salvador’s main political scenario issues persist. New topics include two expected bills finally submitted to Congress: the government’s plan to provide a legal framework for a public offering of digital assets, and the pension reform awaited for one year. Crime and violence reduction led President Nayib Bukele to affirm in social networks that now his country is the safest one in Latin America, despite the continuous pressures of human right watch organizations to cancel the state of exception maintained since March 2022. The economic indicators continue like in previous months, except for the rising fiscal deficit, which will be higher in Q4 than in the previous quarters. Economic activity fluctuates between 2% and 3% y/y, although the leading sectors in term of size remain stagnant. Price rises have gradually slowed, suggesting a year end inflation rate of about 7%. Dynamism of merchandise exports and imports remains similar to previous months, and the effect of international prices explains most of the nominal changes. Remittances have risen around 3.5% y/y since June.
Guatemala is the second largest receiver of remittances in Latin America, after Mexico. Transfers made from abroad are a key element for the domestic economy, especially due to the effects on the balance of payments, consumption, inflation and the exchange rate. During the height of the pandemic, remittances kept expanding robustly, and helped a V-shaped economic recovery. More recently they withstood global headwinds in 2022, but in 2023, the scenario won't be as favorable. The weaker economic outlook for the United States is signaling sluggish conditions for migrants. In this report, we examine in detail the current situation of remittances, and its outlook for next year. We expect the ratio of remittances as a percentage of GDP to be constant over the next 12 months.
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