Bearing up (with updates to Tables 1 and 2)
Costa Rica is caught in political confrontations over the urgent task of restoring fiscal sustainability in order to avoid a financial crisis. The government’s decision to discard the announced proposal for a program with IMF has been October’s most noteworthy event. The failure came from the bias towards increasing taxes, rather than facing the key source of the fiscal structural imbalance, associated with heavy public employment and compensation benefits. Moreover, the reliance on temporary tax measures was seen as a simple way to avoid compliance with medium and long-term sustainability. Uncertainty is now greater, although we still expect the government to find a way to sign an agreement with the IMF in Q1 2021, paving the way for an orderly and gradual adjustment. Economic activity has stopped falling, and should recover somewhat in Q4, closing 2020 at close to our -6.1% forecast. The fiscal deficit continues moving towards our forecast (of 10.9% of GDP) for this year. Given the high financing requirements for the government, getting the funds will be the main challenge for fiscal policy in 2021, particularly if an agreement with the IMF is delayed or discarded.
El Salvador seems to be moving with inertia, with politicians and the government apparently disconnected from the serious financial situation the government will face in 2020. Financial requirements in 2020 have been virtually funded. We don’t know whether the government is working on an integral plan to cope with the high public debt and fiscal deficit next year, after talking about an IMF agreement since July with no news since then. There’s a possibility that the February 2021 legislative elections are stopping any advance on this, and discouraging the government from avoiding addressing sensitive topics like fiscal adjustment. Political criticisms of President Nayib Bukele continue, along with his positive image in polls. The severe lockdown of previous months successfully controlled the pandemic, but also hit economic activity hard, as well as the fiscal deficit and the ramping public debt. Question are arising about the ability of the government to finance funds need next year.
In Guatemala, after a bad Q2 2020, when quarterly GDP declined 9.6% y/y, some green shoots are appearing on the economic scene, so H2 2020 looks better than initially expected. Some of these elements, mentioned in our September report, are the inflow of private sector remittances, the behavior of the value of net merchandise exports and the evolution of private sector expectations. Their positive effect is also supported by a better than originally expected behavior of the U.S. economy, according to the IMF´s October World Economic Outlook.
Partial data for Q3 economic activity showed an improvement in the volume of production, although it is still in negative territory. The Monthly Index of Economic Activity (original series), which dropped 10.9% y/y in May and 7.9% y/y in June declined 4.9% y/y in July and 1.8% in August, a big change from the situation observed in Q2. The improvement is associated with a reduction in the limitations imposed by the policies of confinement, and other restrictions resulting from the pandemic. Bank of Guatemala changed to -1.5% y/y its growth forecast for 2020. We still think the decline will be in the -2% -3% range.
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