Controversies, disappointments -- and surprises
Costa Rica continues to struggle with political confrontation. Giving the fraught political conditions analyzed in our May report, controversial presidential proposals are not likely to make their way easily through Congress. Amid this climate, the government submitted five bills on fiscal matters, including a controversial proposed reform to the income tax law that moves toward a global rent concept. The initiative was badly received, after the persistence of presidential confrontation with political groups whose support is required to pass legislation. Among the surprising political decisions are the proposed cancelation of budget financing for CINDE, widely recognized as one of the world’s top foreign investment promotion agencies, and the rupture with a foundation that has been promoting information technology in public educational centers for almost four decades. Economic indicators show improvement, but in an imbalanced way. Economic activity growth is explained primarily by FTZ activities, while the domestic-based economy is increasing very modestly. The unemployment rate has decreased, though not via job creation, but due to a reduction of labor force participation. Fiscal figures have improved substantially, pushed by the limits imposed by the fiscal rule approved in 2018, which the government would like to make more flexible.
As El Salvador moves toward February 2024 presidential elections, significant changes in political and administrative division are occurring. Some analysts associate these with the already-announced postulation of President Nayib Bukele for reelection. A recent congressional decision that became law on June 14th drastically reduced the number of mayors, from 262 to 44, as reported in our June 15th brief. The pension reform approved in December 2022 led to a complete debt exchange of pension certificates, now as a liability of the Salvadoran Pension Institute. The transaction will render fiscal relief during the four-year grace period, for both principal and interest. Economic activity slowdown continues, along with the relative stability of a still-high fiscal deficit, with external sources of income increasing at modest rates. Credit to the private sector has also started to moderate, as total liquidity shrinks. Inflationary pressures continue diminishing. The country’s image in the financial markets has improved, with its EMBI level falling down to 10%.
In Guatemala, an unexpected candidate came in second in the first round of presidential election voting. Former first lady Sandra Torres, of the social democratic party National Unity of Hope (UNE), was the top vote-taker, with 15.8% of the vote. But Bernardo Arevalo, the son of a popular former president and an ex-ambassador to Spain, came in second, with 11.8%. Arevalo’s rise was a surprise, as polls had not identified him as a leading candidate. As neither candidate accrued the required majority for victory, a runoff has been set for August 20th. Things won’t be easy for Torres: although she was the preferred candidate, she also has a high rejection rate. Guatemalans also voted for a new Congress, and local authorities. Torres’ UNE party failed to garner the most votes in the new Congress. Instead, the VAMOS party achieved this, winning 40 of the 160 seats. According to the latest figures of the Monthly Index of Economic Activity (MIEA), the Guatemalan economy started to slow during the first four months of 2023. The IMEA’s growth rate in April was 3.4% y/y, compared to 3.8% in January. Despite the reduction in recent months, the main problem in Guatemala´s economy is high inflation. In May, the increase in the Consumer Price Index reached 6.5% y/y, down from 9.7% in January. The average rate totaled 8.6% during the first five months of the year. The Central Bank has maintained its policy interest rate at 5% since its latest meeting on May 31st. This is a signal that further rate increases may not be expected in the coming months.
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