COSTA RICA: A cloudy outlook
The 2018-2019 outlook for the Costa Rican economy is cloudy. H1 2018 showed a slowdown in economic activity, a high central government financial deficit and a government debt-to-GDP ratio that had already surpassed 50% of GDP. On the other hand, inflation remains near the lower limit of the Central Bank´s target range; the exchange rate has been relatively stable; and interest rates, although higher than at the beginning of the year, are relatively contained.
For the outlook period, of 2018-2019, actions on the fiscal front will be critical. Our baseline outlook assumes the approval of a basic fiscal reform before yearend. Under that condition, in a financial world dominated by higher interest rates and a decline in liquidity, we see a more vulnerable economy, but not one in crisis. Economic activity will slow further, and macro prices will rise, but fiscal results will start to improve. However, changes in the perceptions of a positive outcome, either due to domestic actions or to unfavorable developments in the world economy, could lead to a forced adjustment, with different consequences than those outlined in this report.
The Guatemalan economy continues its slow growth pattern, with moderate inflation (3.79% y/y as of June) and slight depreciation (1.9% ytd as of July 22nd). Q1 GDP grew only 2% and Bank of Guatemala is revising downward its 2018 growth projection, originally stated at between 3% and 3.8%. Exports are declining (-2.8% y/y as of May) and imports increasing (up 9.8%), but the inflow of private remittances ($4.4 billion as of June) more than covers the trade deficit and, as in previous years, the current account is in surplus. Fiscal accounts show an acceleration of expenditures (7% y/y as of June) that exceed the increase in revenues (3.1% y/y), so the budgetary surplus observed during the first months of the year became a Q667 million deficit as of the end of H1.
Optimism in El Salvador that the climate for economic policy decision-making would improve after the legislative elections of March 2018 hasn’t yet led to progress in that area. In fact, no significant policy decisions have been taken so far, particularly related to the key challenge of coping with the high fiscal deficit and the increasing public debt that threatens fiscal sustainability. Proposals from new Finance Minister Nelson Fuentes continue favoring financing the gap, instead of a more permanent fiscal adjustment. Economic activity is slow, mainly driven by foreign remittances and, to a lesser extent, by merchandise exports. Credit to the private sector has increased slightly, while narrow money indicators keep on slowing down, as reported last June.
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