Costa Rica’s Constitutional Court on November 23 unanimously green-lighted the fiscal reform package. The decision came after a public service workers' strike, and more than a year of discussions. The Supreme Court had indicated that the plan, approved by the Legislative Assembly 35-22 in its first reading, would affect judicial branch operations, and must therefore be approved by a qualified majority (of 38 votes). With the Constitutional Court´s decision, the fiscal proposal will now return to Congress for its second and final vote, for which only a simple majority is needed. We think it will become law before year-end.
The decision came at a crucial moment for Costa Rica’s economic stability, given the financial situation of the central government and pressures on the FX market, where the colon has been under depreciation pressure. As we’ve indicated, the fiscal situation is very complicated, not only due to the government’s large financial deficit, forecast by the Central Bank at 7.3% of nominal GDP, but also because of the accumulation of debt maturing before year-end, including the 498 billion colons in Treasury Notes sold to the Central Bank that mature December 26. Uncertainty over the Constitutional Court’s decision left the government facing major difficulties in debt refinancing, and in raising the resources to finance the deficit. To be sure, the direct fiscal impact of the reform approval won’t be felt immediately. Nevertheless, a change in expectations could increase possibilities of future financing.
Recent Guatemalan economic trends persist, consistent with our August forecast: The economy is growing at close to 3% y/y, with inflation within Bank of Guatemala’s target range of 3% - 5%. The current account continues to be in surplus, although by less than in 2017, as the trade balance deteriorates, but private remittances more than compensate for it. The fiscal deficit is increasing, but will continue to be under 2% of GDP, and credit to private sector is rising. The exchange rate, after depreciating for most of the year, has been relatively stable for the past eight weeks, at around Q7.70 per dollar.
Private sector expectations remain low. The October private sector analysts´ confidence index on economic activity was just 29.47, up from September’s 25, but still at its second lowest level of the year. Nearly 86% of respondents consider the economy in worse shape than in October 2017, and 64.3% don’t expect improvements in the next six months. Just 7.1% think this is a good time to invest.
In El Salvador, economics and politics are idling. The economy maintains the same trends we discussed in October: slowing merchandise exports, and rising imports; a slower rise of foreign remittances; faster credit to the private sector and a rising fiscal deficit since Q2 2018; and relative stability of main prices. The political environment hasn’t improved, evidently under the influence of pressures in the run-up to the February 2019 presidential election.
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