COSTA RICA: Edging toward an IMF deal
Costa Rica is now closer to a serious and formal fiscal adjustment process. We have been skeptical in our previous reports about the willingness, the scale and the timing of the required adjustment, although always keeping hope for an agreement with the IMF in Q1 2021. At last, President Carlos Alvarado confirmed in early December the decision to do it in the next quarter, as well as his commitment to a solution to the serious fiscal situation, and with a more balanced proposal between expenditure cutting and revenue increases. Political support in Congress would be the next challenge, since the opposition seems reluctant to trust the government, after ups and downs in these matters. Economic activity is recovering, after a loosening of the severe restrictions in Q2 and Q3, and moving towards a real GDP annual growth of probably around 5.5%. Expenditure cuts that we doubted in our July outlook, as well as better-than-expected revenue results, could end up with a 2020 fiscal deficit lower than our estimate of double digits, and closer to the Ministry of Finance’s projection of 9.3% of GDP.
In El Salvador, we perceive an inertial evolution of political conditions, with neither improvement nor deterioration in the political stance we have been drawing in previous reports. This is not good news, in the face of the big challenges to be confronted in 2021, related to economic reactivation, curbing social deterioration and solving the unsustainable fiscal imbalance. The apparent lack of a credible and adequate agenda to tackle those challenges in a timely or effective way is striking, considering that strategy should not rely on financing without a comprehensive adjustment program to bring back long-term fiscal sustainability in two to three years. Barely two months away from legislative and local government elections, on February 28th, 2021, President Nayib Bukele’s New Ideas party maintains a comfortable lead of 64% of the preference, according to surveys. Economic activity has started to recover gradually, so as to look forward to a real GDP decrease of around 7%, against our and other more negative forecasts. The main driver will be a better-than-expected evolution of foreign remittances. But fiscal conditions are a matter of concern, as government debt to October increased about four times the average of the previous seven years.
The political storm that affected Guatemala in November seems to be slowing. After the major civil disturbance in the second half of November, the Legislative Assembly decided not to send the originally approved budget to the Executive branch, but instead to approve a proposal to shelve it. In that way, Congress freed President Alejandro Giammattei from vetoing the budget. Instead, he can now prepare to work with the same budget as this year, subject to modifications to adjust finances to the post-COVID-19 era.
Despite all disturbances, the Guatemalan economy is performing better than the rest of its Central American counterparts in the pandemic season. The Monthly Index of Economic Activity, original series, increased 1.3% y/y as of October, and the trend-cycle grew 1.1% y/y, being the first month in positive territory since the beginning of the pandemic. These good results came after August and September readings of -1.4% y/y and 0.1% y/y, which signal that the recovery is underway.
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