Costa Rica: New taxes and financing lead the adjustment plan
After several failed attempts, Costa Rica is finally tackling a fiscal adjustment to reduce its large fiscal deficit, and to stabilize government debt. The road hasn’t been smooth, given the years of accumulated disequilibrium and the associated rigidities imposed by domestic legislation. But the fact that the country was on the verge of a liquidity crisis in the second half of 2018 pushed the political forces to act in concert, and to look for long-term solutions to the fiscal imbalances.
A reform like this creates lots of opposition. A general strike that lasted almost three months put the government in an uncomfortable situation, resulting in a loss of political support for President Carlos Alvarado, whose approval rating fell below 30%. The economy has also suffered. The consumer confidence index fell to its lowest level in 10 years, affecting household expenditures. Business sector confidence also declined, with the index falling from 53.3 in Q3 2018 to 41.6 in Q3 2019. Falling confidence leads to reduced domestic demand, causing a slowdown of real GDP over the forecast horizon (2019-2020). We expect the economy to grow 2% in 2019, and 2.3% in 2020.
In Guatemala, a CID-Gallup poll for Fundación Libertad y Desarrollo published July 17th put rightist presidential candidate Alejandro Giammattei as the frontrunner, saying that 40.6% of respondents favored him, vs. 33.4% who told pollsters they favored center-left candidate and former first lady Sandra Torres. About 19.4% of respondents said they’d leave their ballots blank. The result is similar to some surveys taken after the first round of voting on June 16th: Torres’ center-left National Unity of Hope (UNE) party is the country’s largest -- but her ability to capture votes from other parties is very limited. The reason is that Torres also draws significant negative sentiment: 37% of respondents had a bad or very bad opinion of her. By contrast, just 11.7% of respondents had a bad or very bad opinion of Giammattei.Since Torres garnered a solid initial showing, but had difficulty drawing votes from other parties, the smaller the turnout, the better her prospects for victory.
El Salvador’s path forward is unclear. On one hand, short-term economic indicators show a decelerating economy (per figures to May), and the Central Bank announced a minor downward correction of its GDP estimate for 2019. On the other hand, the new administration has been moving fast in some key areas, such as citizens’ security and short-term fiscal financing, and sending clear signals to investors that the new authorities are pro-business, and favor any kind of investment. This could stoke confidence among consumers and business leaders alike. The Mikofsky survey of July 1st shows a big popularity jump for President Nayib Bukele, from 65% two months ago to 80% in July. We consider it a signal of hopefulness that could help improve expectations, in a population in need of a different kind of leadership.
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