COSTA RICA: Time to deliver
Costa Rica: After tense months filled with debates over fiscal issues, and questions over the day-to-day difficulties of handling largely unbalanced fiscal accounts, the waters seem to be calming. Discussions in December were concentrated on the implications of Moody’s sovereign ratings downgrade to B1, and Standard & Poor’s to B+. There were also discussions over whether the executive branch could cover the outstanding balance of Treasury Bills (TB), of more than $830 million, and the other financial obligations due that month.
The government not only was able to comply with its obligations, but also announced that the 2018 deficit, at 6% of GDP, was lower than projected. But the approval of fiscal reform, and the better-than-expected 2018 deficit, are just the start of a bumpy road Costa Rica will be forced to navigate in coming years. Perhaps the most urgent actions, since the reform is back-loaded, are the approval of pending legislation to advance the reduction of the deficit, and the definition of a clear way to cover the government’s financial needs in 2019, including debt amortization. Preliminary data puts government’s total financial needs at about 13% of GDP.
Government’s proposal to reduce dependence on domestic financing is to get an umbrella authorization from Congress to place up to $6 billion in the Eurobond market, distributed over five years: $1.5 billion per year in 2019 and 2020, and $1 billion per year from 2021 to 2023. But, unlike what happened in fiscal reform, this time there’s no solid congressional bloc backing this proposal.
In El Salvador, preliminary figures released by the Central Bank in December suggest that real GDP could have grown some 2.5%-2.6%, slightly above our estimate, mainly thanks to larger-than-expected earnings from remittances. That was insufficient to generate demand pressures on local resources like banking credit, avoiding the appearance of inflationary pressures. In fact, consumer prices and deposit interest rates closed below the December 2017 levels. Political negotiations in Congress helped approve the 2019 national budget before yearend, including the issue of new debt to finance the gap, and the repayment of Eurobonds at the end of this year. The first round of elections on February 3rd will begin determining the next president, whose term will run from June 2019 to June 2024.
Guatemala’s national elections will take place June 16th, amid a mixed national climate. Politically, the country has experienced complicated times, given the confrontation between President Jimmy Morales and the U.N. international commission against impunity. But we expect moderate growth with economic stability this year, since we don’t expect Morales to make major policy changes during his last year in office.
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