EL SALVADOR: Critical political developments
Political developments remain critical in El Salvador. The March 1st congressional elections revealed the weaknesses of the leftist ruling party FMLN, reflecting dissatisfaction with its leadership for two consecutive presidential terms. Whether or not the political environment will help unlock key decisions in fiscal and growth policies has yet to be seen. We continue to be skeptical that there will be significant changes, in this last year of the current administration. Our short-term economic outlook for 2018-2019 anticipates little change, depending on the result of February 2019 presidential election. Real GDP is expected to grow at a pace similar to that of recent years. The current account deficit is likely to rise, driven by the higher prices of oil, and other important raw materials in international markets. The fiscal deficit is expected to increase substantially in 2018, and to 3% of GDP in 2019. At the end of the forecasting period, government debt would reach 48.9% of GDP, while total public debt would reach the worrying figure of 75.5% of GDP. Stability would stay under control, as a key feature of dollarized economies; even so, external factors would lead inflation toward 2.5% this year, and 3% next year.
Costa Rica continues to prepare for a new presidential administration to step into office May 8th. The outlook for approving the proposed fiscal package before April 30th, the last day of the current Congress, is dimming, even though President-elect Carlos Alvarado has explicitly requested its approval. Expectations remain on diverse issues like the composition of the government staff, and the ability of the new president to cope with the challenges and contradictions involved in the alliance with parties and groups much further to the right than the official party PAC. Economic activity shows signs of weakening, which is not surprising, as the elections brought more uncertainty than usual. The fiscal deficit increased during Q1, compared with a year before, with unpleasant trends in some of its components.
The Guatemalan economy showed no major surprises in Q1. Growth, as measured by the Monthly Index of Economic Activity (IMAE), was in line with 2017’s 2.8% real GDP growth. Inflation, at 4.1% y/y as of March, remains within the Central Bank’s 3%-5% target range. The monetary policy rate was kept at 2.75%, at the last Monetary Board meeting on March 22nd. The fiscal balance exhibited the traditional behavior of the first months of the year, and reached a Q 1.2 billion surplus as of March, slightly higher than the Q 1.1 billion observed in Q1 2017, a partial consequence of the lack of approval of the 2018 government´s budget proposal. The exchange rate has been depreciating, partly as a result of Bank of Guatemala´s net reserve accumulation. The rate closed at Q 7.40 per dollar as of April 24th, up from Q 7.34 as of December 31st, 2017.
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