El SALVADOR: Improvement likely in 2020
El Salvador has this year been suffering the combined effects of the political campaign that put President Nayib Bukele in office starting June 1, 2019, and from adverse international economic conditions, with worsening perspectives for 2020. Uncertainty and poor expectations for consumers and investors are the result, and will be reflected in lower economic activity this year. For 2020, we are fairly optimistic that political conditions will improve, leading to improved expectations that could also boost growth, despite the weak outlook for the U.S. economy, a key partner for export, FDI and foreign remittances. Nonetheless, we recognize that our assumption is fragile with respect to increasing confidence and expectations for the new administration. We will therefore continue monitoring this condition carefully, in the runup to our next outlook report in April 2020. The current account deficit is expected to increase this year and decrease in 2020, while the fiscal deficit is expected to be higher than in 2018 in both years, at least until the implementation of eventual public policies to cut spending and increase revenues. Remittances could grow by 4%-5% y/y, while no surprises are foreseen in prices and interest rates.
In Costa Rica, the government’s 2020 budget is the first one presented under the rules of the December 2018 fiscal reform. The process hasn’t been easy, and discrepancies have emerged with the application of several dispositions. There are three things to note in the aggregate budget numbers. First, the conversion of the sales tax into a full-fledged value added tax, and the reforms in the income tax regime, have had a positive effect on total revenues. Second, the primary deficit has declined, from -3.6% expected in 2019, to -2.7% included in the 2020 budget. This decline is important, as it is a key element to reaching a sustainable debt condition. Third, the ratio of interest payments to GDP accelerated rapidly in 2019, removing some of the benefits of fiscal reform, and will continue to accelerate in 2020, keeping a high deficit to GDP ratio, despite the reform.
The election of Alejandro Giammattei as president of Guatemala is improving domestic expectations. Bank of Guatemala’s August private sector expectations survey partly reflects the better climate. Although there is no change from the way people perceive the economy, a greater proportion of respondents believe the business climate will improve in the next six months (21.5%, vs. 5.3% in July) and consequently, expect the economy to improve over that period (38.9%, vs. 21.1% in July). But respondents still don’t see this as a good time to invest. Though the mood is better than in July, the index at 46.7% is still below 50 points, signaling that those surveyed still hadn’t crossed the line into optimism.
Now read on...
Register to sample a report