El Salvador: Slower and Slower
Growth in El Salvador continues to be sluggish, though there are also glimmers of recovery. Consumer prices have fallen in annualized terms for the eight months to August, leaving prices down 2%. The fiscal deficit problem persists, and political polarization has only hampered efforts to forge consensus around measures to raise confidence and stimulate economic activity. A recent meeting of leaders of the four largest parties, though, may soon improve the political mood.
Our forecast for 2015 and 2016 hasn’t changed much since our April report, though we’ve lowered our 2016 real GDP growth forecast, to 2.3% from 2.5% The main reason is the slower-than-expected U.S. economic recovery. El Salvador’s external balance will improve, with better terms of trade since Q4 2014 continuing. But fiscal conditions are not expected to improve meaningfully, and will continue to be a stone in the shoe for the economy. The modest improvement is not sustainable, as it sacrifices public investment, while government consumption spending is increasing. Inflation won’t be worrisome in either 2015 or 2016, mainly due to foreign factors, and the sluggish domestic economy.
In Costa Rica, President Luis Guillermo Solis is experiencing tough times. Recent polls show that the public’s image of both his government and his performance are poor – a situation seen almost since the start of his presidency, in May 2014.In the latest CID-Gallup poll, 86% of respondents said the country was headed in the wrong direction, up from 69% in January.
Given the president’s loss of political capital, it will be tough for him and his administration to promote the actions necessary to deal with the growing fiscal deficit. We still don’t expect the tax proposals his government submitted to Congress in August to be approved this year, or even in early 2016 – and if that’s so, the country will be forced to muddle through the next 16 months without a major fiscal reform.
Guatemala seems to have weathered the political storm that ended with the resignation and arrest of President Otto Pérez, and the September 7th first round of general elections. A presidential runoff between newcomer Jimmy Morales, of the FCN-NACION party, and former First Lady Sandra Torres, of UNE, will be held October 25th. Manuel Baldizón, who led the race until few weeks before election, was eliminated, after losing to Torres for second place by less than 6,000 votes.Although August polls gave Morales the lead over Torres (45% to 30%), it’s still too early to call the winner
The administration’s 2016 budget proposal has been severely criticized by a range of groups, including the private sector umbrella organization CACIF. Critics claim that spending plans reflect the priorities of the administration, rather than the true needs of the country. If no agreement is reached, the next administration will be forced to work with the 2015 budget. This will be a problem, not only because the 2015 budget was lower than proposed, but because the spending allocations won’t necessarily reflect the next administration’s needs.
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