EL SALVADOR: Stagnation and Mystery
El Salvador’s economic growth/financial stability balance is clearly biased toward the former, as shown by modest real GDP growth averaging 2.5% y/y between 2010 and 2018. Expected growth won’t be different for 2019 and 2020. The roots of long-running stagnation are diverse, and reflected in potential growth, estimated by the IMF at 2.2% y/y. Financial stability isn’t at risk, since dollarization has vaccinated the country against financial disequilibria. High fiscal deficits increase the perils of unsustainability, hitting mainly growth and unemployment. Political conditions aren’t helping clear the road ahead: President-elect Nayib Bukele has said little about his economic policy or related plans.
External conditions are unlikely to stimulate much growth, except perhaps via improvement in terms of trade, thanks to the assumed drop of international oil prices. The influence of foreign remittances on domestic consumption will keep falling, as the effects of tighter U.S. immigration policy materialize. Unemployment would rise.
In Costa Rica, the National Liberation party (PLN) bloc in Congress (17 votes) expressed willingness to authorize a Eurobond issue of $1.5 billion for this year, but not the multi-year $6 billion the government has requested. The bill requires a qualified two-thirds majority, or 38 votes. With the 17 PLN votes plus 10 votes of the official PAC, the modified project will probably be approved, and could become law in May or June.
Domestic economic activity and exports reflect a duality. The monthly index of economic activity (seasonally adjusted) increased 2.4% y/y to February, but when excluding the free-trade zone, rose only 1.1%. Merchandise exports increased 4.2% y/y as of February, but declined 6.8% y/y when excluding the FTZ. Domestic activity slowdown partly explains inflation trends:the annual rate dropped to 1.42% y/y as of March, well below the 2% lower limit of the target range. The fall of consumer prices in February and March suggested room for a more active monetary policy. In fact, the Bank cut its reference rate from 5.25% to 5%.
In Guatemala, it’s still unclear who the leading presidential candidates will be, in the runup to the June 16th election, and who will face off in an August 11th second round. Sandra Torres of the center-left UNE has led the polls lately, but the candidacies of second and third-place contenders Zury Rivas and Thelma Aldana still lack final confirmation. Ex-national penitentiary director Alejandro Giammattei could still win in the August runoff. Organized crime has also surfaced: Mario Estrada, the UCN party presidential candidate, was arrested April 13th in Miami, and accused of cooperating with the Sinaloa drug cartel to import drugs. There were also accusations that he was asking for the physical elimination of two contenders in the race.
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