El Salvador seems destined to keep living with low economic dynamism. Despite the opportunities generated by a positive international environment, GDP growth is likely to continue running at 2%-2.5% y/y. As anticipated after 10 months in 2015 with negative inflation rates, deflationary risks are gone, and inflation has returned to its long-term normal figures for this dollarized country, of about 2% per year. Exports and remittances, mainly linked to the U.S., should sustain the expected results for the 2016-2017 forecast period.
The political polarization of the governing left-wing party and the right-wing opposition could move toward less confrontation, enough to reach consensus on some measures for stopping fiscal deterioration. This could favor congressional approval of some kind of pension reform, to reduce the burden on the national budget, as well as authorization of external financing for the expected fiscal deficit, which requires a qualified majority in Congress and, therefore, the agreement of ARENA.
In Costa Rica, fiscal weakness continues as a main issue, and the biggest economic challenge for the government. As signs of consensus move back and forth, we hold to our statement in our March report about the difficulty of seeing relevant action over the next months. Meanwhile, the government has been able to place bonds via direct negotiations with public institutions and state-owned banks, avoiding upward pressures on interest rates. Inflation fell again in March, after a significant drop of regulated fuel prices. The CPI in March closed 1.1% below the year before. We believe this behavior is transitory, and doesn’t threaten deflation in the near term.
In Guatemala, early 2016 results show slowing production, but with inflation accelerating moderately. There’s continued stagnation in tax collection, after all the corruption problems in 2015, but a decline in government spending, as the new administration negotiates a learning curve, with approval of some external loans still pending. The dollar value of external trade also declined, as oil import prices fell, as did prices of some major export commodities, including mining and precious stones. The inflow of private remittances, on the other hand, continued to rise rapidly (up 19% y/y as of March), helping to finance the trade deficit, and to keep the exchange rate relatively contained.
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