El Salvador: When it Comes to the Economy, We Disagree

CENTRAL AMERICA - Report 29 Jan 2016 by Francisco de Paula Gutiérrez and Felix Delgado

Recent government estimates of economic activity are controversial in the business sector, which complains that government is painting an inappropriately optimistic view of the economy. Businesspeople question whether growth based on private consumption financed by remittances, and by the temporary terms-of-trade improvement, helps strengthen domestic private sector production capacity. In that case, this isn’t a good long-term strategy. We share the view about the presence of structural restraints on economic activity, and have in several reports discussed this as an important weakness.

Relatively high fiscal deficits, plus lack of external financing, threatens internal stability, as the government financed last year’s gap domestically, and will probably have to do the same thing in 2016. Pressures on the financial market are likely to affect interest rates, and crowd out lending to the private sector.

In Costa Rica, the 2016-2017 Macroeconomic Program released by the Central Bank calls for relatively optimistic 4.2% real GDP growth in 2016, a new and lower annual inflation target range (2.0%-4.0%) and a current account deficit of 4.1% of GDP, mainly financed by FDI inflows.The picture seems nice, except for the central government’s financial deficit, estimated at 6.2% of GDP -- the highest rate since the financial crisis of the early 1980s.

There are some critical questions not clearly discussed in the Bank´s text.The main one is how the government will be able to finance its deficit in a year without an authorization to borrow abroad, as it had during the past four years, when it placed $1 billion in Eurobonds every year. That latter policy helped the administration finance its imbalance, without putting pressure on domestic interest rates, and increasing the supply of dollars in the exchange market.That does not seem to be the situation for 2016, and the final result will depend how the Bank handles its monetary and exchange rate policies.

In Guatemala, President Jimmy Morales, who was sworn in on January 14th, is enjoying a honeymoon. Businesspeople and bankers are happy with the new administration, and with the people chosen to oversee government economic management.Expectations for the new administration are relatively high, but it won’t be easy to deliver results, especially given the often limited resources available. The lack of political experience of the president, and several members of his cabinet, is a second limitation; a third is that the official FNC-Nacion Party in the new Congress only holds a sliver of representation: just 11 of the 158 seats.

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