Facing weaker global growth and confidence
Guatemala’s economy will grow steadily in the next 18 months, but at a slower pace than in the previous forecast. International conditions have changed drastically since March 2022. There are no signs of recession or stagnation. We do not expect economic activity to overperform in coming months. We have adjusted downward our GDP growth forecast, from 4.1% y/y in 2022 and 3.6% y/y in 2023 to 3.6% y/y and 3.5%, respectively. The internal political situation will be complex. President Alejandro Giammattei will stay focused on national security, and will continue his hard line against gangs. Nevertheless, we do not expect improvement in solving the corruption allegations. On the fiscal side, we foresee better fiscal conditions in 2022 and 2023 than forecast in March. The fiscal deficit will total 1.9% of GDP this year, and fall to 1.2% in 2023. The increase in 2022 is the result of the increase in subsidies on electricity and in gasoline prices. We don’t rule out subsidies on food, to compensate for high price rises. The main risks for Guatemala are similar to those discussed for Costa Rica in our last monthly report.
Costa Rica’s main public policy issues relate to the hike of consumer prices mostly due to imported inflation, the deceleration of economic growth coupled with an increasing risk of recession, and the congressional authorization for the issuance of Eurobonds currently under discussion. The fast and strong reaction of the Central Bank by increasing the monetary policy rate has been controversial. President Rodrigo Chaves’ political style does not avoid misunderstandings about the separation of powers as a fundamental principle. Therefore, frictions have occurred with deputies at the Legislative Assembly that could hinder the processing of important bills. The commitment to fiscal discipline in the current administration’s agenda is not clear. Government financial results are improving, but actions like relaxing the fiscal rule cast doubts upon the fiscal route and could encourage significant congressional blocs to authorize the issuance of Eurobonds only for $1.5 billion, instead the multi-year amount of $6 billion requested by the Executive branch.
El Salvador’s most noticeable announcement was the government’s plan to buy back bonds maturing in 2023 and 2025, at market prices and as a voluntary decision of bond holders. Legislation to authorize this operation was quickly approved by the government-aligned Congress. No significant political events occurred during the last month, except for the already-expected extension of the exception status, with extraordinary powers for the government to fight crime and violence. Fiscal results continue improving, geared by a robust increase of revenues and moderation of expenditures, where about half of budgeted capital expenditures are not executed. Stress on financing and the absence of fiscal adjustment measures equivalent to not less than 3% of GDP, as suggested by the IMF, suggest that the observed improvement of public finances comes mainly from the financing constraint.
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