Financial thunderclouds in the south
Costa Rica will be soon be walking a tightrope, as various forces act in concert. First, the still-developing pandemic has affected nearly 16,000 people, costing more than 100 lives, and causing negative growth, high unemployment and a rise in poverty. Second, the fiscal situation is critical. Third, there’s an unfavorable perception of sovereign risk. Lastly, the government is politically weak, with just 10 members of President Carlos Alvarado’s party in the 57-member Legislative Assembly -- and, complicating the situation further, a presidential election scheduled for February 2022.
Our 2020-2021 forecast assumes Costa Rica will seek to strike an agreement with the IMF before yearend. We expect that a 6.1% reduction in real GDP in 2020, followed by a modest recovery of 1.2% in 2021, and a fiscal situation aggravated by the advance of COVID-19, will push the 2020 financial deficit to above 10% of GDP, and the government´s debt-to-GDP ratio to over 70%.
In El Salvador, the two main macroeconomic challenges in the medium and long-term continue to lack any clear solution, in terms of effective measures and time span to achieve results: persistently low economic growth, and mounting public debt due to several years of high fiscal deficits. The damage to economic activity could be deeper than a recession this year, followed by slow recovery in 2021. The fiscal crisis will create a severe burden, due to the overflowing size of public debt, and the cost of the prolonged lockdown on productive capacity. The political struggle between President Nayib Bukele and Congress has softened, in the runup to the March 2021 legislative elections. Most short-term macroeconomic indicators reflect the strong impact of the pandemic, which could lead to a deeper recession than previously forecast. The Central Bank now envisages a 6.5%-8.5% y/y fall in real GDP.
In Guatemala, the pandemic is severely affecting production activity. Real GDP grew just 0.7% y/y in January-March, according to official figures, but fresh figures of the Monthly Index of Economic Activity as of May show the economy in the red since March. This deterioration was also considered by the Economic Commission for Latin America and the Caribbean, which forecasts a 4.2% real GDP drop for 2020. CACIF, the umbrella organization of the private sector, has been calling for an opening up of the economy, arguing that economic losses already exceed $2.1 billion, while the government looks for an extension of the “state of calamity,” in order to continue fighting the pandemic, which has already affected more than 46,000 people, and cost 1,782 lives.
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