Growth and advantages ahead

CENTRAL AMERICA - Report 31 Jan 2024 by Fernando Naranjo and Felix Delgado

El Salvador will hold presidential elections on February 4th, with president-on-leave Nayib Bukele a leading contender. Despite strong arguments about the unconstitutionality of his running for another term, Bukele’s candidacy is now a certainty. New members of Congress will also be elected and, according to surveys, the ruling party Ideas could win 57 out of 62 seats, moving the country even closer to a single-party regime. Economic performance in 2023 was better than expected, except for trade, with merchandise exports and imports both contracting. Foreign remittances could grow about 5%, while tourism inflows jumped 36% y/y. We expect real growth in 2023 a little higher than our 2.4% y/y forecast. Inflation returned to normal much faster than expected, although pressures on basic basket prices remain. Banking deposit rates were lower than forecast at yearend 2023, while loan rates were higher, due to market pressures from financing the fiscal disequilibrium. On this latter front, official figures look positive at first glance, but when the pension burden is factored in, fiscal discipline is clearly in question.

Costa Rica’s economy performed better than expected, for a second year in a row. Over the past two years, production has grown 4.7% y/y on average, while in 2011-2019 the average was 3.6%. What elements are driving stronger growth in Costa Rica? Is it possible to keep growing above 4%? Several changes have transpired since the pandemic. These have boosted growth in the special regime, and have increased its share in total GDP from 9% in 2018 to 15% in 2023. Despite the trend in GDP growth, overall improvement was not reflected in all economic sectors. Several activities continued experiencing difficulties in 2023, with challenges still unsolved. For example, there’s duality in economic activity, job creation, reduction of poverty and domestic insecurity. We estimate that Costa Rica could grow by close to 4% in coming years, if the FTZ keeps growing steadily. Nevertheless, this situation seems insufficient to address other urgent problems.

Guatemala´s new president, Bernardo Arevalo, was finally sworn on January 15th, after a 10-hour delay in the inauguration ceremony. Arevalo’s Semilla Party secured the presidency of Congress for 2024-2025, obtaining 90 of the 160 votes. However, three days later, the Constitutional Court suspended the board election. This turbulent start signals a complex year ahead for Arevalo, and his anti-corruption agenda. Arevalo will focus on creating a new legal framework to favor private and public investment, and will also increase investment in infrastructure through public-private partnerships. Major changes will take place in the judicial system in 2024. All 13 Supreme Court magistrates must be renewed. This could be an opportunity to change the country´s image regarding corruption. Arevalo also takes over with an economic situation that has domestic production growing more than 3% per year, and a stable fiscal situation, with the lowest public debt in the region. The new administration has better relations with the U.S. government, which could be an advantage in many ways. In November 2023, economic activity growth increased, after the slowdown seen since August.

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