Growth mixed, but tied to U.S. trends.

CENTRAL AMERICA - Report 01 Apr 2024 by Fernando Naranjo and Felix Delgado

Guatemala´s economy returned to its long-term potential growth rate in 2023. Despite the political tensions over presidential transition, there were no major disruptions in internal production and income. Real GDP growth reached 3.5% y/y, down from 4.1% a year before. Economic expansion can be explained mainly by two factors. The first is the increase in remittances due to the favorable performance of the U.S. economy. The second is internal demand, up 4.3% y/y from 3.6% a year ago. Growth was supported by private consumption, complemented by the country´s prudent monetary and fiscal policies. Several challenges remain, such as high poverty, inequality and migration. Economic growth during the outlook period of 2024-2025 will remain at a satisfactory level, in 3.4% this year and 3.8% in 2025. The slower expected GDP growth in the U.S. economy during H1 will translate into a weaker job market, and hence lower growth in the remittances this year. The fiscal scenario will remain stable over the next two years. We forecast a reduction in the financial balance of 2024 from 1.4% of GDP to 0.9% due to the low capacity to increase expenditures of the new administration. The Banguat will maintain its current managed floating regime and its prudent interventions in the foreign exchange market. For 2024 we estimate a yearend exchange rate of Q7.82 per dollar, and for 2025 Q7.83.

El Salvador: Congress recently approved a bill to exclude capital inflows for resident beneficiaries from taxable income, reducing the tax rate from 30% to zero for most flows of this type. The measure seeks to stimulate domestic and foreign investment aimed at boosting economic activity. We ignore the existence of an estimate of the revenue sacrifice for the government. In addition, a proper investment climate including legal certainty about the ability to recover the investment in the future is also key for investors. The evolution of macroeconomic indicators shows mixed results. On the positive side, the monthly index of economic activity rebounded during Q4 2023, although it is still early to project any longer trend. Inflation continued decelerating, external trade started to recover after the slump since Q3 2022 and foreign remittances continued at a pace similar to in H2 2023. On the other hand, public finances deteriorated in Q4, due to high capital expenditure in November and December.

Costa Rica’s economic activity continued to slow during January 2024. This is the result of slowdown in both the definitive and special regimes. In the domestic economy, the powerful decline in FX had serious consequences in activities such as agriculture, domestic manufacturing, and tourism. The Central Bank has stated publicly that the downward trend in FX is the result of success in the export sector, and FDI inflows. We don't rule out that this is an important cause of colón appreciation, but it is not the main driver of the FX decline. There are other reasons linked to the strong decline in the exchange rate.

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