Growth performance mixed, as political turmoil rises.

CENTRAL AMERICA - Report 19 Dec 2023 by Fernando Naranjo and Felix Delgado

Costa Rica’s 2023 economic performance looks promising, according to economic activity figures to October. Domestic political conditions continue as reported since June 2022, with tense relations between the government and the opposition, but seemingly with little impact on the course of businesses, driven by vibrant FDI inflows, wide access to external sovereign financing and fiscal discipline inherited from the 2018 fiscal reform that established the prevailing fiscal rule. The most likely scenario for economic indicators at year end includes more robust growth than forecast, thanks to higher merchandise exports and lower imports, and marked dynamism of services exports. Tourism inflows are now closer to pre-pandemic figures. Negative inflation coupled with a partial reversal of the elevated interest rates during H2 2022 are factors complementing the FX influx, and that encourage domestic spending. Therefore, better performance of the definitive regime is now complementing the important impulse of FTZ activities.

Congress confirmed Claudia Rodríguez as El Salvador’s new president, after President Nayib Bukele stepped down to run for reelection in the February 4th presidential contest. Rodríguez is to serve from December 1st to May 31st. Congress ratified her at once by the official qualified majority, as expected. This is the first time a woman has served as president. Economic activity continues to slow, facing the adverse external conditions that led to a contraction in foreign trade, and tapped the prospects for greater dynamism of foreign remittances. The fiscal deficit excluding pension expenses will probably fall short of our projection for December 2023. However, public indebtedness to private pension funds doubled the annual figures of previous years. Inflation continues to slow, though food prices continue to resist moderation, limiting the expansion of consumer spending that is the main economic growth driver.

Less than a month before Inauguration Day, political tensions in Guatemala persist. President-elect Bernardo Arévalo is set to assume office on January 14th, 2024. But the prosecutor's office argued on December 8th that Arévalo’s election was invalid, due to alleged irregularities in the Supreme Electoral Tribunal. As a consequence of these latest events, the Biden administration imposed new visa restrictions on nearly 300 Guatemalan lawmakers, private sector leaders and their families. Fears are building over potential actions that Arévalo’s adversaries might take in order to prevent him from assuming office. We believe Arévalo will assume the presidency on January 14th despite the accusations and charges by the Attorney General. Arévalo will face the same challenges that limit Guatemala's growth over the long term: corruption and impunity, lack of private investment, insecurity, high poverty and other longstanding problems. Economic activity has slowed since July. The Monthly Index of Economic Activity grew 1.6% y/y in October 2023, its lowest growth rate of the year. Despite the robust increase in remittances, the exchange rate has remained virtually unchanged.

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