GUATEMALA: Downside risks rising
As Guatemala’s president-elect Alejandro Giammattei and his team prepared to take over the Executive Branch in January, an early October meeting with a visiting IMF mission addressed the state of the economy, and challenges ahead. Though the mission reaffirmed its 3.4% GDP growth estimate for 2019, it also noted that downside risks had risen – both due to global economic trends and to an expectation that more Central American migrants would arrive in Guatemala, based on an accord President Jimmy Morales signed with the United States. The mission pointed out the need for structural reforms, to lift both living standards and potential growth. The list is relatively long, as are the needs for shifting attention from short-term economic policy toward structural reforms that could help stoke higher growth, and allow more people to share in its fruits. GDP growth reached 3.5% y/y in Q2, and September monthly prices declined for the third month in a row, taking y/y inflation to 1.8%, well below the lower limit of Bank of Guatemala´s target range.
In Costa Rica, a dim light seems to have appeared at the end of the tunnel, negative H1 trends notwithstanding. Though this is a very preliminary appraisal, fiscal figures were marked by the achievement of a primary surplus in September, for the first time since 2016. The government has already secured financing for its Q4 needs. Moreover, inflows from the IADB and Eurobonds are expected for this quarter. Despite the struggle against the limits imposed by the fiscal reform on public workers’ wages, that opposition is losing strength. The recent resignation of the Minister of Finance Rocio Aguilar could affect confidence and fiscal discipline negatively. Inflation is on track to meet the Central Bank 2019 target, while interest rates are falling moderately, due to low demand for loans. The exchange rate has been affected by all these events, weakening since mid-August, with greater volatility than in the first three years of the floating regime. Economic slowdown persists. Capital flows seem to have slowed, too, as global uncertainty limits FDI, and lower domestic interest rates, coupled with negative outlooks, discourage private capital inflows.
In El Salvador, President Nayib Bukele continues to enjoy a honeymoon: recent surveys yielded the highest ratings for a Salvadoran president during his first 100 days since the signing of the peace agreements with the FMLN some 30 years ago. Bukele continues to be active in relations with the United States, as he tries to soften conditions for Salvadoran migrants, and to promote FDI, even as El Salvador’s innovation and macroeconomic stability grades in the latest World Economic Forum global competitiveness report have fallen. We still consider it important to understand Bukele’s long-run direction and vision, as he so far looks more like a capable manager than a statesman. Economic activity continues to be weak, and the new administration’s popularity has yet to translate into better expectations, or greater investment.
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