GUATEMALA: Heading toward recession
Five months after the first COVID-19 case in Guatemala, the situation has escalated into a full-blown health, economic and social problem. As of August 27th, the number of recognized coronavirus cases had reached 71,000, and the number of deaths had already surpassed 2,600. As in the rest of the world, the pandemic severely affects economic activity, unemployment and poverty. Our forecast for 2020 calls for a 4.6% decline in real GDP, and unemployment of about 9%.
The decline in production implies a deterioration of social indices, especially in unemployment and poverty. The government reaction could mitigate some of the effects, but will deteriorate the fiscal balance as the deficit-GDP ratio approaches 6%, and the debt-GDP ratio 33%. Despite the increase in the fiscal deficit and an accommodative monetary policy, inflation will be around 3%, the lower limit of Bank of Guatemala’s target range, and the exchange rate will remain around Q7.7 per dollar.
Costa Rica continues fighting the consequences from COVID-19, both in economic activity and on the fiscal front. Tighter mobility restrictions were adopted in August, particularly during the second and third week of the month, apparently with little success in reducing the contagion rate. However, the government decided to continue opening economic activity in September. Congress-government relations are not the best, in a moment when harmony is required to face both the pandemic and the resulting economic maladies: recession, record unemployment, and fiscal worsening. In our view, the imperative of an agreement with the IMF to handle the required fiscal adjustment and improve international confidence is not widely share in political circles. Weakening of economic activity continues, although not as deeply as in March. Not surprisingly, commerce and tourism related activities are the most affected. As government revenues plummeted due to the recessive conditions, and expenditures have changed little compared to 2019, the gap to be financed has widened. Therefore, the main fiscal challenge is to tie financing and assurance with ability to cope with debt commitments.
El Salvador seems to have achieved good control of the pandemic, despite the initial setbacks, and new cases have declined steadily over past two weeks. This paves the road towards normalization of people’s mobility and economic activity, although the little experience with this in the world so far suggests that an infection rebound is always around the corner. Still, given the tense relations between the government and the Congress, what follows is the reconstruction of the social and economic fabric in the Central American country hardest hit by the pandemic’s economic consequences. A deep recession announced by the plunge of the monthly index of economic activity, along with a huge gap in public finances, are the main challenges for President Nayib Bukele and his economic staff, now under new Finance Minister Alejandro Zelaya, after the recent resignation of Nelson Fuentes.
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