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CENTRAL AMERICA - Report 27 Aug 2021 by Fernando Naranjo and Felix Delgado

The Guatemalan economy will recover more quickly than that of other Central American countries, with a more favorable outlook for the next 18 months. The evolution of the international economy, the improvement in domestic expectations and a rational handling of economic policy will be crucial to Guatemala’s rebound. But the political situation remains complex. President Alejandro Giammattei presides over a fragile coalition in a Congress that has more than 10 political parties. Internal demand will keep pushing the recovery. Higher-than-expected remittances will support private consumption on the demand side. However, structural problems will be left to languish. Unskilled labor, weak public institutions, inefficient public spending, corruption and lack of proper infrastructure will limit poverty reduction and income inequality in coming years.

Costa Rica’s economic activity continued improving in Q2, so far not enough to reach pre-pandemic levels, although trends suggest that this could occur in H2. Public health indicators have shown volatility, as in many other countries. Pessimism still prevails in several activities. The vaccination process is advancing, although with uncertainty over when the country will reach heard immunity, due to the new more aggressive COVID-19 variants. On the political front, economic policy decisions have grown more difficult, in the runup to the February 2022 general election. The abnormally high fragmentation of political groups and parties is working against reaching consensus easily. In this context, fiscal adjustment continues, and doubts increase over the government’s ability to comply with the 2021 commitments of the IMF agreement. Moreover, inflationary and FX pressures have tended to lessen.

Political conditions in El Salvador seemed to navigate over calm waters during the last two months, after some turbulence in May and June. Despite our fears about the risk of a turn toward an authoritarian government, we have recently perceived more positive feelings from some key business leaders. Some drafts of regulation for the Bitcoin Law were released about a week ago, with the law due to take effect on September 7th. Proposals for constitutional reforms are also circulating in the media, including the extension of the presidential term to six years from five, and the possibility of allowing a president to run again after one term out of office, instead of the current two. In any case, the risk of liquidity problems for the government continues during our outlook period, while an agreement with the IMF to cope with that problem has not yet arrived.

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