Political and economic ups and downs
Costa Rica’s political conditions remain similar, characterized by confrontational relationships like those prevailing since the beginning of this administration. Positive appraisals of President Rodrigo Chaves have declined, and although more than half the population still approves of his performance, support of former allies is weakening in Congress, now with division within its own legislative faction. Congress sealed legislation to exclude the country from the UE gray list of non-cooperative countries on income taxation matters, after the presidential veto, provoking harsh epithets against the official party deputy and president who joined the opposition group. Cabinet instability, corruption accusations against government officials, and delinquency and insecurity, are dominant topics. Growth could surpass 4% y/y this year, well above our July forecast, with the FTZ as the main driver, but also with significant improvement of construction and services associated with tourism and FTZ activities, the latest economic activity figures suggest. Fiscal conditions are good, although not as robust as last year, because revenue performance broke down, despite the control of expenditures imposed by the fiscal rule of December 2018. Despite good government liquidity, plans are proceeding for a second $1.5 billion placement in international markets in Q4 2023. Financial dollarization has exacerbated, despite inflation remaining in negative territory, due to expectations of relative FX stability, and a good international reserve position.
El Salvador’s authorities took new approaches toward an eventual agreement with the IMF in early October, with little success. IMF officials continue to say that more dialogue is needed. They reported that a mission visited El Salvador, and found that further work is necessary, so it is early to speculate about the timing of a possible agreement. Political conditions look calm, with little prominence both of President Nayib Bukele and of controversial topics, while Bukele campaigns for reelection in February 2024. Economic activity is moving down toward pre-pandemic figures, with growth rates of between 2% and 2.5% y/y, after GDP quarterly figures showed 1.9% y/y rise in H1 2023. Merchandise trade has contracted, while foreign remittances and tourism expanded more than expected, in line with our projected current account deficit decline. Fiscal results behaved as they did in 2022, but financing costs suffered from higher interest rates. Inflation fell gradually.
Tensions in Guatemala have escalated since our last report. As expected, the presidential transition process has been rocky. Blockades have caused fuel and food shortages in some regions, as well traffic congestion on major highways. The situation is complex. President Alejandro Giammattei and some private sector leaders refused the petitions of the protesters. It’s not clear what will the outcome will be, with the inauguration date two months away. Despite the difficult political situation, the economy remains stable. Inflation is falling, and private consumption is picking up. Remittances continue to grow robustly. Confidence in the economic activity is also improving. Macroeconomic indicators show that the economy is stable, with a good short-term growth outlook.
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