Prospects looking up

CENTRAL AMERICA - Report 27 Feb 2024 by Fernando Naranjo and Felix Delgado

Understanding Costa Rica’s unexpectedly good 2023 economic performance requires evaluating the main exogenous elements that departed from our basic assumptions for the country’s short-term economic outlook. This is important, primarily to rehearse a suitable forecast scenario. Those elements relate mainly to robust U.S. economic growth, excellent FDI inflows, abundant external financing for the government and a Central Bank monetary policy rate out of line with inflation.

Prospects for 2024 and 2025 look good, but not as good as in 2023. Our assumptions for U.S. growth and FDI inflows more resemble those in our mid-2023 outlook revision than what really happened last year. We expect the Central Bank to consider a less restrictive monetary policy stance, facing persistent negative inflation during the last eight months. Moreover, under the prevailing fiscal rule, public finances have little room for expansion, coupled with the fall of tax revenues due to currency appreciation, and lower external financing for the government foreseen during 2024 and 2025.

El Salvador’s presidential and congressional elections grew controversial due to the Electoral Court’s delay in releasing the results. Even without the final official figures, there is no question that President Nayib Bukele has won reelection. Final results released by the Electoral Court show Bukele winning 84.6% of the vote. The real support from Salvadorans for Bukele is not that impressive, though, due to heavy abstentions, which could cut his support to 37% of eligible voters. Controversies developed over the congressional elections, with vote-counting delayed for almost two weeks. Recently published figures in the press (which we’ve not confirmed with official figures) give 54 seats to the official New Ideas party, enough to obtain the two qualified majorities of 67% and 75% for specific congressional decisions.

In Guatemala, President Bernardo Arevalo´s administration is laying the ground for a new promising era. As one of his first presidential actions, Arevalo created the National Corruption Committee, to define priorities and actions to control corruption. Arevalo himself will lead it. In February, Arevalo met with both U.S. and E.U. officials. Economic expectations improved significantly in January 2024. The Confidence Index in Economic Activity rose from 47 points in December 2023 to 57.8 points in January. Some 88.2% of respondents expect the economic environment to improve in the next six months. Inflation maintained its downward trend. Prices rose just 3.8% y/y, from 4.2% y/y in December. Remittances continued to grow robustly; 12-month cumulative remittance growth was 9% y/y.

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