Rebound – but with challenges ahead

CENTRAL AMERICA - Report 29 Nov 2021 by Fernando Naranjo and Felix Delgado

Costa Rica’s Presidential elections will be held on February 6th, 2022. Right now there are 27 presidential candidates, none of them have the 40% of the vote, according to recent polls. Elections will gravitate around three subjects: unemployment, the cost of living and corruption in government. All candidates face a challenge: to win the favor of undecided voters, who comprise around 50% of the electorate. The past two elections have shown that an early lead in polls doesn’t necessarily guarantee a win. Economic activity continues recovering at a stronger pace than estimated a few months ago. During Q3, GDP growth reached 8.2% y/y, compared to a contraction of -4.8% a year ago. The country is performing well in its handling of the COVID-19 pandemic. Cases have dropped dramatically since September. On the fiscal front, despite the excellent results, new concerns have appeared in recent weeks. The Supreme Court ruled a few days ago that the Public Employment bill (a crucial reform in the IMF agreement) needs a two-thirds majority in order to pass in Congress, instead of just a simple majority.

El Salvador’s economic rebound continues, along with increasing inflation. The extraordinary impulse of growth in advanced economies is mirrored in an atypically high increase of El Salvador’s two main sources of FX: foreign remittances and merchandise exports. This would bring the economic process back to pre-pandemic standards, as is happening in other countries, meaning that the economy will probably soon rebound to its long-term growth pace. The rebound is also dynamizing government revenues, leading this year to a fiscal deficit lower than forecast, but still very high, considering the weak fiscal conditions. In the political arena, we don’t perceive signals of progress. Instead of looking for ways to improve external relations, particularly with the United States -- by far the country’s largest trade and financial partner -- things appear to be left adrift. That position jeopardizes the financial assistance of multilateral institutions, putting at risk much-needed external financing and investment, and worsening the economic outlook and the already-low agency ratings. These political conditions and risks are not affecting the observed economic rebound so far. But assessment of midterm economic perspectives is more difficult.

Guatemala: 2021 is a special year. The economy has returned to the right path, after a -1.5% contraction of GDP last year. Despite health risks and slow progress in vaccination rollout compared to other countries, Guatemala was the Central American country that recovered most quickly from the recession. Contrary to the events of 2019 and 2020, the 2022 proposed budget was smoothly approved. Most of the deputies who voted for it were part of the official Party Vamos, or allied groups. This signals that President Alejandro Giammattei will likely enjoy a favorable third year in power. Though this year was certainly much better than 2020, several challenges remain.

Now read on...

Register to sample a report