Recovery and corruption

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

Costa Rica’s economic activity continues recovering, after COVID-19’s disruptive effects. External demand is the main driver, as shown by short-term indicators. In fact, most of the dynamism comes from the export-oriented free-trade zones, while the so-called “definitive regime” lags far behind. Whether the final results surpass our expectations will depend upon risks, both domestic and external, that look more complex as time passes. Both public finances and consumer prices are performing better than we expected, while feared lockdown-related liquidity shortages never materialized, and now look unlikely. As vaccination advances, mobility restrictions are relaxed. The political campaign in the runup to the February 6th, 2022, general elections is running with excessive fragmentation of political parties, suggesting that arriving at a winner will require a second round that could bring the undesirable result of having a president elected by a minority. The more relevant external risk is that lower economic activity could arrive from abroad.

El Salvador’s economic activity likewise continues to recover, hand in hand with the extraordinary trend in foreign remittances, currently the main source of FX earnings and a fundamental factor both keeping private consumption afloat and driving merchandise exports. These external risks for Costa Rica in fact apply to most Central American countries, along with the internal risks analyzed in our September short-term economic outlook for El Salvador. They could undermine the current domestic dynamism. Control of the pandemic advanced well both in terms of new cases and vaccination. People now worry about other unresolved problems, like unemployment and the cost of living. Consequently, the popularity of President Nayib Bukele diminished, although it still remains high. Fiscal balances improved, although not enough to return to healthy public finances. External risks could moderate the inflow of remittances and the export trend.

Guatemala’s bicentennial independence celebration was tainted by corruption scandals. The U.S. State Department’s decision to include Attorney General Consuelo Porras and her secretary, Angel Pineda, on the “Engel list” of those suspected of corruption, obstruction of justice or undermining democracy in September introduced a new crisis. This is a serious setback for attracting more private investment to the country. Economic activity remains strong. Growth outlooks have been revised upward by the IMF and the World Bank. They estimated a y/y GDP growth of 5.5% and 5.1%, respectively. This is higher than our 3.7% y/y forecast presented in August, and is sustained by a better external outlook, and higher remittances inflows. We are more conservative about the economic outlook; due to several risks we foresee on the external side. Higher fuel prices will raise costs for transportation and energy generation in coming months. This could lead to a significant rise in domestic consumer prices.

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