Recovery under uncertainty

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

The Costa Rican economy showed better than expected results in H1. Faster recovery of the country’s main trading partners helped improve exports. H1 fiscal figures were also favorable. The next 18 months will be crucial. The first review of the SBA agreement with the IMF will be in October 2021, followed by national elections in February 2022. The forthcoming political scenario will be complex, with a weak representation of the ruling party in Congress, and strong electoral headwinds. The vaccination process will continue advancing in H2, and the country is expected to reach herd immunity before the end of the year. This will help loosen restrictions for the business and economic sectors. The stronger U.S. recovery in coming years will help Costa Rica rebound from the COVID-19 shock. The country will benefit from stronger FDI, exports of goods and the recovery of tourism. This is one of the main changes with respect to our February outlook.

The continuous increase in COVID-19 cases in Guatemala has pushed the authorities to tighten restrictions there. Government officials declared a state of prevention on July 13th, limiting outdoor meetings and public demonstrations, and suspending mass events again. But the vaccine rollout should improve in coming weeks. Vaccines donated by the United States in recent weeks totaled 4.5 million. This might help ease protests against President Alejandro Giammattei over the mismanagement of the coronavirus pandemic. The political crisis in Nicaragua introduces a possible risk. If Nicaragua is excluded from CAFTA, as has been discussed recently by members of U.S. Congress, that might impact Guatemalan industry. Nevertheless, it is still not clear how to exclude a country from this multilateral agreement, since there’s no mechanism for exclusion. The Guatemalan economy, meanwhile, continues to show strong signs of recovery.

El Salvador faces increased uncertainty, issuing from several fronts. Events such as the removal of Constitutional Court members in early May were followed by the so-called Bitcoin Law, and more recently the 20% increase in the minimum wage. All of these events occur at a moment when businesses are fighting the negative consequences of COVID-19, and increasingly cast doubts upon the feasibility of an agreement with the IMF, as well as upon the government’s capacity to finance requirements for the rest of the year. The Bitcoin Law continues to live in the eye of the hurricane, facing complaints from the business sector over the risks it may pose. President Nayib Bukele has clarified some of the doubts that have arisen both domestically and abroad about the brief text of the Bitcoin Law, by explaining the spirit of the new legislation. But interpretation of some key issues is not, in our opinion, an adequate legislative technique.

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