Slowdown, and clashes over corruption
The number of daily COVID-19 cases in Costa Rica has been rising since April. The government announced tighter restrictions to limit the spread of the virus, and to address a possible saturation of the public health system. These actions will definitely slow economic activity in May-June, and affect the speed of recovery. On April 30th, Central Bank President Rodrigo Cubero presented the Q1 2021 Monetary Policy Report. Preliminary estimates account for a Q1 GDP contraction of -1.2% y/y. Fiscal figures during the first four months of the year show a positive outlook. Though the exchange rate has shown a relatively stable trend during the first five months of 2021, pressures for an increase in the exchange rate will remain high.
El Salvador started May in a new stage of strong concentration of political power, as we discussed in our May 5th brief. The international turmoil after the dismissal of top judiciary officials as the first decision of the new legislature also spread to financial markets. Sovereign debt prices in international markets fell, reversed partially after economic authorities calmed investors via a virtual conference call. These of political decisions could affect ongoing talks toward an IMF agreement. Signals remain mixed, as the government prioritized congressional approval of an economic and technical agreement with China, signed by President Nayib Bukele during his December 2019 visit to China. Economic recovery continues to be slow, although we expect a jump starting with March figures, due merely to the comparison with the 2020 months of severe plunge in economic activity. Remittances increased to record levels in April, and exports started to take off. Inflation also increased to levels not seen in the last nine years, while the fiscal deficit hasn’t receded.
Guatemala’s effort to fight corruption has faced headwinds. The recent refusal to confirm an independent judge of the Constitutional Court for another five-year term met with sharp criticism from the U.S. Department of State, and sanctions on Guatemalan government officials were imposed. New restrictions were announced on May 1st, in order to curb the nationwide increase in COVID-19 infections. Nevertheless, production continues to show strong signs of recovery. Improvement is pushed by the inflow of remittances, and a better external outlook. Government accounts were in surplus by the end of March. Improving financial conditions during the outlook period will be positive, and the deficit will continue narrowing. Price pressures keep rising, driven mainly by higher fuel prices.
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