Slowdown and trepidation
El Salvador’s economic trends in 2024 looked like a return to the long-run results characteristic of the pre-pandemic decade: relatively weak economic activity, growth of 2% to 2.5% y/y; weak public sector results, leading to very high public debt; and worries about long-run fiscal sustainability. The political environment was static, with President Nayib Bukele’s robust popularity unchanged. The former lack of clarity on the economic policy agenda took shape last year, and was clearly defined in Q1 2025, with the approval of the IMF Extended Fund Facility program. But the 2025-2026 outlook poses big challenges likely to erase any positive effects of actions to improve the economic outlook taken in previous years. One is the recognition that the necessary fiscal adjustment will be restrictive in the short run, though it would have positive future effects. The other is the current disruptive U.S. and global tariff war, along with a stronger fight against migration to the United States, both conditions that introduce uncertainty, and cracks in business and consumer confidence. All of this makes this forecast very provisional.
Costa Rica faces growing downside risks, after the 10% U.S. tariff imposed in April. The Central Bank now projects 2025 GDP growth of between 3.5% and 3.7%, down from 4.1%. Internally, political support for President Rodrigo Chaves is slipping, while business confidence has deteriorated amid rising concerns over insecurity, corruption and governance. The Monthly Index of Economic Activity shows moderating growth: the definitive regime is slowing sharply, while free trade zones provide some offset. Job creation is losing momentum, and tourism arrivals continue to decline, weighed down by colón appreciation. Public finances are weakening: tax revenues are stagnant, while expenditures accelerate, pushing the fiscal deficit wider in 2024–2025. Although the debt-to-GDP ratio has fallen, the improvement is mostly due to currency effects rather than structural consolidation. Despite these challenges and diverging inflation trends with the United States, the Central Bank remains reluctant to adjust monetary policy independently from the Fed. Inflation has recently returned to positive territory, but remains subdued.
Guatemala faces moderate exposure to the new 10% U.S. tariffs, which now target even CAFTA-DR partners. Around 31.7% of Guatemala’s exports go to the United States, heavily concentrated in agricultural products and textiles—sectors now directly impacted. Preliminary estimates from CENCIT suggest a potential export loss of nearly $500 million annually, with major risks for apparel, bananas, coffee and vegetable shipments. The textile sector, employing 160,000 workers, could face competitive disadvantages relative to non-tariffed countries. Agricultural exports—especially bananas and broccoli—may also lose ground, due to higher costs for U.S. importers. Beyond trade, the uncertainty could dampen FDI flows, particularly in U.S. investment, which remains relatively modest in Guatemala. However, the broader macroeconomic indicators—such as economic activity, inflation, remittances and private confidence—have remained stable in recent weeks. At this stage, no revisions to our forecasts are warranted. While external pressures present new headwinds, Guatemala’s internal fundamentals remain resilient, and we continue to view the economy as one of the most stable in the region.
Now read on...
Register to sample a report