Struggling to fight COVID-19
The COVID-19 pandemic arrived in Central America in March, and is posing both health and economic challenges. The infection has spread, and is having various economic and social impacts, on production, employment, the balance of payments, fiscal accounts and the financial system.
In Costa Rica, which had been beginning a fiscal adjustment, after finishing 2019 with a fiscal deficit equivalent to 7% of GDP, and a central government debt of 58.5% of GDP, the crisis has nearly paralyzed tourism. Most of the tourism activities are spread across the coast, and in the northern part of the country. Tourism is important to production (comprising around 7%-8% of GDP), employment (accounting for nearly 200,000 direct and indirect jobs), and the inflow of dollars (about $4 billion per year). Fighting the pandemic is also forcing the authorities to establish transfer programs to help families that lost their sources of income, which will increase the fiscal deficit even further. Deficit financing this year rests upon loans from international financial institutions, and some of these have already been approved. The deficit is expected to close at around 9% of nominal GDP.
In Guatemala, the pandemic has been gaining momentum in recent days, as the number of positive cases has been increasing at greater speed. In just May 19th to May 26th, the number of cases climbed from 2,001 to 3,619. If this trend continues, the government may consider ”closing” the economy for 15 days, which would affect economic activity. Private remittances, the main source of FX, and equivalent to 50% of the wage bill, have started to decline, with the April inflow 20% below that of April 2019. Production has also started to slow; we estimate that Q1 2020 GDP will rise by less than 1% y/y, after growing 3.9% y/y in Q4 2019.
In El Salvador, unlike the moderated COVID-19 trend discussed in our previous report, that comprised data to April 27th, May reflected an expanding pandemic. Public health damage appeared to increase. Total and active cases have soared since the late April, suggesting that the combat strategy could require more prolonged confinement and, hence, more economic damage. After several extensions, the state of emergency and quarantine will last through June 6th, the date set by the government for gradual restarting of economic activity. Political disagreements between the government and Congress have now extended to the Constitutional Court, and to some private business chambers. But President Nayib Bukele’s approval ratings continue to be above 90%. Within this context, Congress authorized new debt for $1 billion, in addition to the $2 billion approved in March. Economic indicators mainly from the external sector, such as in trade and remittances, have begun to show the contractive economic effects of the pandemic, and the measures taken to cope with it, as has the fiscal deficit, now rising due to higher spending.
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