Tough choices
Guatemala’s situation is mixed, with the economy improving but the political environment worsening. The events of November 21st and 22nd, when popular protests caused major turmoil in the capital city and some locations in the interior, including an assault on the Congress building, require attention, especially because the current administration has been in office for less than a year. Protests focused on calls for the resignation of President Alejandro Giammattei, and the cancellation of congressional approval of the 2021 budget. On November 25th, Congress relented, and voted to suspend its approval of the budget.
Yet the private sector is growing more optimistic about the economy. The private sector expectations index computed by Bank of Guatemala improved in H2, as the economy has begun to show signs of recovery. The index reached 53.38 in September, and 52.24 in October, well above its 36.4 in June, and 38.68 in July. The improved mood can also be seen in the answer to the question: “Do you expect the economy to improve in the next six months?” In July, just 21.1% of respondents answered yes; in October, 79% did.
El Salvador appears to be moving under the winds of the February 28th, 2021 electoral process, with the powerfully popular President Nayib Bukele, and projections that his New Ideas party will win a comfortable majority in the next legislature. The pandemic remains under control, showing the best results among Central American countries, with credible figures. The inertia could explain the absence of fiscal adjustment proposals and public political discussion of those sensitive topics. Economic activity continues to recover, after the opening since August-September, so far much in line with our predictions. The external sector will probably suffer less than expected, at least in the area of foreign remittances. Credit to the private sector has decelerated, as should be expected due to the deepening of the recession and is likely to fall short of our estimate at yearend. On the contrary, fiscal finances are in worse shape than expected, and this year’s deficit in public finances could easily exceed our projections.
Costa Rica’s government continues to be hesitant to knock at the IMF’s door. After an attempt in September, in which the economic team presented what could be Costa Rica’s proposal to the Fund, enthusiasm for a proposal started to dissipate. The situation was complicated even further because the country had to face several days of local protests that paralyzed its main roads. The government and Congress organized a dialogue with civil society that concluded with 58 policy recommendations of various kinds, but shared a common thread: do not create more taxes if they affect the middle and low income groups, and do not make comprehensive reforms that affect the job security of public sector employees. Is there room for an IMF agreement? Involving the IMF would be, in our opinion, the best way to boost confidence. But the latest developments regarding public discussions of the authorities make us question how likely would it be. It seems clearer that Alvarado would prefer to avoid this option. Yet difficulties in meeting financial needs, either because the opposition refuses to vote in favor of external loans, or because domestic bond holders refuse to roll over their maturities, could force a change in strategy.
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