Bracing for shrinkage of up to 4%

CENTRAL AMERICA - Report 28 Apr 2020 by Francisco de Paula Gutiérrez and Felix Delgado

The COVID-19 pandemic is still developing in El Salvador, with negative economic effects arriving on the heels of the government’s tough measures to cope with it. The virus arrived relatively late, with the first positive case recorded on March 18th. That was almost two weeks after the first case detected in Costa Rica, and the last among Central American countries that maintain reliable data. The restrictive measures adopted since March 6th suggest that public health damage could be less than in the rest of the region. But the economic effects will be highly conditioned by the country’s tight economic links with the United States -- the tightest in this region.

We share a recent statement by Harvard economist Kenneth Rogoff about the difficulty of producing worthwhile assessments of the economic consequences while the crisis is still developing. As we stated in our March report, it would be premature to attempt a formal economic outlook at this time. We instead offer a set of considerations about the expected direction of the main macroeconomic indicators and, when possible, a preliminary appraisal of magnitudes. Real GDP will certainly fall substantially in 2020, by at least -4.3% y/y, with risks toward the negative side. A rebound in 2021 of 3.6% would replicate, and depend critically upon, rebound in the United States.

Costa Rica has so far avoided exponential escalation of the contagion. The pandemic hit as the country was in a weak position, experiencing low growth, high unemployment and unsustainable fiscal deficit and public debt. So the economy will this year suffer not only the abrupt worsening of those indicators, but also the uphill course for 2021, and beyond. The public health success so far is only provisional but, if it consolidates, the economic cost won’t be as large as it otherwise would be. In any case, the challenges for the current half-decade are already big enough in terms of economic reactivation (once back to “normality”) and returning to a path of fiscal sustainability. Our own assumptions about the sequence of the COVID-19 evolution and the gradual flexibilization of the stay-at-home measures lead us to estimate a real GDP contraction of 4.1% y/y in 2020.

Guatemala’s Central Bank revised downward its real GDP growth estimate for 2020, due to the impact of the virus. The latest revision, communicated last week, projects growth at 0.5% to -1.5% in 2020, with a midpoint expectation of -0.5%. This was the Bank’s second downward revision, after the January announcement of expected 3.1%-4.1% growth. Still, the Bank’s new midpoint estimate for 2020 is more optimistic than that of other sources. The IMF forecasts -2%; the World Bank, -1.8%; ECLAC, -1.3%; and CABEI, from -1.3% to -3.2%.

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