COSTA RICA: Dynamism is waning
Costa Rica’s economic activity continues decelerating, more or less in line with our 2017 forecast, despite official optimism about expected real GDP growth. The slowdown is quite generalized across sectors. We reiterate the influence of both external and domestic factors. Rising interest rates in international markets are reducing Costa Rica’s attractiveness to capital inflows. Terms of trade have worsened gradually, dampening consumer spending and private investment. The fragile fiscal situation, and presidential elections set for February 4th, 2018, add uncertainty, and affect consumer decisions.
Despite government’s weak plans to pass tax legislation, no effective action should be expected during the less than five months remaining for this presidential administration. The attempts to place $1.5 billion of domestic dollar-denominated debt before yearend have also failed. Therefore, the fiscal deficit will be close to 6% of GDP, as forecast. Inflation will close the year very near to our estimate of 2.5%. Interest rates will continue rising, although more slowly than expected. The exchange rate reacted to the strong monetary measures of April-June, and is moving to a depreciation rate below the 5.2% y/y of our short-term outlook.
El Salvador is in the midst of intense negotiations toward approval of the 2018 national budget, and eventually other measures, to assure financing of government commitments through 2019. This time the government has accepted the participation of a multilateral, the IADB, a requisite of the opposition ARENA to assure the compliance of the eventual agreements. But political confrontation over various topics persists, as has been the rule for several years. Macroeconomic indicators point toward our November report projections: low GDP growth, low fiscal deficit due to financing constraints, and price and interest rate stability.
Bank of Guatemala recently published its review of 2017, and its outlook for 2018. On balance, 2017 has been a year of slow growth (2.8% y/y), the lowest since 2009. It was also a year of stable conditions: an inflation rate within its target range (4.0% ± 1.0 p.p.); a government deficit-to-GDP ratio of about 1%; a relatively high level of net international reserves, due in part to a large inflow of private remittances; a nominal appreciation of the exchange rate; and relatively low interest rates. For 2018, the Bank is projecting 3%-3.8% GDP growth, and relatively stable macro-prices, given its management of monetary policy. In general, we concur with Bank of Guatemala’s outlook for 2017, but are less optimistic about the speed of recovery in 2018.
Now read on...
Register to sample a report