Costa Rica: Government Growth Plan Skirts Key Issues
President Luis Guillermo Solis’ growth plan includes an interest rate cut, but seems to address few key issues, concentrating instead on minor advances, and mostly silent on projected impacts or details needed to evaluate the results. Moreover, his announcement was vague on many points. Despite falling inflation and interest rates, economic activity indicators continue to be weak. In our opinion, expectations are not helping activity, and are suppressing credit demand. They are linked to external demand trends, and the lack of a solution for the fiscal deficit. Moreover, political conduct has helped dampen confidence.
In El Salvador, the government sent Congress a proposed 2016 budget that includes a moderate spending increase of 0.8%, compared with a 3.1% rise last year. We share the criticism levied by several groups that argue that the budget contains overvalued revenues and hidden expenses. The government is working on a proposal to tax telephone communications to finance a plan to combat violence and public insecurity. Moreover, Finance Minister Carlos Caceres presented to the political parties last September the basis of a first proposal for pension system reform. Economic activity continues to recover. Deflation continues, reaching -2.3% to September, the largest negative figure of the year. Yet deposit interest rates are showing a persistent pickup, probably discounting an imminent international rate rise. The fiscal deficit has stopped rising, but is far from solved.
In Guatemala, political turmoil is dissipating, and the economy continues to perform without major changes. The private sector confidence index as of September, measured after President Otto Pérez resigned, has returned to a more normal level (of 46.67), its highest rate since April 2015, when the customs accounts corruption scandal exploded. The currency returned to about 7.7 quetzals per dollar, and net international reserves closed at $7,471 million as of October 22nd, up from $7,333 million on December 31st, 2014. But the economy slowed during Q2, with real GDP up 3.5% y/y, down from 4.4% in Q2 2014. Economic dynamism has been sustained by private consumption, which increased 5.5% y/y, reflecting not only the impact of higher terms of trade on real income, but also the behavior of family remittances. Inflation continues to decline (to 1.88% y/y as September), below the lower boundary of Bank of Guatemala´s target range. The Bank has cut its monetary policy rate from 3.25% to 3%, in an attempt to bolster economic activity.
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