COSTA RICA: New government’s fiscal stance off to a promising start

CENTRAL AMERICA - Report 29 Jun 2018 by Francisco de Paula Gutiérrez and Felix Delgado

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Costa Rica’s new Carlos Alvarado administration appears to be tackling the fiscal problem seriously, unlike its predecessor, which took an ambivalent stance. In fact, in response to the request of the new Congress, Finance Minister Rocio Aguilar on May 30th-31st addressed several topics sensitive for public employees, but crucial for long-term solutions to fiscal weaknesses. Economic slowdown continues, driven particularly by factors affecting domestic demand (consumer spending and investment). The main prices, reflected in inflation and interest rate trends, are rising slowly, despite the risks of increasing the fiscal deficit. No FX pressures have been detected in exchange rate trends, partly because of Central Bank intervention, and the solid international reserves position, after disbursement of a $1 billion loan from the Latin American Reserves Fund.

In El Salvador, signs of a deepening slowdown during Q1 have partially reversed, and the trend now looks more seasonal. That also applies to external trade and foreign remittances. The initial slowdown in merchandise exports and imports, and remittance earnings, has stopped. But the other driver of domestic consumption, credit to the private sector, continues to slowly rise. These elements suggest that real GDP growth in 2018 will barely surpass the 2017 rate, as we have forecast. In the political arena, nothing is clear for the last year of President Salvador Sanchez’s administration, after the defeat of his FMLN party in the March legislative elections.

Guatemala was severely hit by the eruptions of the Fuego volcano, which affected a large area of agricultural production (mainly coffee plantations), destroyed infrastructure and will probably have a negative impact on tourism. The emergency will require additional funds to address reconstruction, and needs linked to the population affected by the eruptions, estimated at over one million people. The eruption came as the economy was growing slowly, merchandise exports were declining and private sector confidence was low. It also came at a time of relative fiscal stability, so there’s some room to maneuver, to help the country address the emergency.