COSTA RICA: Turning point ahead?
Costa Rica will be struggling to grow, and to clean up its public finances, this year and next. The outlook for economic activity in 2021 will mark the end of the recession triggered by the COVID-19 pandemic. It also could mark a turning point for the long-standing fiscal deficit, if the Extended Fund Facility with the IMF succeeds. This would pave the way for reverting fiscal sustainability in the medium-term. But much water still must flow under the bridge in coming months, as the political process will not be easy. No overshooting of economic activity is expected, mainly because fiscal stimulus is severely limited by the huge public finance problem. Therefore, economic reactivation will be probably U-shaped, instead of V-shaped. Moreover, uncertainty persists, not only on the fiscal front, but also due to the erratic evolution of COVID-19 in the world, and the eventual new lockdown episodes, here or in the main trade partners. The external sector will improve slowly, particularly in exports of services associated with tourism. Inflation would remain within the Central Bank target range, and only be affected by some pressures we foresee in the FX market.
El Salvador is struggling with the possibility of significant political change. After many years of a radical leftist opposition (via the FMLN) to the radical rightist status quo (via ARENA), after the first 10 years of guerrilla war followed by 20 years of ARENA in office, and then 10 years of FMLN, the winds are blowing toward new promises. That was the meaning of the election of President Nayib Bukele in 2019. But there’s an opportunity to consolidate a drastic change, by handing a congressional majority to Bukele. Such results could also pave the way toward a fiscal adjustment program with IMF support, following the government intentions expressed in May 2020, when El Salvador accessed the IMF Rapid Financing Facility to cope with COVID-19. March developments will be crucial to learning the government’s orientation, although the new Congress won’t be seated until June 1st.
Guatemala´s better-than-expected recovery during H2 2020 is shaping private sector expectations about the future of the country. For the second month in a row, the level of the confidence index about economic activity by private sector analysts has increased. Other indicators, such as the Monthly Index of Economic Activity, original series, reflect a V-shaped recovery. Private consumption is gaining steam, as the inflows of remittances from the United States continue to increase powerfully. As in 2020, private consumption will benefit from the effect of remittances in disposable income, thus pushing Bank of Guatemala’s expected GDP growth to within the 2.5%-4.5% range. The FX market was under appreciation pressures, partially due to the positive view held by economic agents. As of February 20th, net international reserves reached $18.3 billion, up from $18.2 billion at the end of January.
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