COVID’S variable impacts
The COVID-19-driven global crisis is leading to the worst economic contraction since the Great Depression. The depth of the consequences, however, isn’t the same everywhere. It depends both upon a country’s economic health at the starting point, and the stringency of public health measures to cope with the pandemic, as two main factors.
El Salvador has a sick economy with little long-run growth, coupled with a persistent fiscal deficit incompatible with the condition of a dollarized economy. The resulting increased public debt has already surpassed the usual sustainability thresholds. The country has succeeded so far in its public health strategy against COVID-19, thanks to strictly enforced confinement, albeit at a high cost to productive activities. The number of new cases has decreased continuously since early August. Most of the lockdown measures were ended by the end of August, and social and economic activity is gradually rebounding. In the absence of mandatory restrictions, the risk of a new contagion wave will be a challenge. This revision of the short-term economic outlook shows a deeper recession than our April forecast. The immediate consequence would be a weaker recovery in 2021. The loss of confidence over fiscal sustainability would increase the cost of financing, limit the access to the required funds to finance the huge fiscal gap and oblige the country to deal with its challenging public-debt-to-GDP ratios. The current conditions urge adjustment measures to stabilize fiscal finances.
In Costa Rica, an adverse political reaction from various sectors and political parties to the preliminary proposal for an IMF program presented by the government’s economic team on September 17th sent the authorities back to the drawing board, to develop a more palatable adjustment program. The one presented was heavily concentrated on an increase in government revenues, with minor adjustments to the expenditure side. Meanwhile, economic activity continues to show negative growth, as the IMAE trend cycle as of July declined 7.8% y/y, although the special regime, mainly free trade zone activities, fell just 1.6% y/y. The deterioration of government finances continues to unfold, with the financial deficit as of August closing at 5.8% of GDP, and interest payments, up 23.3% y/y, being equivalent to 43.2% of total tax collection of the period. Inflation continues in negative territory as of August (- 0.07), but the currency has been depreciating during H2: from June 30th to September 24th, the exchange rate weakened from 583.45 to 602.97 colons per dollar.
In Guatemala, confidence over the future of the economy is starting to increase, as the country moves to reduce confinement and COVID-19-related restrictions. The monthly IMAE, original series, declined 4.8% y/y in July, and the trend cycle fell 5.2 y/y. In both cases, the negative rates were lower than those observed in the previous three months, signaling the possibility of a recovery sooner than initially expected. The Central Bank´s confidence survey among private analysts also showed an improvement in economic activity expectations. The confidence index closed with a score of 47.88, the highest level registered since the pandemic severely affected the country, and higher than the level observed in August 2019. If the recent positive signs continued for the rest of the year, real GDP could perform better than the -4.6% we forecast in our August report.
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