Economic performance mixed, with Bukele likely to be reelected
El Salvador’s economy turned in a weak performance this year, influenced by adverse international economic conditions, especially in the country’s main trading and financial partner, the United States. The effect on local activity was both direct and indirect, the latter via slower growth in other Central American countries, collectively El Salvador’s second trading partners. Moreover, the export structure based on traditional products is less resilient to external shocks. Political conditions also affected economic trends. Disagreements with important partners like the United States about the Salvadorian administration’s authoritarian measures have cooled bilateral relations. The probable reelection of President Nayib Bukele in February 2024 would leave the current situation unchanged. Differences with the International Monetary Fund over topics such as El Salvador’s adoption of bitcoin as legal tender have delayed IMF support for a required fiscal adjustment, also reducing investor confidence, and restraining multilateral and international market financing. Under the current economic and political conditions, not expected to change substantially in the near term, economic growth will be low during 2023-2024. Key drivers of growth, such as exports, remittances, FDI inflows and banking credit to the private sector will remain weak. The lack of policies to stimulate total demand in a dollarized economy places the burden on fiscal policy. That happens in a moment when high fiscal deficits and public debt leave little room for expansive measures, not without harming confidence and scaring away investment.
Costa Rica´s real sector continues to perform well. H1 2023 GDP growth totaled 4.6% y/y, according to the latest figures released by the CRCB. Domestic growth was mainly in the FTZ. Growth in the domestic economy has been linked to spillovers from the FTZ, and to recent improvements in the terms of trade. Despite the good performance in the real sector, the country shows several financial imbalances. The drastic change in inflation, the exchange rate, interest rates and the lack of a clear road map on monetary policies complicates the decision making process by families and businesses. Another concern is the slight deterioration of the fiscal account. Tax revenues increased 2.1% y/y in the first seven months of the year, while expenditures increased faster, at 4.3% y/y. This reflected in a slightly higher financial deficit in first seven month of the year compared to 2022 (1.3% vs. 1.1%). In politics, President Rodrigo Chaves’ popularity keeps declining. In the latest public opinion survey produced by the University of Costa Rica, 53% of those surveyed gave Chaves a positive rating, down from 71% a year ago, while negative opinions jumped from 9% to 23%.
Guatemala’s presidential transition got a rough start in September, with presumed president-elect Bernardo Arevalo temporarily suspending his participation in the transition process, after the raid on the Supreme Electoral Court on September 12th. Arevalo also presented an appeal on the investigations against his Semilla Party and requested the removal of Attorney General Consuelo Porras. In economics, there have been few changes since our last report. Economic activity improved slightly in July. Remittances are growing well, with the 12-month accumulated figure for August rising 12% y/y, higher than our forecast of 6%, though on a downward trend since January.
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