Edging forward
Opacity in political conditions in El Salvador continued during April, the last month of the current Congress. What happens from May on, when the official party will be dominant in Congress, remains to be seen. The ample majority obtained by the president’s New Ideas party and its allies in the February 28th legislative elections did not moderate the confrontational behavior of President Nayib Bukele. As forecast in our February report, the government announced in early April the start of talks with IMF authorities toward a medium-term agreement under the EFF instrument. The short-term economic outlook foresees economic growth higher than expected in our September outlook, thanks to the estimated robust growth, particularly in the United States, and the end of immobilizing political belligerence undermining confidence for several years. Long-term fiscal sustainability will start to be addressed through the IMF agreement, which will surely be geared toward lower government deficits, a higher primary balance and a gradual retrenching of the public debt to GDP ratio.
Costa Rica’s political process to advance toward congressional approval of draft bills included in the IMF-EFF agreement shows ups and downs almost every week. As of now, the outlook for approving the public employment law before the end of May is uncertain and has little probability of passage, as this is a key piece of that agreement. Vaccination against COVID-19 is advancing slowly, despite the region’s well-developed public health system. Risk of a new wave of the pandemic is now higher than we assumed in our February outlook. Economic activity improves gradually with the impulse of very dynamic FTZ activities, whereas domestic-based sectors lag behind, and are sluggish. Fiscal results brought good news with the Q1 figures, after our disappointment with February expenditure trends. Higher revenues and less dynamic expenditures led to a positive primary balance in Q1, equivalent to 0.61% of GDP.
Guatemala performed better than its regional partners during Q1 2021. Economic activity grew at an average rate of 3.1% y/y during the first two months of the year. The U.S. stimulus package and the reduction of Hispanic unemployment boosted foreign remittances improving household consumption. Nevertheless, the recent rise in daily new COVID-19 cases might affect the V-shaped trend recovery in economic activity in the short term. The government just a few days ago announced new restrictions to contain the spread of the virus. Vaccine access remains limited, due to country´s difficulties over accessing more suppliers. This poses a challenge for reaching herd immunity. The abundance of FX has kept the exchange rate stable since March, while price pressures have been rising, driven mainly by higher fuel prices.
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