El Salvador: An Unfortunate Step Backward
El Salvador has taken a step backward in its efforts to improve economic conditions. What we consider an unfortunate government decision – the announcement that it has been forced to miss payments on pension certificates – has created unnecessary turmoil, with unwanted consequences. New downgrades by the main rating agencies will probably reduce financing flows, and increase interest rates. The political struggle has gone very far, and will hamper both economic growth and investor and lender confidence, while adding to the uncertainty over the effects of U.S. immigration and protection policies. We don’t expect economic growth over the forecasting period to be any higher than in recent years. Campaigning for the March 2018 legislative elections, and the open confrontation between the two main political forces, has added to the skepticism over consensus on key political and economic decision making, and over the prospects for revving up the productive engine.
In Costa Rica, without a fiscal solution in sight, the effects of the deterioration of terms of trade, the increase in international interest rates and domestic disequilibria are all started to show. The monthly index of economic activity as of February maintained its decelerating trend, the strong performance of free trade zone activities notwithstanding. The Q1 trade deficit increased 11.6% y/y, as the value of merchandise imports grew faster than merchandise exports (8.9% y/y, vs. 7.6%). Inflation kept increasing, though slowly: Inflation ytd as of March reached 0.55%, against the 3% ±1 pp Central Bank’s target range, but above the -0.26 registered in Q1 2016. Inflationary expectations, according to Central Bank surveys, also increased slightly, approaching the upper level of the target range.
In Guatemala, government finances still reflect the execution problems of 2016. Q1 data shows total revenues increasing 6.1% y/y, and tax revenues rising 10% y/y. But spending has risen only 2.7% y/y, mainly due to stagnation of current expenditures. The administration is clear that this kind of fiscal execution is not helping solve several problems, such as the annual budget, without a clear medium term framework, which only contributes to preserving the status quo. To tackle the issue, the Finance Ministry is starting to discuss a methodology for a multi-year budget, to help place long-term issues on the policy agenda. This could open the discussion of goals and means for fiscal action, including the need for a major fiscal and tax reform, an issue that will be discussed with the IMF.
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