El Salvador: Fiscal Showdown

CENTRAL AMERICA - Report 28 Oct 2016 by Francisco de Paula Gutiérrez and Felix Delgado

Intense political negotiations over fiscal issues are underway in El Salvador. Many analysts (us included) have anticipated a payment crisis for several months, as the opposition ARENA has refused back new borrowing. The party conditions its congressional support upon reaching consensus on a fiscal responsibility act, and other fiscal measures, including the correction of bad budgetary practices. The government, for its part, continues to demand that Congress authorize its requested $1.2 billion new debt issue.

As cash shrinkage grows more evident, the government is asking for partial authorization of the $1.2 billion, and blaming ARENA for the negative consequences of delayed spending. This only creates a climate of confrontation that now also includes other opposition parties. The problem is so critical that external players, among them the IMF, World Bank, IDB and representatives of donor countries, such as the United States, Germany and Spain, have stepped in to mediate.

In Costa Rica, principal macroeconomic indicators are performing better than expected. Consumer prices remain controlled, even after returning to positive territory since July, and will probably close the year at below 2%, the lower boundary of the target range. Economic growth trends exceed our estimate, thanks to robust free zone exports and low interest rates. The government has succeeded in financing the fiscal deficit with dollar-denominated debt issued locally. Gradual devaluation since May evidences a growing gap in the FX market, partially covered with Central Bank intervention. The exchange rate has remained quite stable in October, when the government has actively sold dollars.

Economic activity has been slowing in Guatemala.Real GDP growth fell to 3.2% in H1, down from 4.3% in H1 2015.Slowdown will probably continue during Q3, since the original series of the Monthly Index of Economic Activity (IMAE) increased only 2.1% y/y in July and August.New Q2 GDP figures showed a deceleration in private consumption expenditures, a modest 1.1% y/y growth in private investment and a decline in government consumption and real exports.

Confidence in the economy is low.The private sector confidence index was 38.89 in September, a plunge from the 61.54 of March, when the government was still enjoying a honeymoon. Yet the currency has strengthened, to Q7.5 on October 24th, from Q7.64 on June 30th.

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