EL SALVADOR: Growth and inflation at status quo
El Salvador’s revised short-term economic outlook for 2018-2019 was unsurprising, with only minor changes in key or sensitive macroeconomic indicators. We reaffirm our prediction for real GDP growth of 2.2% y/y in 2018, and 2.4% in 2019. We are also maintaining our inflation forecast, meaning that higher fuel prices are being offset by reduction of other categories of demand. The absence of inflationary pressures is mirrored by decelerating lending to the private sector, and a lower fiscal deficit-to-GDP ratio than in our April forecast. The government’s financial deficit was revised downward, in accordance with the restrictions to access additional financing, but also due to lower annual pension outlays after the pension reform of September 2017. Bigger changes are included in external sector figures, where the current account deficit was revised upward, mainly due to higher imports driven by the effect of a new rise in international oil prices in 2017 and 2018. This factor more than offset the increase in foreign remittances this year. The better performance of capital inflows in 2018, chiefly in FDI, is helping to keep real economic activity unchanged.
The fiscal situation in Costa Rica continues to deteriorate, and opportune solutions remain in doubt. September was a very active month for fiscal issues, including the presentation of the central government’s 2019 budget, the conclusion of legislative committee discussions over the fiscal reform proposal and its movement to the plenary session for approval, and the emergence of a public sector strike against the proposal. Government´s liquidity problems increased, so the Central Bank decided to purchase Treasury Notes from the administration, a short-term emergency facility contemplated in the legislation. The government also released August fiscal figures, which showed continued deterioration of fiscal balances. The primary deficit had already reached 1.8% of GDP, and the financial deficit 3.7% of GDP, up from 3.2% in August 2017.
In Guatemala, political noise is reemerging. Tensions between President Jimmy Morales and Ivan Velázquez, chief of the International Commission against Impunity (CICIG), have escalated in recent weeks. Morales announced his decision not to extend CICIG´s mandate when it expires next year. The president made this announcement while surrounded by military forces, rather than by his cabinet. Furthermore, the administration denied Velázquez the possibility of entering the country, a decision rejected by Guatemala’s Constitutional Court. Morales’ move could jeopardize the support of some donor countries, including the United States. United Nations General Secretary António Guterres meanwhile confirmed and extended Velázquez’s appointment, giving the commissioner strong support in his conflict with Morales.
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