El SALVADOR: We’re Pessimistic
The economic outlook for El Salvador in the short term continues to be for low economic growth, with severe fiscal constraints. Lack of economic dynamism is driven by both political and economic factors. Uncertainty and negative expectations discourage investment. Moreover, fiscal restriction impedes public investment from becoming an important growth driver. The unnecessarily missed payment of pension certificates in April was a repercussion of both political and fiscal issues, with serious consequences for the country’s sovereign debt ratings. The unsolved pension gap was only postponed by congressional reforms in 2006, and has been complemented by lack of fiscal discipline.
We remain pessimistic about the short-term economic outlook. The approval of an appropriate pension reform, departing from consensus on key topics, would be a positive signal. The results of congressional elections in March 2018 will be key to later political developments. So GDP growth will continue low, and the fiscal deficit high with liquidity constraints, with limited access to international markets, and probably high real interest rates soon.
In Guatemala, the standoff between President Jimmy Morales and UN anti-corruption commissioner Ivan Velázquez over the petition to lift the president’s immunity so he can face legal charges over contributions to political campaigns has resulted in both mass protests and cabinet resignations. Support for the protests is weaker than in 2015, in part because the strong private sector umbrella organization, CACIF, hasn’t joined in. But the situation has damaged the government and the president.
Nothing severe has happened yet in economic terms. The currency depreciated slightly over the past 30 days (0.5% to September 25th), but the Bank of Guatemala continued to intervene. In September alone, the Bank purchased $89.5 million, and $1.9 billion in 2017, contributing to a buildup of net international reserves. Reserves were $11.2 billion as of September 25th, up from $9.1 billion in December 31st, 2016.
In Costa Rica, with presidential and congressional elections set for February 4th, 2018, we don’t expect any substantial fiscal reform to be approved before then. The heart of the reform is a tax package to increase revenues, with light spending proposals that will create problems with some opposition parties, which want more comprehensive measures. Although from December 1st to April 30th the congressional agenda is determined by the executive branch, it is also the last period the administration has to promote other types of legislation. We think approval and implementation of the new reforms will be handled mainly by the next president.
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