Expansion, with inflation
Costa Rica presented a mixed picture during H1. On the positive side, the economy displayed good economic activity momentum; fiscal accounts kept improving, despite the attack by Conti; credit in domestic currency expanded nicely; and nearshoring remained strong. On the negative side, the country registered a higher-than-expected trade deficit; and experienced inflation and currency devaluation, elements that will restrain growth in coming months. The economy will keep expanding over the next two years, but in a more moderate way, despite a less favorable international environment. We don´t see reasons or indicators that suggest a recession in the short term. Costa Rica has strong fundamentals that will facilitate growth and opportunities for attracting foreign direct investment, thanks to nearshoring and friend shoring. Government authorities have stated their commitment to an IMF agreement, so fiscal consolidation will be still on the map.
Guatemala´s higher inflation is a main risk to this year’s growth outlook. For the second month in a row, the variation in the Consumer Price Index was above the Central Bank’s 3%-5% target range. To compensate for the negative impact of higher prices on family income, the government implemented a national emergency plan on June 16th, addressing fiscal, monetary, social and credit policies. Despite the measures announced, the Central Bank is still anticipating a continuation of inflation in coming months. Internal production continues showing a good momentum: GDP increased 4.9% y/y during Q1. Growth was explained by a sound expansion of private and public consumption. On the political side, the United States recently posted an update of its Engels List (a list of allegedly corrupt actors in Central America). The document lists the head of the Attorney General´s office’s special anti-impunity unit, and 15 more Guatemalans.
El Salvador’s recent news includes three predominant financial topics: the external perception of increasing default risk; the severe fall of bitcoin quotes; and mounting inflation. The negative expectations and uncertainty driven by these factors are consistent with the observed drop in the pace of economic activity. There have been few changes in the political environment: public approval of President Nayib Bukele’s performance continues to be high, despite these adverse elements. Quarterly real GDP grew 2.4% y/y in Q1 2022, within the long-term range of 2%-2.5%, suggesting that the economy could have returned to potential growth faster than we expected. The government remains silent about fiscal adjustment and financing options, increasing the perceiving risk of default in international financial markets. The bitcoin plummet has only worsened external perceptions. The fiscal deficit has decreased substantially, although it is hard to determine whether that outcome was due to discipline, or to financing restrictions.
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