External Conditions Shift to Negative
El Salvador closed 2016 with negative inflation, a first at yearend since 1999 (-0.9% y/y). Estimates of last year’s economic growth are controversial. The official figure of 2.5% y/y is considered optimistic by private sector representatives and analysts, and by international organizations like the World Bank, too. The detailed monthly indicator of economic activity shows scant impulse from key sectors. Merchandise exports decreased all year, and credit to the private sector grew only moderately. The only positive economic element was the increase of family remittances, and there are high risks to that under the new U.S. administration.
Fiscal results improved, pressed by the liquidity crunch in government accounts that restricted spending capacity. That restriction came from the refusal of the majority party in Congress, ARENA, to authorize the issuance of external debt for $1.2 billion the government has been requesting since March 2016. Despite the stronger fiscal results, confidence continues to be low, domestically and abroad, as it’s not clear whether the government is willing to confront the unbalances.
Costa Rica appears unable to solve its fiscal problems. The new year begins with hopelessness: neither the official caucus in Congress nor the government are willing to pass any tax reform in the last year of the Luis Guillermo Solis administration. Coincidently, the ratings agency Fitch downgraded Costa Rica’s sovereign debt, due to the lack of sufficient fiscal action to reduce the gap in public finances. There is finally an open discussion on the gap of the PAYG pension system, after three actuarial studies in the last years rejected by its administrator, the Costa Rican Social Security Institution.
Not everything looks bad, as macroeconomic performance in 2016 was better than expected in terms of economic growth, inflation and current account and fiscal deficits. We perceive vulnerabilities in 2017, as the negative factors we assumed would occur last year are shifting to the present.
In Guatemala, 2016 was a period of consolidation. GDP growth fell to 3.1%, down from 4.1% in 2015. Inflation reached 4.23%, within the 3%-5% target range. The current account balance was positive, and Bank of Guatemala’s reserves rose by $2 billion. The nominal exchange rate appreciated, and the central government deficit closed at 1.1% of nominal GDP. In his first state of the nation report, President Jimmy Morales said his first year in office was mainly devoted to putting the country in order, after corruption problems during the previous administration. Morales said he found the government in a negative cash position, without an approved budget, with the tax collection agency in need of reorganization, and with external financing basically closed.
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