Few political surprises, as economies flag
El Salvador’s economic performance in 2023 and 2024 is confronting challenges from both abroad and at home. Global economic slowdown, distortions due to the armed conflict in Ukraine, persistent and defiant inflation and strong monetary policy measures taken by many central banks are important concerns for local public policies. On the domestic front, large fiscal deficits and the resulting high public sector indebtedness, along with the adoption of bitcoin as legal tender, have undermined investors’ confidence in both fiscal sustainability and financial stability. Tackling the long-time problem of crime and violence from gangs has been worthwhile, and is restoring a sense of public peace. Aggressive anti-crime measures have also helped to keep President Nayib Bukele’s popularity high, which in our view he’ll be able to maintain; he’s also likely to prevail in his decision to run for reelection in February 2024.
Investor worries about the government’s capacity to comply with the public debt obligations were reflected in high levels of EMBI in 2022, now reduced to about 15%. We don’t expect unpopular fiscal measures, such as increasing taxes, at least not before the elections. Rather, fiscal efforts will focus on nailing down the needed financing. Most short-term indicators of economic activity in 2023 are expected to perform a little worse than in 2022, but slightly better in 2024. Real economic growth is forecast at 2% y/y in 2023 and 2.2% in 2024. Foreign remittances and merchandise exports are likely to increase at modest rates. The current account deficit will shrink slightly in 2023 to 6% of GDP, and to 4.6% of GDP in 2024. Inflation will fall relatively fast in 2023 (to 3.6% y/y at yearend), landing close to a long-term figure of 2.5% y/y in 2024. Fiscal results will continue with a low global deficit of 2.9% and 3% of GDP in the outlook period, while the primary surplus moves to 1.5% and 1.7% of GDP.
Costa Rica’s continued economic activity slowdown reveals the deepening of duality in the productive structure of the country: rampant FTZ growth, while the other sectors (definitive regime) are virtually stagnant. As inflation recedes, the Central Bank is moderating its monetary policy stance, although the shock treatment of raising the monetary policy rate from 0.75% to 9% over just 10 months would call for a reduction of that rate as aggressive as the previous rise. In fact, inflation fell to 5.6% y/y in February and decreased again in March to 4.4% y/y, very close to the inflation target range of 2% - 4%. The Bank cautiously reduced the monetary policy rate in 50 bp in March, but was more aggressive in April, when it cut the rate 100 bp, to 7.5%. Fiscal conditions continued improving hand in hand with the fiscal rule, following the detailed treatment to this topic given in our March report. The novelty refers to the lessening of financing pressures for the government, after the placement of the first approved tranche to issue Eurobonds in 2023 for $1.5 billion, in late March.
Presidential elections in Guatemala are only two months away, and no candidate seems strong enough to win in the first round. As of today, Zury Ríos and Sandra Torres are the strongest candidates, according to the latest polls. We don´t expect the other candidates to present surprises. Both Torres and Ríos are experienced politicians with similar views, and neither hold extreme positions or promulgate populist ideas. There is no risk of a significant change in the country’s prudent economic policies or stable macroeconomic situation. Since our last report, there haven’t been mayor changes in economic indicators. Inflation is not yet on a declining trend, and probably will continue at a high level for some time. The outlook remains positive, but traditional problems remain.
Now read on...
Register to sample a report