Fiscal reform’s painful birth depresses growth
Costa Rica’s 2019 economic evolution was marked by the fiscal problem, and the political environment surrounding it. In the reform and its entry into law in early December 2018, uncertainty about its implementation, and the willingness of the Executive to comply with it extended negative expectations in 2019, geared by the opposition of important public institutions, the delay of external financing approval and the placement of dollar-denominated internal debt at high interest rates. Those conditions, coupled with high unemployment, the effect of new taxes on spending and high household indebtedness led to postponement of consumption and investment decisions. The final result was meager economic growth of 2.1% y/y to December. Just to put the bitter cherry on the cake, the news of a 7% fiscal deficit as percentage of GDP came unexpectedly in January, due to high government spending in December.
Economic perspectives for 2020 show similarities to 2019, particularly in the results for the main economic indicators. The economy will continue virtually lagged, with high unemployment, as well as pressures in the external sector and domestic prices. Our estimate for 2020 real GDP growth is 2.3% y/y, only a hair’s breadth higher than last year. The current account deficit would remain relatively low, as would inflation and interest rates, while the FX inflows won’t be as large as in 2019. Fiscal finances will see a major correction. Government requirements are roughly financed during H1 2020. But the government will need additional external financing in H2, that will probably be conditioned by the struggle between the Congress demanding decisive actions for expenditure cuts, and the government that sometimes seems reluctant to do it.
El Salvador’s hottest topic these days has been political: the authoritarianism exhibited by President Nayib Bukele in pressing Congress for approval of an external loan, for the third phase of his security program. His boasting in Congress demanding that approval, with the undue presence of Army members backing him, had a clear touch of authoritarianism. It could even be considered an unacceptable blow to the division of powers, essential for the correct functioning of a democracy. The Constitutional Court quickly demanded the president stop such pressures. Macroeconomic indicators don’t show significant changes. Indicators to November showed continued growth of around 3% y/y, while inflation readings were close to zero.
In Guatemala, private sector expectations show positive results, consolidating the trend observed since the election of Alejandro Giammattei. The January 2020 confidence index on economic activity by private sector analysts was almost 30 points higher than in July 2019. In the January survey, 60% of people interviewed believe the economy will be better in the next six months than in the previous six months. And 40% of respondents thought it a good time to invest, up from 15.8% in July 2019.
Now read on...
Register to sample a report