GUATEMALA: In a poverty trap
Our revised 2018-2019 outlook for Guatemala has the same characteristics as our outlook of last March: Slow growth, relatively low inflation and depreciation, a moderate fiscal deficit, government debt below 25% of nominal GDP and monetary control. The outlook calls for GDP growth of 2.8% to 3.4% in 2018-2019, a rate clearly insufficient to lift people out of poverty. Year-end inflation will close below the midpoint of the inflation target (4.0% ±1 p.p.), and the year-end exchange rate will reach Q7.55 per dollar. The fiscal deficit, relatively low in recent years, will marginally increase in 2018, to 1.7% of GDP, and will keep rising in 2019 to 2.1%, as election year pushes spending up. But the central government’s debt-to-GDP ratio will remain below 25%.
The main issue in Guatemala isn’t stability, but growth rates insufficient to address the 60% poverty rate. The challenge seems to be breaking out of the poverty trap. The country has low domestic savings, and a low investment to GDP ratio. These elements, together with a low tax collection ratio, limit government’s capacity to supply good health and education, and to finance infrastructure to increase productivity. In sum, the main challenges aren’t in short-term management of economic policy, but in long-term implementation of development policy. With presidential elections scheduled for July 2019, there is opportunity for improvement.
In Costa Rica, fiscal issues continue to dominate the headlines. Insufficient funds for public debt amortization of the central government, due to budgetary slipups in the last administration, led to severe criticism of public financial planning. Reproach increased after the finance minister acknowledged having paid public debt without congressional approval during the last two months. That’s why she asked Congress to approve a special budget to fill this gap. Although the errors don’t affect fiscal deficit projections, they could affect political negotiations to pass the fiscal reform in Congress. The Central Bank released its macroeconomic program mid-year revision, with differences in key assumptions and results with respect to our economic outlook for 2018-2019. We don’t share the apparent optimism of the Bank, particularly not for 2019. Greater exchange rate volatility should be expected soon, according to the new Central Bank president.
El Salvador continues kicking down the road the necessary actions to cope with the fiscal deficit, and the increasing public sector debt that threatens mid and long-run fiscal sustainability. This reinforces our belief that substantive measures won’t be taken before the February 2019 presidential elections or, in the worst case, until the new administration takes office. Four parties formed a coalition around ARENA candidate Carlos Calleja for the February 2019 presidential elections, and Calleja’s star is rising.
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