Guatemala: No Surprises
The IMF mission working on the Article IV report for Guatemala delivered no surprises. The team’s end-of-mission report, published at the end of May, expressed no worries with Guatemala’s short-term economic outlook, but reaffirmed its national structural problems. We agree with those findings.
Guatemala’s macro variables have been remarkably stable, thanks to a conservative mix of fiscal and monetary policies. On the other hand, structural problems affect Guatemala’s long-term performance: The gross national savings rate, at 11.7% of GDP in 2015, is very low for financing the investment required to improve competitiveness. And security problems, in part associated with organized crime, and the low quality of the labor force, are other structural obstacles to sustainable higher growth.
Short-term economic indicators for early 2016 support both the IMF mission’s characterization and our forecast: the average growth of the IMAE original series, a very good proxy for the behavior of GDP, was only 2.9% y/y; CPI prices, as of May, were up 4.36% y/y, from 3.07% y/y in December 2015; the exchange rate stood at Q7.64 per dollar as of June 27th, almost flat on December 31st (Q7.63 / dollar); and the fiscal position is much better than it was in the first five months of 2015.
In Costa Rica, Central Bank policy under the “formal” floating exchange regime has been under scrutiny. In CEFSA’s June conference, we cast doubt upon how flexible the floating rate has been in practice. The exchange rate has fluctuated within a band of +/- 1% since managed floating was adopted in February 2015, coupled with regular Central Bank intervention in the FX market. That’s a very low figure, resembling a fixed more than a floating exchange regime. But FX market trends shifted in June. With fewer sources of supply, FX market pressures have been weakening the currency. On fiscal matters, political forces in Congress agreed on a special procedure to discuss and eventually approve reforms to rationalize pensions under the national budget. That’s a bit of light at the end of the tunnel that we anticipated in our May report.
Fiscal conditions in El Salvador continue to be a serious threat to economic stability, and are a main source of political confrontation. The think tank FUSADES recently warned that the government could have serious cash-flow problems for most of H2, increasing the risk of a payment crisis. In the last week of May, Congress authorized the government to issue $152 million of external debt to pay for public security programs. But the opposition continues to resist voting to authorize the $1.2 billion in external financing the government requested last March.
Now read on...
Register to sample a report