Guatemala: Reverting to Normal
After a rollercoaster year, with the political situation driving the action, Guatemala seems to be normalizing. Back are the days when corruption scandals erupted almost every month, and people were calling for the resignation of President Pérez and Vice President Baldetti -- both now in prison, awaiting the judicial process that will decide their future. The process continues, with new corruption discoveries -- but the turbulence seems to be dissipating. The economy is nonetheless showing strong resilience. Real GDP grew 4.1% last year; inflation was 3.1%, slightly above the lower limit of the inflation target range; the current account deficit was only 0.4% of nominal GDP; and the fiscal deficit closed at 1.5% of GDP, as spending contracted. The yearend exchange rate closed at Q7.63 per dollar, up just 0.4% over the year.
The economic situation for 2016-2017 won’t be different, though the political environment will be better. We are forecasting growth of nearly 3.8%, and inflation within the Bank of Guatemala´s target range (3%-5%). International price trends, and the moderate growth of the U.S. economy, will keep the CAD fairly low. The fiscal deficit, although higher than in 2015 due to the normalization of the political situation, will stay in the 1.6%-2% of GDP range. That will keep public debt levels relatively low, at around 24%-25% of nominal GDP.
In El Salvador, controversies over pension system reform are the dominant issue. The official proposal was presented to Congress on February 22nd. This would create the National Pension Institute (NPI), funded by the obligatory contribution of all workers of up to two minimum wages (some $500/month), to the new public pay-as-you-go system (PAYG), similar to the one that prevailed until 1998, when pension reform turned on individual accounts managed by private pension operators. The proposal would create a mixed pension system. The current debt of the government to private pension operators would be transferred to the NPI as an initial contribution to the PAYG system.
In Costa Rica, an IMF Article IV mission visited the country, during the last two weeks of February and the first week of March. The mission stressed the importance of advancing the fiscal reform plan to cut the deficit, which, absent relevant actions, is projected at 6.5% of GDP for 2016 and close to 9% of GDP by 2021. Debt sustainability is at risk: The central government´s debt-to-GDP ratio, which in 2008 stood at 28%, reached 42.4% in 2015 and, without relevant fiscal actions, will rise to nearly 70% by 2021 -- the year Central America celebrates the 200th anniversary of its independence from Spain.
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