Guatemala: Showdown
The next 18 months will be crucial for Guatemala. The country has exited from major crisis mode, but still has not embarked upon an optimistic path. H1 had a “business as usual” feel. The economy grew just above 3.1% y/y in H1, with inflation within the Central Bank’s 3%-5% target range. The fiscal situation was under control in terms of financial results, but is still in debt over expectations for structural change that could improve competitiveness, and advance human development. The external sector is basically in equilibrium, due to a high inflow of private remittances. Net international reserves at nearly $9 billion are at record levels, and the quetzal has suffered appreciation pressures, mainly after May’s $700 million Eurobond placement.
Our outlook for 2016-2017 calls for current trends to continue. Real GDP is expected to grow 3.5%-4%, fueled by domestic demand, as private remittances keep increasing. Inflation should stay on target, and the fiscal balance will benefit from an expected tax reform, while public spending is expected to normalize. The value of merchandise exports and imports will increase as commodity prices rise, and the rising trade deficit will be compensated for by services and transfers, to basically balance the current account. Monetary policy will continue to be orthodox, and the currency stable.
Costa Rican inflation turned positive in July, after 12 months in negative territory. We anticipated that reversal, in part due to the evolution of international oil prices as well as to currency depreciation of about 2% since the end of May. Economic growth is showing positive signals -- the index of economic activity increased close to 5% y/y during H1, and the 12-month average reached 4% at the end of June -- while the basic interest rate for deposits has kept falling. The latter comes from methodological changes by the Central Bank, as most interest rates for deposits has remained fairly stable.
In El Salvador, intense negotiations between the government and opposition parties continue, in an effort to solve the difficult fiscal situation, and to avoid a public finance payments crisis in coming months. Lack of confidence in government intentions has created a political impasse, hampering consensus over how to address the fiscal deficit and the increasing public debt. A fiscal responsibility act and clear guidelines for the 2017 national budget are the main demands of the ARENA political opposition, in exchange for agreeing to authorize $1.2 billion of new debt the government has been requesting since March.
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