GUATEMALA: The Good and the Bad
This year hasn’t been bright for the Guatemalan economy. Real GDP growth is expected to fall below the 3.1% of 2016, despite U.S. economic recovery and large private remittance inflows. Inflation will be in the upper parte of the 3%-5% target range. Monetary policy remains under the control of the Bank of Guatemala, and the currency appreciated in both nominal and real terms. The government has shown limitations in budget execution, so the fiscal deficit will be below 2% of GDP, and the government´s debt will finish the year at just below 25% of nominal GDP.
Political factors, which continue to create domestic noise, aren’t helping. Private sector expectations are on the low side. The private sector confidence index reached 20.84 in October, its lowest value since July 2009, during the Great Recession. Amid such subdued sentiment, it’s unsurprising that no survey respondents consider this a good time to invest, and only 13.3% expect the economy to improve in the next six months.
Costa Ricans on Feb. 4th will go to the polls to elect a new president, two vice presidents and a new Congress. Though the cards are already on the table, the results are still very uncertain. The new administration won’t have it easy. Costa Rica runs a fiscal deficit of over 6% of nominal GDP, and a government debt to GDP ratio of close to 50%. It will also have to deal with a fragmented new Congress; since no party will command a majority, representatives will be obliged to continually negotiate plans and policies. That has been the situation since 2002, when the two-party system broke down, with well-known results: two fiscal reform programs, approved after long processes, were ruled unconstitutional by the Court, due to procedural problems.
El Salvador is still failing to reach consensus over fiscal measures, marked by radical political discrepancies. That makes us skeptical of the government’s ability to achieve positive results in the short-term. The only signal of dynamism comes from foreign remittances, prompted by announcements of U.S. government immigration policies, and recent decisions for other Central American countries. The fiscal deficit hasn’t been expansionary in H2. Investment is being moderated by uncertainty over the economic outlook, and by political confrontation. Capital inflows in general and FDI in particular continue to be low. Credit to the private sector has been growing at a low and stable 5.5% to 6% for the past 18 months. So we don’t expect significant deviations from our economic outlook this year.
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