High hopes for Guatemala, as neighbors struggle
In Guatemala, private sector confidence has improved since President Bernardo Arevalo took office in January, and expectations within the country are high. In Bank of Guatemala surveys, most respondents said they expected the economic situation to improve in the next six months. Arevalo is working hard to strengthen Guatemala’s relationship with several nations to increase foreign direct investment and exports, and to address long-term problems, such as migration and poverty. We consider it too soon to evaluate progress in some of these areas. Nevertheless, as several credit rating agencies and even the IMF have stated, the outlook is positive. In this revised outlook, we do not expect economic activity to outperform in coming months. We maintain our GDP growth forecast of 3.4% y/y for 2024 and reduce it to 3.6% y/y for 2025 (from 3.8%), due to the expected U.S economic slowdown. The main risks for Guatemala are related to international conditions. First, weaker-than-expected global growth could reduce the value of remittances and affect economic growth estimates. Second, if the United States experiences a major slowdown, the effect will be negative, due to Guatemala’s heavy dependence on the U.S. economy.
Costa Rican political conditions continue to worsen, due to the escalation of confronting positions from the executive branch toward the legislative and electoral bodies. The draft bill proposed by President Rodrigo Chavez to call for a referendum aimed at reforming supervisory power of the Comptroller General is the latest source of disagreement. By end-July the Constitutional Court declared unconstitutional several articles of the draft bill that weaken the checks and balances system to control the use of public resources. The economic evolution showed deceleration compared to 2022 and 2023. Public sector balances worsened, due to the combination of slower tax collection and faster current expenditures. Merchandise exports were also less dynamic than in previous years, mainly due to the negative effect of a large appreciation of the domestic currency, particularly since 2023. We believe that a very restrictive monetary policy stance between end 2022 through October 2023, which has persisted to some extent through today, was responsible for 13 months of negative inflation before July 2024, also affecting competitiveness of exporters, including from the FTZ.
The El Salvadoran government’s threats against food shopkeepers reported in our July issue, accusing them of price manipulation and speculation, had no further consequences, such as repression or hostility from public supervisors, apart from the measures described there. Nonetheless, food price increases have slowed since June, but still rose faster than the H1 average. Public policies anticipated by President Nayib Bukele in his inaugural speech of June 1st, 2024, to address economic problems with hard measures for the public, have not yet been announced. Economic activity deceleration has deepened during H1 2024, mainly due to the poor evolution of merchandise exports and foreign remittances, not offset by services exports and FDI, which continued to be at the lowest levels in Central America. Fiscal conditions are also deteriorating, despite new tax collection, due to increasing current expenditures, including on interest payments.
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