Mixed Growth, Fragile Finances
Costa Rica is headed toward the second lowest GDP growth rate in the region, after El Salvador. Indicators show some improvement, though still suggest pessimism. The outlook for 2016 looks somewhat better: both imports and exports are on track to reverse their decreasing trend soon, as the effects of Intel’s pullout dissipate, and international oil prices reach their evident nadir. International reserves are firm at about 15% of GDP. There’s no threat to stability this year, but risks will increase in 2016, due to the lack of solutions to the fiscal deficit problem, and to the danger of capital outflows, drawn away by the interest rate increase in the United States. As current rating agency grades are in doubt, that could be another source of risk.
The fiscal deficit continues to be the main near-term challenge for economic policy. Financing options in 2016 will probably put pressure on the domestic financial market, and interest rates. In this report speaks of a long list of potential measures, but approval and implementation are uncertain.In El Salvador, this year’s economic activity rebound continued in September. Improvement could have been greater if remittance dynamism had not declined from 2014, as merchandise exports grew faster over the year. Fiscal deficit pressures tended to decline, per the warnings we raised in our November report, as the September and October deficit averaged three fourths of the January – August average. But fiscal conditions are still fragile, because the degrees of freedom of fiscal policy are reduced in a dollarized economy. Under such conditions, the possibility of fiscal stimulus to tackle low economic growth is reduced, or even null.
In Guatemala, the year of political turmoil took no visible significant toll on the macroeconomy. According to the Bank of Guatemala’s October economic expectations survey, the confidence index on economic activity increased. Real GDP could rise 4% this year, compared with our 3.7% forecast. Price stability is also positive, as the annual CPI change could be close, but below our 3% forecast for this year, and also under the Bank’s target range of 3% to 5%.For 2016, we think both economic growth and fiscal conditions could be clouded by the mystery of presidential direction: just a few weeks from taking office, President-elect Jimmy Morales has offered little information about his governing team, his plans or his priorities. A comprehensive analysis of the economy by the Bank of Guatemala, released in December, has set the basis for 2016 targets and policies.
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