Next challenge: tackling structural problems.
Costa Rica is expected to maintain discipline in public finances under the fiscal rule implemented in the 2018 legislation, although shielding the fiscal advances to reinforce medium and long-term sustainability is important. Public policies are a next step in addressing several lagged social and economic problems. As imported inflation recedes, room will be available to loosen monetary policy that threatens to discourage private investment and spending, and distorts basic financial balances between goods prices, banking interest rates and the exchange rate. Structural challenges must be tackled, after most efforts concentrated in the external shocks from the pandemics and the war in Ukraine. Such measures include improving productivity, education, infrastructure and social conditions, and facing the current dichotomic productive setting, with a very dynamic free-trade zone regime and a stagnant domestic-based economy. Adverse conditions abroad, and the effect of domestic monetary policy restrictions since 2022, will undermine economic growth this year, though growth should resume slowly in 2024, at a more gradual pace than in the two previous years. Both external and fiscal deficits would be lower than last year, while domestic inflation is expected to enter the tolerance range of the Central Bank by the end of 2023.
International investor perceptions of El Salvador’s sovereign bonds continue to improve, as evidenced by the fall of the J.P. Morgan EMBI index. February news includes the concluding statements of the Art. IV IMF mission in El Salvador, which could affect that perception; the statement reiterates January 2022 recommendations of a substantial fiscal adjustment and elimination of legal tender for bitcoin. A protest march against various decisions of President Nayib Bukele took place in mid-January, among them measures against crime and violence, and Bukele’s wish to run for another term in 2024. Monthly economic activity figures continue showing increased rates, of around 5% y/y. Merchandise exports and imports maintained double-digit readings, with a very gradual drop. Government financial results were lower than expected, and mostly financed with domestic sources. Inflation shows a very soft landing, after peaking at 7.8% y/y in June 2022.
Guatemala´s stable macroeconomic indicators helped it achieve a sovereign ratings upgrade, with Fitch on February 16th upgrading government bonds from “BB-” to “BB,” with a stable outlook. It will be difficult to see further improvements soon, since many barriers limit growth. In a situation where the economy grows well, external vulnerabilities are low and fiscal deficits will remain small, government financial needs can be fulfilled in the domestic market. This is why the outlook for Guatemala is favorable. The country faces a complex political landscape in the runup to the June presidential elections. No candidate commands anything close to the 50% of the vote required for a first-round win. Guatemala could have a woman president for the first time in its history: in the latest CID-Gallup poll, Zury Ríos and Sandra Torres continued to lead voter intentions, with 21% and 20%, respectively. Both candidates have run for president in the past. All candidates are promising to tackle corruption, and to address the structural problems that are the main drivers of Guatemalan migration.
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