Outlook mixed, with traditional politicians contenders
Costa Rica´s economy presented a mixed balance during H1. On the positive side, the country displayed good momentum in real sector accounts, inflation dropped faster than expected and international reserves increased. On the negative side, economic activity in the definitive regime remained low, job creation was negative, interest rates in the financial system remained high and the exchange rate appreciated. Overall, during the first six months of the year, most indicators evolved according to our February 2023 forecast. The major deviations were in macro prices. The coming 18 months will be challenging for Costa Rica. Consumers and business will keep dealing with the effects of still-high prices, slower U.S. growth and less active private expenditure on consumption and investment. On the political side, risks of social and political instability have increased. For 2024, we foresee a more active expansion of domestic production to 3.4% y/y, driven by lower interest rates, smaller inflation rates and the improvement in disposable income due to a recovery in the terms of trade. Nevertheless, growth rates of private consumption and investment will not be as dynamic as in 2015-2019.
Since the first round of the presidential election in Guatemala, uncertainty has risen. This is, first, because the Constitutional Court ordered a recount of the votes after fraud allegations. The second reason is that the Semilla Party was suspended by the prosecutor’s office after allegations of irregularities in the registration of more than 5,000 party members. Guatemalan law states that a political party cannot be suspended in the middle of the election, and the Electoral Court had already validated the first-round results. It appears that the second round will proceed, unless another surprise arises, which is unlikely. The second ballot of the presidential elections will be held on August 20th, between Bernardo Arevalo and Sandra Torres. It won’t be easy for Torre to win. This will be the third time she is trying to win an election. Arevalo is considered an outsider of the traditional political parties. Both candidates have promised to tackle corruption and boost economic growth. Whoever wins this election will face the same long-term challenges in Guatemala: low private and public investment, low tax revenues, high corruption, insecurity, strong dependance on remittances and very unequal income distribution.
El Salvador will conduct presidential elections in February 2024, with current President Nayib Bukele as a candidate, despite persistent controversies about the constitutionality of his running for reelection. Public opinion surveys show an increase of negative positions about economic conditions, but we believe there is a low risk to Bukele’s electoral success. Minister of Finance Alejandro Zelaya was named as representative in the board of CABEI, and was replaced by Deputy Minister Jerson Posada. Economic growth shows deceleration, with Central Bank estimates of Q1 2023 (0.8% y/y), an unsurprising result, considering adverse external conditions, the negative effect of inflation on consumer spending, and uncertainty over government liquidity trends. The recent congressional authorization for new debt for up to $1 billion aims to replace short-term debt for the long-term, thereby helping to free margins to place new LETES and CETES.
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