Smooth Guatemalan transition expected; economies bearing up
Guatemala’s economy is expected to continue expanding in 2023 and 2024, though at a slower pace than in 2022. There are no signs of stagnation in our review of the forecast we presented in March. Internal political conditions in recent months have been complex, but we don't expect more political instability in the near term, and the transition toward the Bernardo Arevalo administration should proceed peacefully. Outgoing President Alejandro Giammattei has agreed to meet with Arevalo ASAP. Guatemala’s H1 macroeconomic results were mixed. For instance, though economic activity kept growing, confidence continued to stagnate. Inflation was controlled, and interest rates remained high. Fiscal accounts, while stable, deteriorated slightly from 2022. In our revised outlook, we don’t expect economic activity to overperform in coming months. We maintain our GDP growth forecast of 3.4% y/y for 2023 and reduce it to 3.5% y/y in 2024 (previously 3.7%), due to the expected U.S. economic slowdown. We foresee a slight deterioration in fiscal accounts during 2023, and an improvement in 2024. The fiscal deficit is expected to widen to 1.9% of GDP this year. The Bank of Guatemala will keep adjusting its monetary policy interest rate according to international and domestic conditions. We expect possible downward adjustments in Q4 2023 or Q1 2024.
Costa Rica’s economic activity is growing more robustly than expected, considering the adverse global conditions of slow growth, high inflation and increasing interest rates. Upward revision of Central Bank estimates for real quarterly GDP placed average growth in H1 at about 4.6% y/y. This is also signaled by the monthly index of economic activity. The main driver continues to be the FTZ, although the definitive (non FTZ) regime is recovering slowly. July inflation was again negative, the record in the Central Bank series since 1996. But prices of categories more demanded by low-income groups show resistance to decrease. The Central Bank’s upward revision of the economic growth series placed its 2023 estimate at 4.2% y/y. Although our forecast is conservative, considering several risk factors, we accept that this year growth could be higher if the current trend of key FTZ exports continues. But the Bank’s figure looks very optimistic to us.
El Salvador’s political evolution continues toward the reelection of President Nayib Bukele, which currently looks to be the most likely outcome. In a statement before Congress last June, Bukele stressed the successful war against crime and violence, and announced a second priority “war” against corruption. Criticism has intensified in international media about Salvadoran plans to begin collective trials against gang members in prison, arguing that they violate people’s right to a fair trial. Economic activity remains decelerated, since merchandise exports and foreign remittances have slowed from 2021 and 2022. The negative effect of high inflation on consumer spending runs in the same direction. In our June report, we warned about the April wipeout of the pension debt from the official public debt statistics. As this situation persists, our outlook analysis will make the necessary adjustment to reflect our opinion about the true size of the public debt.
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