Trump Plans Could Hit Migration and FDI
Uncertainty over the potential impact of President-elect Donald Trump’s economic decisions is high. If Trump makes good on his campaign promises, Central America will be negatively affected on several fronts. The main areas relate to migration, remittances, trade and foreign direct investment.
Central American migration to the United States has been relatively strong in recent decades. Private remittances sent by migrants are an important source of foreign currency, and a major support for private consumption spending. Hence, restriction and eventual deportation of migrants would create both a social and economic problem.
The region has also been attracting FDI. Changes in the rules to keep investments in the United States would have a negative impact on Central America, not only because these could slow down eventual future flows, but also because that could encourage firms already here to return to the United States. The free trade agreement between Central America, the Dominican Republic and the United States (CAFTA-DR) could also be affected, if the Trump administration decides to renegotiate the NAFTA. And a NAFTA renegotiation could also put CAFTA-DR on the table, since there are political groups opposed to the deal.
Hurricane Otto hit Costa Rica on Thanksgiving Day. In addition to several lost lives, there were severe damages, with heavy rain and winds destroying infrastructure and damaging productive areas. Headed into yearend, indicators signal real GDP growth of close to 4%; inflation below the lower boundary of the Central Bank´s target range; and moderate fiscal improvement. Yet economic vulnerabilities continue. The central government continues to carry large primary and financial deficits, keeping the debt-to-GDP ratio rising.
With its fiscal finances in critical condition, and a short-run cash shortage, El Salvador is finally seeing white smoke in political negotiations over fiscal matters. The most important new development was the November 10th agreement for fiscal sustainability, economic development and strengthening government liquidity, which President Salvador Sanchez-Ceren signed with ARENA and FMLN. The main short-term results were a partial authorization for new borrowing, blocked in Congress and/or the Constitutional Court for almost two years, and the approval of a fiscal responsibility act. Sales abroad are still down, while uncertainty is interfering with domestic investment and consumption.
Guatemala is receiving financial support from the World Bank, the IDB and the Central American Bank for Economic Integration to strength its institutional capabilities and walk through structural reforms Short term financial stability is not in doubt: the country has a low public sector debt-to-GDP ratio, a low fiscal deficit (of under 2% of nominal GDP), sound reserves ($8.9 billion), relatively controlled inflation (4.76% as of October) and a slightly appreciated currency.
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