Uncertainty Is the Name of the Game

CENTRAL AMERICA - Report 24 Feb 2017 by Francisco de Paula Gutiérrez and Felix Delgado

In the short term, uncertainty is the name of the game for Central America. The escalation of protectionism in developed countries is evidenced by recent events such as Brexit and the U.S. presidential elections, reinforced by rising populist movements in Europe in the runup to elections. The impact of these developments on Central American countries in 2017-2018 will depend upon the timing and intensity of the new protectionist measures. Merchandise trade and FDI inflows are both matters of concern. A third threat is linked to more restrictive migration policies, which will particularly affect the Central American north triangle, in terms of displaced workers and remittance inflows.

The short-term outlook for Costa Rica looks negative and uncertain. As the country has been turning in fiscal deficits of up to 5% of GDP for several years, there’s little chance of postponing the negative consequences. Rating agencies share this view: Moody’s and Fitch have both issued downgrades. The external outlook also looks poor. Trade and FDI could be hurt by new protectionist measures. International oil prices are forecast to keep rising, a negative impact on terms of trade.

In El Salvador, political conditions continue muddled, after the rupture of talks by the opposition ARENA party, with news of confrontation alternating with reports of conciliation. After an official visit to Washington led by Finance Minister Carlos Caceres, the government has intensified calls for dialogue, since political agreements on key fiscal and pension issues are requisites for an IMF program. Government officials, meanwhile, sometimes employ the rhetoric of class struggle. We certainly can’t see a happy ending at the moment.

There are some glimmers of optimism in Guatemala. The Monthly Index of Economic Activity (IMAE), trend cycle, has started to recover, taking the y/y rate as of December to 3.42%, the highest of the year. The private sector confidence index on economic activity climbed to 58.04 in January´s expectations survey. This mood is also reflected in economic perceptions of investment, as 35.7% of people surveyed said they had a positive view, and none had a negative view. The nominal exchange rate appreciated from Q7.52 per dollar at the end of 2016, to Q7.38 as of February 21st. Headline inflation rate reached 3.8% y/y as of January, falling below 4% for the first time since December 2015.

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