Weathering the storm
In El Salvador, we continue to perceive calm political conditions, a month before legislative and municipal elections. Despite serious fiscal problems, now aggravated by the pandemic, the absence of discussion of hot topics related to fiscal adjustment amazes us. As we’ve said in previous reports, this inertia seems driven by the desire to avoid controversies that could alter the comfortable advantage the New Ideas Party holds in the contest to win both those elections and a congressional majority for the next three years, according to polls. Our hypothesis is that President Nayib Bukele expects his party to win Congress by an ample majority. That would allow him to start governing unimpeded on May 1st, with little need to negotiate with other parties, at least for initiatives requiring a simple majority. COVID-19 continues to be under relative control, making eventual new restrictions unlikely. Economic activity continues to gradually recover, with the results to be observed this year, as real growth in 2020 is expected to fall by somewhat less than our -7.8% estimate. This will be supported by the surprisingly strong performance of family remittances. The fiscal deficit will exceed our projection, though, aggravated by a 2021 national budget poised to grow 16%, with little sign of an urgent adjustment program.
The first weeks of 2021 brought two interesting pieces of news to Costa Rica. First, there was the agreement reached on January 22nd between Costa Rican authorities and the IMF staff team, after 15 days of “virtual” discussions. The proposed program is for a three-year, $1.75 billion Extended Fund Facility. Second, there was the publication of the preliminary figures of the 2020 fiscal accounts, which show that fiscal disequilibria are smaller than previously anticipated, although significant enough to remain the major concern of the short-term economic horizon. These two events, together with the starting of the COVID-19 vaccination process, removed some clouds from the difficult situation facing the country.
Guatemala´s economy has performed much better than most other Latin American countries have during the pandemic. The country managed to experience only a moderate GDP decline (estimated by Bank of Guatemala at -1.5%), while maintaining relative stability. Inflation closed within Bank of Guatemala´s target range; the exchange rate remains stable (at just a 1.2% depreciation); and the Bank´s NIR position improved (up to $18.5 billion). The increase in the fiscal deficit (up to 5.3% of GDP) reflects the active use of fiscal policy to reduce the impact of the pandemic, and we think it will be reverted, as the situation tends to normalize, with the application of the vaccine. However, the structural problems of the economy remain unsolved, as reflected in the latest issue of the Human Development Report, where Guatemala ranks 127th out of 189 countries and territories. That is the major challenge Guatemala faces, as it approaches the 200th anniversary of its independence.
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