Central America Economic Forecast

Economic Snapshot for Central America

February 15, 2017

Economic growth decelerates in 2016

Central America and the Caribbean managed to accelerate timidly in the second half of 2016 supported by improving dynamics in the U.S., which translated into higher remittances and exports, and the recovery in commodities prices. Overall, however, in the full year 2016, growth in the region decelerated to 3.0% from 3.3% in 2015, according to preliminary estimates. Moreover, despite the improving momentum in the second half, clouds are now gathering on the horizon. U.S. President Donald Trump is delivering on his campaign promises to strengthen migration controls. Although no countries in the region are yet affected by Trump’s restrictive policies, there is growing concern that a tougher stance on migration policies in the region could negatively affect all-important remittance flows from the U.S. Moreover, faster-than-expected growth in the U.S. could prompt the Fed to tighten its monetary policy more quickly than previously anticipated, which could fuel volatility in the region’s financial and exchange rate markets.

The Dominican Republic continued to be the fastest growing economy last year. Despite decelerating, the economy benefited from surging tourist arrivals and strong remittances, particularly from Spain and the U.S. In Panama, growth remained resilient in 2016 but it decelerated to a multi-year low as a result of sluggish global trade. Moreover, regional growth in 2016 was plagued by outright contractions in Belize, Puerto Rico and Trinidad and Tobago. Belize is suffering from plummeting sugar and fishing exports, while oil and gas production continues to drop in Trinidad and Tobago. Meanwhile, Puerto Rico’s economy remains in the doldrums as a result of the never-ending debt saga.

Region set for steady growth in 2017

Economic growth is expected to perform at a broadly steady pace this year. Our analysts expect GDP to expand 3.1% in 2017, which is unchanged from the previous two month’s estimates. This month, growth projections were revised down for Haiti, Honduras, Panama and Puerto Rico. Forecasts were revised up for the Dominican Republic, while they were left unchanged for the other seven countries, including Costa Rica, Guatemala and Nicaragua. Our analysts expect growth to stabilize at 3.1% in 2018.

Panama will be the fastest growing economy this year with an expected growth rate of 5.6%, followed by the Dominican Republic and Nicaragua, in that order. In contrast, the economies of Puerto Rico and Trinidad and Tobago are expected to be the worst performers. 

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COSTA RICA | Political gridlock casts cloud on fiscal sustainability

Costa Rica’s economy ended 2016 on a strong footing, with economic activity expanding across the board at a solid pace in December, culminating a year of sustained growth. However, the country’s sizeable budget deficit and rising debt-to-GDP ratio remain a cause for concern, with preliminary data for 2016 showing a deficit slightly larger than expected. In response to the worrying fiscal situation, Fitch Ratings recently downgraded the country’s credit rating, citing the government’s failure to garner sufficient parliamentary support for its tax reform plan as an additional reason for the re-rating. In a bid to tackle the problem and put an end to the political gridlock, the government presented a watered-down fiscal reform at the end of January. The new proposals still include changes to income tax and the introduction of a Value-added Tax to replace the current sales tax, but at a lower rate than previously planned.

Economic growth is likely to dip slightly this year but will remain strong, thanks to increases in private consumption and investment due to low interest rates and credit expansion. Analysts expect the economy to expand 4.0% in 2017, which is unchanged from last month's forecast. For 2018, the panel expects GDP growth of 3.9%.

DOMINICAN REPUBLIC | Infrastructure investments, remittances and tourism propelled growth in 2016

According to recent data from the Central Bank, GDP expanded 6.6% in 2016, registering the fastest growth rate in Latin America for the third year in a row. Growth was broad-based but came in particular on the back of a strong rebound in silver and gold production. In addition, a booming tourism sector stimulated the upgrading and diversification of tourist facilities which, together with strong public infrastructure spending, supported the construction sector. The good health of the U.S. labor market pushed up remittances, fueling both private consumption and the financing of small businesses. Moreover, the robust expansion in credit activity supported growth in financial services, which reflects the strength of the banking sector. Last year, the economy enjoyed healthy macroeconomic conditions, which were facilitated in part by the stable political environment, reinforced by the re-election of Danilo Medina.

This year, growth will remain robust, despite decelerating. The slowdown will come on the back of a less favorable external sector, slowing domestic demand and a high base of comparison. Tighter financing conditions stemming from the Fed’s rate hike cycle and a protectionist shift by the Trump administration represent the main downside risks. FocusEconomics analysts expect the economy to expand 5.0% in 2017. For 2018, the panel projects that GDP will increase 4.5%.

GUATEMALA | Political developments threaten 2017 growth

The Guatemalan economy likely accelerated in the fourth quarter of 2016, despite an increasingly uncertain political environment. The Central Bank’s monthly economic activity indicator suggested that growth picked up further momentum in December, recording its fastest expansion in a year and pushing the quarterly average above Q3’s disappointing GDP result. Meanwhile, remittances, which account for nearly 10% of GDP, started off 2017 on a solid footing. The upswing in economic activity remains susceptible to political unrest, however, and controversial President Jimmy Morales’ legitimacy and ability to govern are being called into question following the arrest in January of his brother and son on corruption charges. He had been elected in late 2015 on an anti-corruption platform after large-scale protests had forced the previous, scandal-ridden administration to resign.

Donald Trump’s stricter U.S. immigration policy, which could disrupt the flow of remittances to Guatemala, coupled with the increasingly fragile political situation are the main risks to the outlook. FocusEconomics Consensus Forecast panelists forecast that GDP will grow 3.7% in 2017, which is unchanged from last month's estimate. In 2018, the panel also expects GDP growth of 3.7%.

PANAMA | Government continues infrastructure investment

The economy has been consistently decelerating since growth peaked at 11.8% in 2011. Completion of the Panama Canal expansion, flagging global trade and a general deceleration in Venezuela and Colombia, the country’s main trading partners in the Colón Free Trade Zone, have been to blame for the slowdown. Although 2016 is set to mark the slowest expansion yet since 2009, the country is in fact still among the most dynamic in the region and its economic fundamentals remain sound. Economic activity accelerated in November, and in January the government announced its plan to invest USD 5.1 billion in infrastructure projects this year alone. An improved economic outlook for the region in 2017 should also support growth in the country’s all-important services sector.

The economy is expected to remain among the fastest growing in the region for another year. Risks, however, are tilted to the downside as the growing prospect of trade protectionism, flagging maritime trade and a slower-than-expected recovery in Latin America could dent growth. Analysts expect the economy to expand 5.6% in 2017, which is down 0.1 percentage points from last month’s forecast. For 2018, GDP is expected to also grow 5.6%.

INFLATION | Inflation accelerates in December      

Inflation rose from 2015’s multi-decade low of 1.7% to 2.0% in 2016. The print reflected higher inflation in most countries in the region, including Belize, Costa Rica, Guatemala, Haiti and Panama. Conversely, inflation decelerated in the Dominican Republic, Jamaica and Trinidad and Tobago. Moreover, El Salvador experienced a decline in consumer prices in 2016.

Our Consensus Forecast panelists left their inflation estimates for 2017 unchanged at 3.1% for the third month in a row. For 2018, inflation is expected to increase to 3.4%. 

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Written by: Dirina Mançellari, Senior Economist

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