Central America: Economy expands at slowest pace in nearly four years in Q4

Central America: Economy expands at slowest pace in nearly four years in Q4

April 20, 2016

In the final quarter of last year, Central America and Caribbean region’s economy decelerated over the previous quarter’s increase and expanded at the slowest rate in nearly four years. According to a more complete set of data, GDP expanded 2.8% on an annual basis (Q3: +3.3% year-on-year). Looking at the countries individually, in Q4, Panama’s economy slowed mainly on the back of a weak service sector. Decelerations were also recorded in Costa Rica and in the Dominican Republic, even though growth in the latter remains at relatively-high levels. For the full year 2015, the region grew 3.2%, thus matching the expansion tallied in 2014.

Panama’s service sector and lax tax exchange information system have been thrust into the spotlight following the unprecedented leak of millions of documents from the Panamanian law firm Mossack Fonseca. Although the leak is not expected to have an impact on Panama’s economy in the short-term, it will likely lead to a push for more regulatory scrutiny. Elsewhere in the region, against the backdrop of a deteriorating debt crisis, last month, Puerto Rico’s Parliament passed a bill that allows the government to halt debt payments to its creditors. The bill, which permits Governor Garcia Padilla to declare a moratorium on any debt payment that he deems necessary, might jeopardize the ongoing restructuring plans between Puerto Rico and the bondholders.

Read our most recent regional summary of the Central America and Caribbean economy

Outlook stabilizes for the third consecutive month

In April, the economic outlook for the Central America and Caribbean region was left unchanged again after last month's projection. In 2016, the region will likely grow faster than Latin America and will continue to benefit from the recovery in the U.S. as well as from low oil prices. The analysts we polled this month see the region’s GDP increasing 3.1% in 2016. Analysts kept their forecasts unchanged for 5 of the 12 economies surveyed, including Costa Rica and Puerto Rico and Jamaica. Conversely, analysts cut the GDP forecasts for five other countries including Nicaragua, Panama and Trinidad and Tobago. The Dominican Republic and Guatemala were the only countries for which the 2016 growth outlook was upgraded this month. In 2017, the Central American and the Caribbean region is expected to grow 3.3%.

Panama will be the country with the fastest growth rate in 2016 and the Dominican Republic will likely be the second-fastest economy with projected expansions of 6.0% and 5.3%, respectively. At the other end of the spectrum, Puerto Rico will likely be the worst performer as its economy is expected to contract by 0.8%.

COSTA RICA | Economy gains momentum in the first quarter

According to the revised methodological framework adopted by Costa Rica’s Central Bank, GDP grew 3.8% in Q4 and expanded 3.7% in the full year 2015. Q4 growth marked a deceleration from the 4.2% increase registered in Q3 reflecting a deterioration in the external sector’s contribution to growth. Despite the lower cost of imported fuel, the total value of imports increased, thereby detracting from economic growth in Q4. Overall, economic activity in Q4 was still robust and the monthly IMAE economic activity indicator has picked up speed in 2016. However, the country still faces a burdensome fiscal imbalance. Low tax revenues and weak growth pushed the fiscal deficit to a record 5.9% of GDP in 2015, sparking concerns from the IMF and the OECD over the country’s fiscal stability.

The fiscal hemorrhaging that has tarnished Costa Rica’s outlook is unlikely to abate this year. Luis Guillermo Solis’ administration has proposed a series of bills that are designed to improve tax collection, however, it is doubtful if the fragmented Congress will pass said bills. Analysts see the economy expanding 3.7% in 2016, which is unchanged from last month’s projection. The panel foresees GDP also growing 3.7% in 2017. 

DOMINICAN REPUBLIC | Growth prospects remain positive amid strong fundamentals

The economy, supported by solid macroeconomic fundamentals, continues to perform well, although the latest GDP data point to a slight moderation in the growth rate. The economy decelerated to 6.1% growth in Q4 and expanded 7.0% in the full year 2015, which was marginally down from 2014’s growth. The slowdown in Q4 was mainly due to a contraction in mining activity. The mild loss of momentum carried into 2016, as evidenced by the latest monthly indicator for economic activity, which showed a slight decline in February. In the political arena, presidential elections are scheduled for 15 May. The latest polls show incumbent President Danilo Medina, from the Dominican Liberation Party, widening his lead over his main opponent, opposition leader Luis Abinader from the Modern Revolutionary Party.

The economy is set to continue expanding in 2016, albeit at a slower pace than in 2015. Moderate growth prospects for the global economy in 2016 will weigh somewhat on the Dominican economy. However, macroeconomic fundamentals—strong investment, stable consumption and sustainable public finances—will continue to support growth. Analysts expect the economy to grow 5.3% in 2016, which is up 0.1 percentage points from last month’s projection. For 2017, the panel projects GDP to increase 4.4%. 

GUATEMALA | Economy maintains positive momentum in Q1 due to strong remittances

Guatemala’s economy moderated last year, although performance was still robust considering that the slowdown was driven by a decrease in government spending, while consumer-driven demand, which is the main driver of growth, soared to record-breaking highs. Remittances growth, which contributes to consumer demand, surged in the first quarter of 2016, marking the strongest gains in nearly eight years. Like other Central American economies, Guatemala’s outlook is closely linked to that of the U.S., which is by far Guatemala’s largest trading partner and source of remittances. On 12 April, Parliament approved an act that regulates microfinance institutions. Guatemala currently has USD 334.7 million of loans in the fast-growing microfinance sector and the new law should pave the way for further sustainable growth in the industry.   

A steadily expanding U.S. economy and solid growth in financial services, including microfinance services, will help to maintain Guatemala’s economic momentum. However, political turbulence, crime and corruption pose risks to growth. FocusEconomics Consensus Forecast panelists forecast that the economy will rise 3.5% this year, which is up 0.1 percentage points from last month's projection. Next year, the panel sees GDP inching up to 3.6%.

PANAMA | Unprecedented leak likely to have a limited impact on the economy

The Panamanian economy remains resilient despite facing a challenging external environment.Following a sluggish December readingeconomic activity picked up slightly in January. Moreover, the planned opening of the Panama Canal expansion on 26 June, along with a toll hike, promises to boost the economy. On the downside, the recent leak of more than 11 million documents from a Panamanian law firm have put Panama’s service sector and lax tax exchange information system in the spotlight. Although the leak is not expected to have a short-term impact on the economy, the fallout could deter foreign investment and weaken the country’s financial sector in the long term.

Ongoing strength in Panama’s diverse service-oriented sectors and substantial public investment will continue to foster growth going forward. Analysts expect the economy to expand 6.0% in 2016, which is down 0.1 percentage points from last month’s projection. For 2017, the panel forecasts growth of 6.1%. 

INFLATION | Regional inflation edges up in February, outlook for 2016 moderates

According to a more complete set of data, inflation in the Central America and Caribbean region accelerated slightly in February, advancing from 3.1% in January to 3.2%. The figure marked the highest reading in over a year. A preliminary estimate for March elaborated by FocusEconomics shows that inflation eased slightly to 3.0%. Inflationary pressures will likely remain stable for the rest of this year. Forecasters polled by FocusEconomics in April downgraded their inflation forecast for 2016 from the previous month’s 2.8% to 2.7%. The forecast was reduced for 7 of the 12 economies surveyed, including Costa RicaPanama and Puerto Rico. Conversely, panelists upgraded their inflation estimates for four other countries including Guatemala, Nicaragua and Trinidad and Tobago. The forecast for El Salvador was the only one that was left unchanged. Panelists expect regional inflation to accelerate and end 2017 at 3.2%. 

Get the Full FocusEconomics Central America & Caribbean Report

Written by: Dirina Mançellari, Senior Economist


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