A Brief Analysis of the Central America and the Caribbean Economy
A sometimes overlooked region, the Central America and Caribbean economy is very important to the global economy. There is quite a bit going on in the region at the moment, including public unrest, corruption scandals and yet robust economic growth in many of the region’s economies. To get a better idea of what is happening in the Central America economy currently and how it looks for the foreseeable future, we asked some of our economists responsible for the region to give us an update. Here are their responses:
Central America Overview
Fiscal stimulus in the U.S., the region’s largest trading partner, will propel growth in Central America this year, supporting remittances, exports and tourism. Looking at a country-by-country picture, Panama’s economy will enjoy another stellar year thanks to strong fixed investment growth and solid earnings from the expanded Panama Canal. In Costa Rica, greater political certainty following victory for the establishment candidate in the second round of presidential elections should boost confidence, while Guatemala’s economy will be buoyed by robust infrastructure spending. Risks stem from faster-than-expected monetary tightening by the Fed, which would tighten financial conditions in Central America. Rising global protectionism and higher oil prices could weaken the external sector.
In general terms, Central America will likely find it difficult to make substantial headway in reducing fiscal imbalances. This is partly because many necessary measures—such as tax rises, subsidy cuts and pension reforms—could be politically unpopular, as demonstrated by recent unrest in Nicaragua over the government’s attempt to increase pension contributions. Another potential stumbling block is parliamentary arithmetic. In the case of Costa Rica, for instance, newly elected President Carlos Alvarado lacks a majority in parliament and could struggle to pass substantial fiscal reform measures. However, with its pension bill approved late last year, El Salvador showed that well-prepared proposals with broad-based support can bridge the political divide and overcome a fragmented legislature. Our panelists see Central America’s fiscal deficit coming in at 2.8% of GDP this year and narrowing only slightly over the forecast horizon to 2022.
- Central America Economist Oliver Reynolds
The latest from Costa Rica
What to expect from the new government and future economic policy
Carlos Alvarado and his new government will take the reins of a country whose public finances are flashing red. Moreover, when Alvarado takes office on 8 May, his political party, the Citizen’s Action Party, will only have 10 out of the 57 elected lawmakers in the Legislative Assembly. The extent to which his economic agenda can be enacted is therefore not entirely in his party’s hands.
The fiscal balance deteriorated to a deficit of 6.2% of GDP last year, the largest on record, and it continued to worsen in the first quarter this year, highlighting the urgent need for fiscal reforms. Alvarado supports the imposition of a fiscal spending rule, constraining government current expenditure levels, and transforming the current sales tax into a Value Added Tax with a wider range of taxable goods and services. All in all, he aims to bring the fiscal deficit down to 2.0%–3.0% of GDP by 2022. He has also outlined measures to shore up the country’s flagging economic growth, such as completing its entry into the OECD, establishing greater incentives to hire workers with disabilities, and promoting the science and technology industries. If effectively enacted, this encompassing agenda should improve Costa Rica’s economic outlook.
FocusEconomics Consensus Forecast panelists surveyed last month expect Costa Rica’s economy to expand 3.5% in 2018 and 3.6% in 2019. In terms of the country’s fiscal balance, they pencil in a deficit of 6.8% of GDP for 2018 and 6.6% of GDP for 2019.
FDI in Costa Rica and its longer-term prospects
Foreign direct investment (FDI) in Costa Rica, which benefits from an educated population and a friendly inward investment environment, was strong last year, despite uncertainty in the run-up to this year’s elections and higher interest rates. FDI was particularly strong in the tourism sector and in areas of the country that operate as free trade zones.
This year, the tourism sector should continue to support FDI in Costa Rica, as the country continues to be an attractive travel destination and important works such as the opening of a new Planet Hollywood are in the pipeline. Moreover, the longer-term prospects for the sector are likely to also benefit FDI, particularly if a recent Central American Council of Tourism proposal to create a common regional tourist visa gets off the ground.
However, risks to the FDI outlook for Costa Rica and the Central American region include a general rise in protectionism. This would be concerning for Costa Rica given that its economy depends to a large extent on FDI to finance persistent current account deficits.
- Costa Rica Economist Edward Gardner
The latest from Guatemala
The future of economic growth and its distribution between industries
Remittances from the U.S. have buoyed consumer spending in recent years and are expected to continue fueling consumption-driven growth in the years ahead, barring a slowdown in the U.S. or any abrupt policy changes by the Trump administration. That said, on the international stage, the two countries have been in lockstep in recent months, and warmer relations are likely to go some way in keeping stricter policies targeting Guatemala off the books in the U.S. Tepid government spending is set to get a much-needed boost over the next few years as heavier outlays into education and infrastructure are realized. Investment is seen picking up as economic sentiment recovers from years of political scandal and following recent government moves towards greater transparency.
How President Jimmy Morales’ corruption scandal affects current economic policy and the future of Guatemala’s government leadership
President Jimmy Morales has burned much of his political capital amid unending scandals, making it increasingly difficult to enact further (and sorely needed) economic reforms ahead of next year’s elections. Unfortunately, Congress also faces significant challenges as gridlock and political fragmentation keep necessary progress from materializing. Center-right parties still hold the advantage going into the elections, but they could see formidable challenges from political outsiders promising to crack down on corruption. Outgoing Attorney General Thelma Aldana now looks to be the one to beat given her broad popularity, influential political backing and anti-corruption agenda.
How foreign investment is affected by recent government corruption and instability
Investor confidence was badly shaken by the political scandals of the past few years, with international investors holding off as the crises unfolded. FDI inflows have been falling in recent years as political instability scared away more risk-averse investors. As the country looks to be moving away from the depths of these scandals, however, there is renewed hope that stronger foreign investment will eventually return.
- Guatemala Economist Christopher Thomas
The latest from Nicaragua
How the recent calling off of pension reform affects the ongoing deficit
Last year, the SPNF (non-financial public sector) deficit fell to 1.9% from 2.0% in 2016, despite a substantially larger INSS (social security institute) deficit. This came on the back of a healthier financial position in state-owned enterprises. However, with the pension reform shelved for the time being, the INSS deficit is likely to increase further this year, which should see the SPNF deficit rise too. The IMF had previously warned that liquid reserves could be exhausted by 2019 without fundamental structural changes to shore up the system. On the positive side, the impact on the public debt ratio should be limited, thanks to expected robust GDP growth. Last month our panelists expected the fiscal deficit to reach 2.2% this year and 2.2% again in 2019.
How recent riots will affect government stability and the economy
The riots will generate uncertainty and cause jitters among investors. One of Nicaragua’s key draws for investors in recent years has been the relatively stable macroeconomic and political environment; this now seems at risk. Although calling off the pension reform will placate those angered by that particular issue, it will do nothing to appease many who were shocked at the level of police violence. The dialogue promised by Daniel Ortega with firms, workers and students will be crucial, but a firm date has yet to be set. The success of these crunch talks will depend in part on how broad the demands of the different sectors are—and whether they will be limited to shedding light on police brutality and providing justice for victims, or go further and call for enhanced democratic freedoms and a new government. In the case of the latter, Ortega has shown few signs of wanting to relinquish his grip on power.
- Nicaragua Economist Oliver Reynolds
The latest from Panama
Economic growth in 2017 in Panama was supported by a recovery in the country’s service sectors, which expanded 5.1% in annual terms (2016: +3.8% year-on-year). The expansion in services was driven by stronger growth in trade-related sectors including ports and Panama Canal transits, reflecting the pick-up in global trade observed last year.
The construction sector, which has, along with services, been one of the main drivers of economic growth in the past 10 years, had a more muted performance in 2017 as large-scale infrastructure projects were finalized. The Panama Canal expansion project culminated in 2016, and the expansion of the Inter-American highway finished in early 2018. This trend is expected to persist, as the expansion of Panama City’s international airport and the construction of its second metro line are nearing completion this year. Despite the slowdown, construction is nevertheless set to remain buoyant, which should help propel strong economic growth in the upcoming years.
On the proposed law to introduce more transparency in the financial industry and how this will affect Panama’s economy
The proposed law was introduced as a necessary step to modernize Panama’s financial sector, as international pressure from organizations like the OECD and countries including France hindered activity in the sector. The tax proposal includes measures that in the interest of all key players involved because it was jointly drafted by the government and industry players such as interest groups and lobbies. This implies that the bill should not undermine the sector’s competitiveness.
The bill forms part of the government’s efforts to adhere to existing standards of international transparency and exit grey and black lists the country currently finds itself on. This would help overcome barriers and restrictions that impede the normal functioning of the financial sector.
The law must be understood as part of ongoing efforts by the Panamanian government to make the financial sector more competitive and efficient by adhering to international standards of transparency and good practice. According to the Panamanian Ministry of Economy and Finances, the bill stipulates the creation of special entities to broaden the financial services offering and boost competition in the sector, among other things. As it is aimed at making the financial sector more efficient and competitive, this should have a positive spillover effect on the country’s GDP growth in the medium and long term.
- Panama Economist Jean-Philippe Pourcelot
As you can see there is a lot going on in Central America and the Caribbean and we here at FocusEconomics cover the region extensively with our monthly Consensus Forecast report. We cover 12 countries in the region with forecast and analysis on over 30 macroeconomic indicators for each economy. If you are interested in downloading a free sample of the report, just click on the button below.
5-year economic forecasts on 30+ economic indicators for 127 countries & 30 commodities.
Date: May 4, 2018
TagsTrade Cryptocurrency Economic Growth (GDP) Euro Area Portugal Italy Housing Market Ukraine Company News Russia Turkey Germany Gold Base Metals Commodities Argentina European Union France Tunisia Canada Major Economies Commodities UK South Africa OPEC G7 Nordic Economies Brazil Healthcare oil prices Emerging Markets Sub-Saharan Africa Japan USA Unemployment rate Energy Commodities Agricultural Commodities Africa India China Colombia Precious Metals Commodities Asia Mexico Infographic precious metals Consensus Forecast IMF Oil Exchange Rate Inflation Australia Venezuela Latin America TPP Iran Spain Bitcoin Banking Sector United States Forex MENA Eastern Europe United Kingdom Investment Vietnam Greece Brexit
Fiscal slippage and a slow-moving reform agenda are likely to constrain South African growth over the medium-term.… https://t.co/Ugk3BJ83qX
4 hours ago
The Korean economy will grow 2.8% this year and 2.7% in 2019, which is down 0.1 percentage points from last month's… https://t.co/fwZrgwwtDe
10 hours ago
Uncertainty over the fiscal position and a small revenue base pose downside risks to Malaysia's outlook. Read more: https://t.co/wxJTHWfmrk
16 hours ago
High-income Singapore is expected to record the weakest expansion in ASEAN next year, at 2.7%, reflecting a moderat… https://t.co/EN6uqqM2o5
1 day ago
Political uncertainty and the possibility of credit-rating downgrades will hang over the South African economy goin… https://t.co/YwkYrMuqW1
1 day ago
- Which ASEAN countries are most exposed in the event of a U.S.-China trade war?
- 75 Top Economics Influencers to Follow
- Emerging Markets Economic Outlook 2018 and 2019
- The Faces Behind Latin America’s Key Institutions
- 2019 Economic Outlook for the Top Oil Producing Countries
- Is your cup of coffee about to get more expensive going in to 2019?
- The Economic Implications of an Aging Global Population
- Can the Wisdom of the Crowds predict the results of the 2018 World Cup?
- Railway Mania: The Largest Speculative Bubble You’ve Never Heard Of
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Investment looks to Latin America, but forecasts are not encouraging
- Turkey: Erdogan has cemented his grip on power - now what about the economy?
- How can Latin America’s business environment benefit from technological change?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- The Poorest Countries in the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Venezuela's Electoral Conundrum
- Gold: The Most Precious of Metals (Part 3)
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- The World's Top 10 Largest Economies
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Russian economy update in wake of OPEC deal announcement
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit