Central America Economic Outlook December 2018

Central America: Economic Snapshot for Central America

December 6, 2018

Regional economy likely gained momentum in Q3


According to a preliminary estimate, the economy of Central America and the Caribbean should have expanded 3.3% in the third quarter, which—if confirmed—would mark an acceleration from the second quarter’s 2.2% but would be below last month’s estimate of 3.4% growth. Excluding Puerto Rico, which was still mired in recession in the second quarter, growth likely declined from 3.7% in Q2 to 3.6% in Q3.


Preliminary data from the Dominican Republic shows that growth edged up in the third quarter, with the economy spurred by construction, duty-free manufacturing and retail sales—with the latter likely supported by a healthy labor market and strong credit growth. Panama also appeared to gain some momentum following a second quarter disrupted by strikes, although the recovery was only gradual. Moreover, regional heavyweight Puerto Rico is finally finding its feet after last year’s hurricanes, returning to growth in September after 69 consecutive months of contraction and chalking up a double-digit expansion in October.


In contrast, in Guatemala annual GDP growth looked to have edged down from the second quarter. However, this was largely due to a less favorable base effect; underlying momentum was in fact robust, supported by record remittance inflows. In Costa Rica, growth also seemed to have decelerated from Q2, due to uncertainty over the darkening fiscal situation and strike action in September.


Turning to the region’s smaller economies, monthly economic activity readings in El Salvador were aided by the industrial and financial sectors, while the Honduran economy appeared to lose steam on more sluggish growth in mining and energy. In Jamaica, the economy likely expanded at a mild pace in Q3 on the back of strong external demand, although ongoing fiscal consolidation will have weighed on activity somewhat. Recent data for Belize shows a healthy third quarter outturn, thanks to a surge in visitor arrivals, while Trinidad and Tobago should have also performed well due to high oil prices. Nicaragua is set to have slumped into deep recession due to the impact of violent social unrest, while Haiti likely grew moderately. 


On the political front, in late November Costa Rica’s constitutional court approved the tax reform bill currently in parliament. The bill passed a final vote in the Legislative Assembly on 3 December. This marks an important step towards the implementation of fiscal austerity which will be vital for ensuring the long-term stability of the public finances and reassuring financial markets—which are still nervy, as demonstrated by the hammering the colón received in early November.


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 Growth should be healthy going forward, but downside risks remain


Over the next few quarters, Central America and the Caribbean should continue to benefit from solid domestic demand and the firm U.S. expansion, which should fuel remittance inflows, tourism and exports. Moreover, Puerto Rico should continue to recover as rebuilding efforts accelerate and thanks to a very favorable base of comparison. Uncertainty over immigration policy in the United States—particularly the temporary protected status of many Central Americans currently residing in the U.S.—global trade tensions and faster-than-expected tightening by the Federal Reserve are the key external risks. Internally, key risks include a further deterioration of the political situation in Nicaragua, a failure to enact tax reform in Costa Rica and potential political uncertainty in Guatemala leading up to elections next year.


FocusEconomics panelists expect regional growth of 3.6% next year, which is down 0.1 percentage points from last month’s forecast. Costa Rica, Guatemala, Haiti, Nicaragua and Panama had their 2019 growth forecasts downgraded this month, while Belize, the Dominican Republic and Trinidad and Tobago had theirs upgraded. The region’s remaining economies saw their 2019 projections unchanged. Our panelists see regional growth at 3.3% in 2020.


The Dominican Republic and Panama are expected to log the region’s fastest growth next year, with both economies forecast to expand by 5.0%. Conversely, Nicaragua is expected to be the region’s laggard with a 0.2% contraction, as the fragile political situation continues to weigh on the economy.


GUATEMALA | Remittances seen buttressing activity; Congress approves 2019 budget bill


Economic activity eased somewhat in September and the pace of economic growth in the third quarter is expected to have cooled slightly from the previous quarter in which the economy accelerated. Domestic demand should have buttressed the economy in the third quarter on the back of strong remittance inflows supporting private consumption. Looking at the final quarter, household expenditure will likely continue supporting the economy as remittance inflows reached an all-time high in USD value in October. During a staff visit in early November, the IMF noted that the macroeconomic framework remained solid but urged the government to focus efforts on modernizing the financial system and on improving productivity and competitiveness. Later in the same month, Congress approved the 2019 budget bill, a substantial part of which will be financed by debt, both internal and external. The budget was passed amid allegations that the allocation of funds depends on personal relations with the president.


Economic growth is expected to accelerate next year owing to firming domestic demand. Private consumption should benefit from a tight labor market and robust remittances inflows, while public expenditure is likely to increase. However, increased political risk leading up to next year’s elections could pose a downside risk. FocusEconomics Consensus Forecast panelists expect the Guatemalan economy to expand 3.1% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.1% again in 2020.


DOMINICAN REPUBLIC | Robust growth momentum continues


The economy performed well in the third quarter, with data revealing broad-based growth which was particularly strong in the duty-free manufacturing and construction sectors. Moreover, job creation strengthened, while exports were up notably in annual terms in the January–September period. Looking ahead to the fourth quarter, growth has likely remained robust. The number of tourists and remittances continued to boom in annual terms in October, likely supported by a tighter U.S. labor market. Moreover, the recent fall in oil prices will likely lead to a lower import bill, benefiting the external sector. On the political front, in mid-November, the Dominican Republic and Russia agreed to abolish visa requirements for citizens to travel between the two nations, which could boost Russian tourist arrivals going forward.


Looking ahead, growth will likely soften slightly due to a less favorable base effect. However, a budding labor market, strong fixed investment and spillovers from the robust U.S. economy—which should fuel remittances, exports and tourism activity—should ensure growth remains elevated compared to regional peers. Downside risks include monetary tightening in the U.S., high debt servicing costs, and vulnerability to severe weather conditions. FocusEconomics panelists expect GDP growth of 5.0% in 2019, which is up 0.1 percentage points from last month’s forecast. For 2020, panelists see the economy expanding 4.6%.


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PANAMA | Growth likely improved slightly in Q3 but remains meek


The economy likely picked up pace in the third quarter, after GDP plunged to an over eight-year low in the second quarter due to prolonged strikes within the construction sector. Nevertheless, economic momentum should have remained much weaker than its long-term average, which was reflected by relatively subdued—though strengthening—readings for the monthly economic activity indicator (IMAE, Índice Mensual de Actividad Económica) over the quarter. On the other hand, data for the Panama Canal shows strong freight activity growth in the period, which particularly ramped up in September. On the political front, President Varela met Chinese President Xi Jinping on 2–3 December—the first diplomatic visit of a Chinese official since the two countries established diplomatic ties in June last year—and signed nineteen wide-ranging cooperation agreements on matters such as banking, infrastructure, trade and tourism, highlighting increasing economic ties between the two countries.


Growth should accelerate from next year onwards after registering a subdued performance this year. Particularly, new public infrastructure projects, which will likely buoy the construction sector, coupled with the scheduled opening of the mammoth Cobre Panama copper mine—which should further buttress industrial production and merchandise exports—should drove growth. Nevertheless, a dampening of global trade flows, especially owing to the ongoing Sino-American trade spat, could weaken activity in the crucial Panama Canal and weigh on overall growth. FocusEconomics Consensus Forecast panelists project that the economy will grow 5.0% in 2019, which is down 0.1 percentage points from last month’s forecast, and 4.9% in 2020.


COSTA RICA | Crucial fiscal reform bill moves one step closer to approval


The economy appeared to lose its footing in the third quarter, after the second quarter’s year-on-year acceleration. According to the Central Bank’s monthly index, economic activity decelerated in the third quarter compared to the previous quarter, likely linked in part to large-scale protests. Meanwhile, union strikes against the landmark fiscal reform bill, which have been ongoing since September, have diminished in recent weeks. The bill, which includes changes to Costa Rica’s tax structures and limits on government spending, was deemed legally acceptable on 23 November by the constitutional branch of the Supreme Court, passed a final vote in the Legislative Assembly on 3 December, and was signed off by the president on the same day. The bill was considered as urgent given Costa Rica’s deteriorating fiscal position. The Central Bank recently said that the new measures would reduce the deficit and allow the government to stabilize its debt accumulation.


The economy should be supported next year by stronger export growth, a steady increase in household consumption and a more certain fiscal outlook. However, the effects of fiscal consolidation and tighter monetary conditions are likely to limit growth, while instability in neighboring Nicaragua poses a risk. FocusEconomics Consensus Forecast panelists expect GDP to grow 3.0% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.2% in 2020.


INFLATION | Inflation unchanged in October


According to a comprehensive estimate produced by FocusEconomics, regional inflation was 3.6% in October, matching September’s figure. There were lower price pressures in Belize, Costa Rica, Guatemala, Haiti and Puerto Rico. Inflation rose in the Dominican Republic, El Salvador, Honduras, Panama and Jamaica, was unchanged in Nicaragua and dipped in Trinidad and Tobago. All central banks holding meetings over the last month opted to stay put.


Currency weakening and solid domestic demand will drive inflation in the Central America and Caribbean region next year. FocusEconomics panelists see inflation coming in at 3.3% in 2019, unchanged from last month’s forecast. For 2020, FocusEconomics panelists expect inflation to remain broadly stable at 3.2%.


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Written by: David Ampudia, Senior Economist

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