Central America Economic Outlook May 2018

Central America: Central America & the Caribbean: Growth momentum remains firm in first quarter

May 14, 2018

Preliminary estimates suggest the economy of Central America and the Caribbean remained in good shape at the outset of the year, with growth expected to come in at 2.7% year-on-year in Q1, matching Q4’s figure. Data for the Dominican Republic shows that the economy expanded at a breakneck speed of 6.4% in the first quarter, supported by solid tourism growth and monetary easing since the middle of last year, which has shored up economic sentient and boosted credit growth.

The region’s other heavy hitters are also expected to have chalked up solid, albeit more modest, performances. Economic activity readings in Guatemala and Costa Rica averaged higher for the first three months of the year than in the fourth quarter of 2017, likely buttressed by strong remittance inflows from the U.S. and solid external demand. The resilient performance of the Costa Rican economy will be welcome news for newly inaugurated President Carlos Alvarado Quesada, as it means the economy is more likely to be able to absorb any short-term hit to domestic demand from a tighter fiscal stance. The new president is currently in talks with other groups in the Legislative Assembly regarding a fiscal reform designed to reduce the hefty budget deficit and slow the rise in public debt.

The Panamanian economy likely lost some speed in Q1, after economic activity growth dipped to a multi-year low in February on lower cargo movements. However, growth in the quarter was still likely among the fastest in the region on the back of greater canal earnings, as the country profits from robust global trade. In addition, Jamaica also likely saw a pick-up in growth, amid a strengthening labor market and strong compliance with the IMF assistance program.

In contrast, Puerto Rico’s economy continues to drag on the regional figure. Economic activity in the fiscal year to February was down sharply, amid a struggling power grid and ongoing net migration, as the aftereffects from twin hurricanes that struck the island last year continue to ripple through the economy. This comes after the release of GNP data confirming that the economy shrank for the fifth consecutive year in FY 2017. Furthermore, the turnaround plan approved by the U.S. federal oversight board in mid-April—against the wishes of the island’s governor Ricardo Rosselló—points to a hefty dose of fiscal austerity to boost Puerto Rico’s capacity to make debt repayments. This could further depress already ailing economic activity in the short term.

More worrisome is the violent unrest that has shaken Nicaragua over the last month. Protests that began against the government’s social security reform proposals have escalated into anti-government demonstrations and left dozens dead. President Daniel Ortega has promised national dialogue with different sectors of civil society and business to discuss the way forward, with talks set to begin on 16 May. The uncertainty risks upsetting what has until now been an encouraging economic trajectory—growth has been among the quickest in the region in recent years—by scaring away investors and tourists and disrupting labor supply.  

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 Regional growth should pick up this year and next, although several downside risks are present

The regional economy should be supported this year by fiscal stimulus in the U.S—by far Central America and the Caribbean’s largest trading partner—which should in turn continue to boost remittances, exports and tourist arrivals. However, the flipside of this fiscal boost is the potential for faster-than-expected monetary tightening by the U.S. Federal Reserve, which would tighten financial conditions in the region, weighing on credit growth, investment and private spending. A tougher U.S. immigration policy is another key risk. The latest sign of this came in early May, when it was announced that the Temporary Protected Status for Hondurans residing in the U.S. would end in 2020. Although the impact on the Honduran economy will likely be measured, it could be a sign of additional and more stringent measures to come.

FocusEconomics panelists expect regional GDP growth of 2.6% this year, which is unchanged from last month’s estimate. Panelists now factor in a slightly deeper recession in Puerto Rico, likely thanks to the announcement of austerity measures and in light of the contraction in economic activity through February. There were also downgrades for the economies of Belize, Costa Rica, Guatemala and Trinidad and Tobago. Conversely, the GDP forecast for the Dominican Republic was revised upwards notably, following Q1’s stellar GDP reading. The region’s remaining economies saw their projections unchanged. Regional GDP growth is seen accelerating to 3.7% in 2019.

Panama’s economy is expected to log the highest increase in the region for a second consecutive year in 2018, the result of higher Panama Canal earnings and robust fixed investment levels. GDP in Panama is projected to increase 5.5%. Conversely, Puerto Rico is expected to be the region’s laggard, recording a contraction of 4.6% in FY 2018.

GUATEMALA | Economic activity readings point to solid first quarter, although business confidence remains subdued

The economy is expected to have performed well in the first quarter. Economic activity edged higher throughout the quarter and in March hit the highest pace since April 2017. Growth was likely underpinned by private consumption, which benefited from low unemployment and strong remittances amid a healthy U.S. economy. In April, growth in remittances soared, boding well for private consumption in the second quarter. However, in the same month sentiment among businesses eased due to a less rosy outlook on the general economic situation and investment prospects. Business confidence has been on a largely downward trajectory since March 2017, partly on the back of political uncertainty. On a more positive note, Fitch Ratings affirmed Guatemala’s BB rating with a stable outlook, citing its resilient macroeconomic stability, stable government finances and low public debt.

Robust consumption and fixed investment growth are expected to support the economy this year and next. Remittance inflows should boost household consumption, while government expenditure will likely pick up on the back of infrastructure investments. However, private investment could be held back by pessimistic business sentiment. The FocusEconomics Consensus Forecast panel expects the Guatemalan economy to expand 3.2% this year, which is down 0.1 percentage points from last month’s estimate, and 3.3% in 2019.

DOMINICAN REPUBLIC | Monetary easing powers growth in Q1

The economy roared ahead in Q1 according to preliminary figures, propelled by monetary loosening from the second half of 2017, which has led to faster credit growth and lower lending rates. The manufacturing, construction and trade sectors were key growth drivers, while the hospitality industry benefitted from buoyant growth in tourist arrivals. Adding to the positive news, both FDI and remittances grew at double-digit rates in the same period, while international reserves are close to all-time highs. The strong economic performance meant government revenue growth exceeded budgeted estimates in the first four months of the year, boosting the likelihood of meeting the 2.2% of GDP deficit target for 2018.

Growth should moderate slightly from Q1’s blistering pace but remain robust this year overall. The economy will be supported by the Central Bank’s looser monetary stance and fiscal stimulus in the U.S., which should continue to support remittances, exports and tourism activity. However, the rising public debt burden, elevated debt servicing costs and a narrow tax base pose concerns, which could become more pressing with higher oil prices and as global financial conditions tighten. FocusEconomics panelists expect GDP growth of 4.9% in 2018, which is up 0.3 percentage points from last month’s forecast. For 2019, panelists see the economy expanding 4.3%.

PANAMA | Economy hits slight bump in the road, but overall momentum remains strong

The most recent data suggests the economy lost some steam in the first quarter of the year but remained solid nonetheless. Dragged down by a contraction in cargo movement in Panamanian ports in February, economic activity dropped to a multi-year low in the same month. Car sales in the first quarter contracted at a double-digit rate, underscoring weakening private consumption due to more restrictive credit conditions and a weaker labor market. Political developments in Q2 could weigh on on growth; ongoing protests by the country’s largest labor union have paralyzed the construction sector since 18 April. Despite these setbacks, economic fundamentals are healthy. The government received offers worth three times the value of bonds offered on 10 April, highlighting investors’ confidence. In addition, the Panama Canal authority decided on 7 May to increase daily transits in the expanded Panama Canal from seven ships to eight to accommodate high demand.

Solid growth in fixed investment and public spending should offset a slowdown in private consumption, keeping the economy on a solid growth path this year and next. FocusEconomics Consensus Forecast panelists project that the economy will grow 5.5% in 2018, which is unchanged from last month’s forecast. They expect GDP will expand 5.4% in 2019.

COSTA RICA | Growth remains robust, although fiscal clouds are darkening

President Carlos Alvarado was sworn into office on 8 May, taking the reins of a country whose economy has performed modestly so far this year and whose public finances have continued to deteriorate. Economic activity strengthened in the first quarter of 2018 compared to the previous quarter, particularly due to greater activity in the services sector. However, this did not prevent an increase in the unemployment rate, which rose as fewer individuals were employed informally. Meanwhile, in April, the OECD said that comprehensive reforms were necessary to stabilize the country’s worsening fiscal deficit. The organization recommended, in addition to tax revenue raising measures, reforms such as the implementation of a fiscal spending rule and improved debt management practices. During his inauguration this month, President Alvarado implored lawmakers in the Legislative Assembly to pass a bill to help reduce the deficit. However, in a sign of how difficult this may prove, public sector workers have recently demonstrated against the bill.

Increased political certainty and strong demand from key export markets such as the United States should support economic growth this year. However, persistent fiscal deficits and growing public debt will continue weighing on prospects. The analysts we surveyed this month expect GDP to grow 3.4% in 2018, which is down 0.1 percentage points from last month’s projection, and 3.6% in 2019.

INFLATION | Inflation unchanged in April

According to a preliminary estimate produced by FocusEconomics, inflation was 3.6% in April, unchanged from March’s revised figure (previously reported: 3.7%). Higher inflation in the Dominican Republic and Panama was offset by lower price pressures in Costa Rica, Guatemala and Honduras, while inflation in Nicaragua and El Salvador was unchanged from March.

As a net energy importer, inflation in Central America and the Caribbean should be supported this year by higher international oil prices. Our panel sees inflation coming in at 3.3% in 2018, which is down 0.1 percentage points from last month’s estimate. In 2019, Consensus Forecast panelists expect inflation to remain broadly stable at 3.4%.

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Written by: David Ampudia, Senior Economist

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