Central America: Economic Snapshot for Central America
November 5, 2018
Regional economy likely gained steam in Q3
According to a preliminary estimate, the economy of Central America and the Caribbean should have expanded 3.4% in the third quarter, which, if confirmed, would mark an acceleration from Q2’s 2.2%. Excluding Puerto Rico, growth likely picked up from 3.6% in Q2 to 3.8% in Q3.
The Dominican Republic’s economy gained steam in the third quarter according to preliminary data—likely recording by far the fastest growth rate in the region—supported by construction, retail and manufacturing in duty free zones. Other indicators for the quarter, such as tourist arrivals, employment and credit growth, also painted a positive economic picture.
July and August economic activity readings for Costa Rica and Guatemala, two of the region’s other big hitters, suggest that both economies likely performed solidly in the third quarter. Private-sector construction was an important driver of growth in Costa Rica, while Guatemala’s performance should have been buttressed by surging remittance inflows from the United States. Moreover, Puerto Rico’s economy showed tentative signs of recovery, finally returning to growth in September following 69 consecutive months of contraction, aided by a surge in power generation. In contrast, economic activity data suggests Panama continued to perform sluggishly after a month-long strike disrupted activity in Q2.
Economic dynamics should have been fairly robust in the region’s smaller economies in the third quarter. In Honduras, growth was supported by mining and retail, while Jamaica should have been boosted by the Central Bank’s looser monetary stance and Trinidad and Tobago from higher oil prices. A notable exception is Nicaragua, which appeared to contract sharply due to violent civil unrest.
On the political front, Costa Rica’s tax reform still hasn’t cleared parliament, despite passing a first reading in early October. With the fiscal deficit already up significantly so far this year, the swift approval of the reform is considered a vital first step to putting the public finances on a sustainable long-term footing.
Nicaragua’s fiscal situation is also deteriorating due to the tanking economy. In October, the government presented its 2019 budget, which foresees a sharp fall in revenues next year, and correspondingly cut spending allocations to contain the fiscal deficit. Dialogue between President Daniel Ortega, business and civil society has proved fruitless, and ongoing political tension is likely to continue to dampen tourism and FDI inflows. In contrast, Panama’s parliament recently approved an expansionary budget for next year to boost growth, and allocated significant funding to investment projects.
Growth should be solid 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 booming U.S. economy, 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 Fed are the key external risks. Internally, 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 are the key risks.
FocusEconomics panelists expect regional growth of 3.7% next year, which is down 0.1 percentage points from last month’s forecast. El Salvador was the only country to have its 2019 growth forecast upgraded this month. Belize, Guatemala and Honduras saw their forecasts unchanged, while the region’s remaining economies received downgrades. Our panelists see regional growth at 3.5% in 2020.
The Dominican Republic and Panama are expected to log the region’s fastest growth next year, with both economies forecast to expand at around 5.0%. Conversely, Nicaragua is expected to be the region’s laggard with 0.2% growth, as the fragile political situation continues to weigh on the economy.
GUATEMALA | Domestic demand should have supported growth in the third quarter
After accelerating in the second quarter thanks to strong domestic demand, the economy likely performed fairly well in Q3 due to the same drivers, with the average reading of the monthly economic activity index in July and August trending only slightly below the previous quarter’s reading. Moreover, private consumption should have been buttressed by strong remittances growth in the quarter, which reached their highest USD value on record in August, benefiting from continued robust momentum in the U.S. economy. In late October, S&P confirmed Guatemala’s credit rating as BB- with a stable outlook, due to a manageable fiscal shortfall, a low public debt ratio and an improving external position. However, the agency noted that political instability is hampering growth. Looking at Q4, floods and heavy rainfall in October could drag on economic activity somewhat.
Momentum in the economy is expected to edge up next year on the back of strong domestic demand. Private consumption is likely to benefit from a tight labor market and robust remittances inflows, while growth in government consumption and fixed investment should also accelerate. However, political risks are likely to increase in the build-up to next year’s presidential elections. FocusEconomics Consensus Forecast panelists expect the Guatemalan economy to expand 3.2% in 2019, which is unchanged from last month’s forecast, and 3.4% in 2020.
DOMINICAN REPUBLIC | Economy fires on all cylinders in the third quarter
After a stellar H1, growth accelerated slightly in the third quarter according to recent data, underpinned by construction, retail and manufacturing in duty-free zones. Credit growth stayed in double digits throughout the period and employment growth picked up, likely supporting private consumption. Moreover, tourist arrivals surged in September in annual terms, boosted by greater arrivals from the U.S. and a low base effect, while merchandise exports expanded at a robust pace in the January–September period. The trade deficit, however, likely widened on greater oil imports. Despite higher oil prices, international reserves are comfortable and have risen year-to-date, supported by remittances, FDI and tourism inflows. In early November, President Danilo Medina inaugurated the Dominican Republic’s embassy in China. This marks a further sign of warming relations with the Asian giant, which could translate into increased investment and commercial opportunities going forward.
Looking ahead, growth will likely moderate slightly but should still compare favorably to regional peers. A healthy labor market, solid fixed investment and spillovers from the expansion in the U.S. economy—which should continue to fuel remittances, exports and tourism activity—are expected to drive the economy. Downside risks stem from higher oil prices, tighter international financial conditions, vulnerability to extreme weather events and elevated debt servicing costs. FocusEconomics panelists expect GDP growth of 4.9% in 2019, down 0.1 percentage points from last month’s forecast. For 2020, panelists see the economy expanding 4.5%.
PANAMA | Panamanian parliament approves 2019 budget against mixed economic backdrop
The economy appears to have regained some steam in the third quarter, after wage strikes in the construction sector in April-May dragged down GDP growth to an eight-and-a-half year low in Q2. Although the monthly economic activity indicator (IMAE, Índice Mensual de Actividad Económica) was still weak in July, it improved markedly in August. Furthermore, freight data for the Panama Canal shows strong year-on-year growth in July and August, though September logged a decline due to a high-base effect. Meanwhile, on 31 October the parliament approved an expansionary budget for 2019, including USD 9 billion dedicated to investment projects.
Growth is likely to pick up pace in 2019 and 2020, after a weaker performance this year. Notably, new public infrastructure projects will likely buttress the construction sector, while the scheduled opening of the large Cobre Panama copper mine should further stoke industrial activity and exports. This will also likely support the ongoing narrowing of the current account deficit. Nevertheless, the external sector remains vulnerable to the effects of the US-China trade war, which could dampen trade flows in and around the all-important Panama Canal. FocusEconomics Consensus Forecast panelists project that the economy will grow 5.1% in 2019, which is down 0.1 percentage points from last month’s forecast, and 5.2% in 2020.
COSTA RICA | Fiscal reform bill yet to clear parliamentary hurdle, investor concerns are rising
The economy likely had a mixed performance in the third quarter of 2018, after year-on-year growth accelerated in the second quarter. In August, economic activity increased at the fastest pace in nearly two years, boosted by a resurgent construction sector. However, union strikes against the landmark fiscal reform bill, which began in early September and continued through October, will have taken a toll on the economy. The fiscal bill passed a crucial vote in the Legislative Assembly in early October but was later rejected in its current state by the Supreme Court for containing changes that could affect the independence of the judiciary. The bill should wind up for a final vote in the Legislative Assembly in the coming weeks and, if approved, would come into effect next year and should help to bring down the deficit. However, the lack of definitive approval is fraying investors’ nerves; the colón has tanked over the last month, and credit rating agency Moody’s recently put Costa Rica on review for a downgrade, citing worsening fiscal metrics.
Rising household consumption and robust exports—aided by economic growth in the United States—should drive the economy next year. However, fiscal consolidation and tighter monetary conditions are seen weighing on prospects, as could instability in neighboring Nicaragua. Failure to enact serious tax reform which puts the public finances on a sustainable footing is a key downside risk to the economy. FocusEconomics Consensus Forecast panelists expect GDP to grow 3.1% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.4% in 2020.
INFLATION | Inflation stabilizes in September
According to a comprehensive estimate produced by FocusEconomics, regional inflation was 3.6% in September, matching August’s figure. There were lower price pressures in the Dominican Republic, Panama and Puerto Rico. Inflation rose in Guatemala, Haiti, Jamaica and Nicaragua, was stable in Belize, Costa Rica, El Salvador, Honduras and Trinidad and Tobago.
On 1 November, Costa Rica’s Central Bank increased its policy rate from 5.00% to 5.25% following the sharp currency selloff, as the Bank was concerned that inflation could overshoot the 2.0%-4.0% target range going forward. Other Central Bank’s holding meetings over the last month stayed put.
Higher oil prices and currency weakening 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 rise to 3.5%.
Written by: David Ampudia, Senior Economist