Central America Economic Forecast

Economic Snapshot for Central America

September 22, 2020

The regional economy is forecast to shrink this year, hit by fallout from Covid-19

The regional economy will contract notably this year as the pandemic and associated containment measures wreak havoc on domestic and foreign demand, weighing heavily on trade, tourism and activity. Consequently, unemployment is set to increase while incomes are expected to fall, denting private consumption. Fiscal stimulus should cushion the blow somewhat.

Central America Monetary & Financial Sector News

Price pressures intensified in August, with inflation rising to 1.9% from 1.6% in July. Inflation gained steam in the Dominican Republic, Guatemala and Honduras. Meanwhile, deflationary pressures in El Salvador increased. This year, price pressures should ease compared to last year as the Covid-19 pandemic and still-low oil prices weigh on domestic demand.

Central bank action was muted in recent weeks. However, the Central Bank of the Dominican Republic opted to lower its policy rate in late August, aiming to stimulate the economy in the face of the pandemic. Going forward, monetary policy in the region is expected to remain loose as central banks aim to soften the blow from Covid-19.

Regional currencies had a mixed run against the USD in recent weeks. The Guatemalan quetzal lost some ground, the Costa Rican colón and the Dominican peso remained broadly stable, and the Honduran lempira appreciated. Looking ahead, regional currencies are expected to depreciate against the greenback over the year due to lingering uncertainty and persistent twin deficits.

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