Central America & Caribbean: Growth to pick up in Q1 despite trouble looming ahead
May 17, 2017
According to a comprehensive set of data, the economy of Central America and the Caribbean gained some traction in the final quarter of last year. The region expanded 2.8% over the same quarter of 2015, a marked acceleration compared to Q3’s 2.1% increase but still the second weakest reading since Q1 2013. Although softness in economic activity seems to have persisted somewhat in Q1—GDP is estimated to have only grown 3.0% in the first quarter—some incipient signs that the region’s economy bottomed out last year are encouraging. The U.S. labor market, which is nearing full employment, is fueling double-digit growth in remittances across the region. Higher commodity prices, a booming tourism sector in some countries and a pick-up in global trade flows are all further buttressing the region’s economy.
However, despite the stronger start to the year, trouble is brewing ahead. Recent Republican proposals in the U.S. Congress to slap a 2.0% tax on all remittances sent south of the border risk an economic fallout. Remittances have proved the linchpin of economic growth so far this year as they constitute a key source of disposable income and foreign currency. If enacted, the tax would most likely have a dramatic effect on household spending—heightened by accelerating inflation—and could send the region’s currencies into a tailspin. This could also pave the way for the new U.S. administration to implement restrictive trade policies, which would distort trade flows between Central America and Caribbean countries and their northern neighbor.
Head on over to our Central America & Caribbean page for more recent economic news on the region.
On the domestic side, fiscal woes continue to dominate headlines. In El Salvador, a stand-off between the ruling party and the main opposition saw the government miss debt repayments, which prompted downgrades by all three major rating agencies. Although the government later resolved the issue by reallocating funds, political polarization continues to damage the country’s credit quality. Sovereign downgrades were also seen last month in Trinidad and Tobago, where large fiscal imbalances have exposed the country to financial shocks down the road. In Costa Rica, the inability to reach a political agreement on fiscal reform will keep fueling concerns over poor debt dynamics this year, particularly ahead of next year’s elections. Meanwhile, debt-ridden Puerto Rico was put under court protection by the federal control board in early May and talks are slated to start on 17 May to restructure the island’s USD 70 billion in debt.
Outlook deteriorates as fiscal woes persist
Against a backdrop of ever-lingering uncertainty regarding U.S. trade and migration policies, coupled with ongoing fiscal distress across the region, FocusEconomics panelists decided to downgrade the region’s economic outlook only one month after upgrading it for the first time in eight months. Our analysts expect GDP to grow 3.0% in 2017, which is down 0.1 percentage points from last month’s estimate. This month, forecasts were revised down for Costa Rica, Haiti, Honduras, Puerto Rico and Trinidad and Tobago. Conversely, growth projections were revised up for Belize, the Dominican Republic, El Salvador and Nicaragua, while they were left unchanged for Guatemala, Jamaica and Panama. Our analysts expect growth to be steady at 3.0% in 2018.
Major players Panama and the Dominican Republic will be the fastest growing economies this year, at 5.4% and 5.2%, respectively. In contrast, Puerto Rico’s economy will contract again in 2017 as the island’s debt saga continues to weigh on the economy.
COSTA RICA | Economy loses steam in Q1
After a bumper year-end, last year’s momentum in economic activity, as measured by the IMAE, eroded somewhat in the first three months of the year. Nevertheless, a surge in imports in Q1, while partially due to higher global energy prices, signals that private consumption has not wavered, despite significant challenges facing the economy. At the top of the list remains the country’s ongoing public debt saga, which has only grown more concerning in 2017. While this year’s Q1 fiscal deficit mirrored last year’s, the public debt stock rose through February. Addressing the debt burden has grown increasingly elusive, particularly at a time when elections later this year will prevent any meaningful legislative progress on the issue.
Healthy economic growth is expected this year on the back of robust private consumption and solid fixed investment growth. FocusEconomics Consensus Forecast panelists expect the economy to expand 4.0% in 2017, which is down 0.1 percentage points from last month’s forecast. In 2018, they see GDP growth edging down to 3.8%.
DOMINICAN REPUBLIC | Economy shows resilience despite decelerating
Despite growth having decelerated to an over three-year low in the first quarter of the year, economic momentum is still holding up. Tourist arrivals continued to grow robustly throughout Q1, a nod to the sector’s success in its efforts to increase room availability and tourism services supply. Likewise, remittances swelled in the first three months of the year as they benefited from the economic upturn of the U.S. economy and a weakened Dominican peso. Higher remittances and tourism revenues, coupled with a remarkable pick-up in exports, also played a key role in the recent surge seen in the Central Bank’s international reserves, which reached a fresh record high in March.
Growth will moderate this year after 2016’s strong performance, weighed down by rising fuel prices and a pick-up in financing costs linked to the Central Bank’s tightening path. While both of these will dent disposable income, some degree of resilience in the economy will be ensured by healthy FDI inflows, rising exports and soaring tourism revenues and remittances. FocusEconomics analysts expect the economy to expand 5.2% in 2017, which is up 0.2 percentage points from last month’s forecast, and 4.6% in 2018.
GUATEMALA | Economy remains largely unscathed amid political noise
The economy seems to be showing resilience in the face of continued political turmoil. After slowing down somewhat in 2016, economic activity was on an upward trajectory in Q1 2017 according to both hard and soft data. The Central Bank’s economic activity indicator registered three consecutive improvements over the course of the first quarter. Encouragingly, the upswing seems to be driven by both the external sector and domestic demand. Exports and imports grew solidly in February, the latter pointing to strengthening domestic demand. Indeed, remittances have continued to grow at a relatively healthy pace while credit growth has seemingly turned a corner and is now firmly on an accelerating path. Nevertheless, it remains to be seen if the data will translate into a strong GDP outturn in Q1, as political uncertainty continues to plague the country. In late April, President Jimmy Morales dismissed the Economy Minister, to the surprise of many.
Political uncertainty in the region and further to the north risks weighing on the growth outlook. GDP growth should nevertheless continue to be supported by healthy private consumption, thanks to a solid expansion in remittances. FocusEconomics Consensus Forecast panelists forecast that GDP will grow 3.6% in 2017, which is unchanged from last month's estimate. In 2018, the panel expects GDP growth of 3.5%.
PANAMA | Increasing global trade flows to support the economy
The country seems to be getting over a tough 2016, when the economy decelerated to a multi-year low. In February, economic activity accelerated and the average growth of the first two months of the year was far higher than the 4.3% expansion observed in the corresponding period of last year. Data from the country’s maritime sector is encouraging and suggests that a recovery is underway. Buttressed by a double-digit increase in cargo tonnage, Canal toll revenues expanded a strong 17.0% in the January-February period. Increased maritime trade not only has a positive spillover on the country’s ports, which expanded at a double-digit rate during the same time period, but will also help the government’s fiscal consolidation efforts. In a sign of strong confidence in the economy, bonds worth USD 1.0 billion were oversubscribed four times when the government tapped international bond markets on 4 May.
The country should remain one of the fastest growing economies in the region on the back of ongoing infrastructure projects and high Panama Canal dividends. Nevertheless, a slower-than-expected economic recovery both at global level and in the region could dampen trade and growth prospects. Analysts expect the economy to expand 5.4% in 2017, which is unchanged from last month’s forecast. For 2018, GDP is expected to grow 5.6%.
INFLATION | Higher commodity prices drive up inflation in March
Higher energy prices continued to fuel upward inflationary pressures. Complete data for March shows that inflation inched up from 3.6% in February to 3.7%, which is the highest figure in over two years. Higher inflation was seen in Costa Rica, El Salvador, Haiti, Honduras, Jamaica and Puerto Rico, while inflation eased in the Dominican Republic, Nicaragua and Panama.
Our Consensus Forecast panelists left their inflation estimates for 2017 unchanged at 3.2% after having raised them by 0.1 percentage points last month. For 2018, inflation is expected to increase to 3.4%.
Written by: David Ampudia, Economist