Central America economy decelerates markedly in Q4 2015

Central America economy decelerates markedly in Q4 2015

According to a more complete set of data, the economy of Central America and the Caribbean decelerated in the final quarter of 2015. GDP expanded 2.9% over the same quarter of 2014, which was down from the previous quarter’s increase. However, despite Q4’s deceleration, the economy accelerated and expanded 3.3% in the full year 2015. Looking at the countries individually, in the fourth quarter, the economy of Dominican Republic decelerated markedly due to a disappointing performance of the industrial sector. Moreover, slowdowns were recorded in the economies of Guatemala and Costa Rica, with the latter expanding at the softest pace in three quarters. According to a preliminary estimate, in the first quarter of 2016, the economy of the Dominican Republic stalled, expanding at the previous quarter’s 6.1% increase.

This month, headlines in the region were dominated by political developments. On 15 May, the Dominican Republic held presidential elections; incumbent President Danilo Manila is headed for a second term after winning over 60% of the vote. As a result, Manila’s lead over his opponents was sufficient to avoid runoff elections. Manila is popular for his effective economic policies in the last four years, especially in education and infrastructure. Elsewhere in the region, the debt crisis in Puerto Rico intensified earlier this month after the government defaulted on a USD 422 million debt payment. However, the worst is yet to come as the country is facing bigger payments later this year. Meanwhile, pressure is mounting on the U.S. Congress to pass a rescue package for Puerto Rico. Legislation has been delayed for months, but a revised bill is set to be introduced later this month ahead of the country’s USD 2.0 billion payment due on 1 July.

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Outlook deteriorates for the first time in four months

This year, the region is expected to grow faster than Latin America and it will continue to benefit from low oil prices as well as from a gradual recovery in the U.S. In May, the economic outlook for the Central America and the Caribbean region was revised down after three consecutive months in which the outlook was left unchanged. Our panelists see the region’s GDP increasing 3.0% in 2016, which is down 0.1 percentage points from last month’s estimate. Analysts kept their forecasts unchanged for 6 of the 12 economies surveyed, including Costa Rica and the Dominican Republic. Conversely, our panel cut the GDP forecasts for four other countries including Guatemala and Panama. Finally, the GDP outlook improved only for Honduras and Nicaragua. For next year, the region is expected to grow 3.1%.

Panama will be the fastest-growing economy of the region this year followed by the Dominican Republic and Nicaragua. At the other end of the spectrum, Puerto Rico will likely be the worst performer as its economy is expected to contract by 1.2%.

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COSTA RICA | Uncertainty regarding fiscal consolidation poses serious risks to the economy

Recent data indicate that Costa Rica’s debt problem continues. Public debt climbed to 42.4% of GDP in 2015 and is set to rise even higher this year. The Solis government had made fiscal consolidation a priority, however, its taxation reform proposal has not succeeded in passing through Congress. Given the divisiveness of the governing coalition, it does not seem likely that anything more than a very watered down version of the tax-reform plan will be approved by Congress this year. The bleak situation regarding government finances continues to be reflected in the country’s speculative credit rating status.

Costa Rica’s uncertain fiscal reform prospects will present a risk to growth in 2016. The high levels of debt make the country vulnerable to shocks that could hinder its ability to finance its debt. Furthermore, the high degree of dollarization in Costa Rica poses a liquidity risk for the government, as well as stability risks in the financial sector. However, resilient foreign direct investment and accommodative monetary policy will counter some of the aforementioned risks. Analysts expect the economy to expand 3.7% in 2016, which is unchanged from last month’s projection. The panel foresees GDP growing 3.9% in 2017. 

DOMINICAN REPUBLIC | Growth stalls in the first quarter, but economic prospects remain positive

According to preliminary data from the Central Bank, the economy grew 6.1% in the first quarter of 2016. The growth came mainly on the back of gold and silver ore mining activity being resumed as well as double-digit growth in the financial sector. In addition, tourism and foreign direct investment emerged as additional factors supporting the economy and unemployment fell throughout the quarter. In the political arena, presidential elections were held on 15 May. The current President Danilo Medina, from the governing Dominican Liberation Party, was reelected, defeating the opposition candidate Luis Abinader from the Modern Revolutionary Party. Early results suggest that Medina won by significant margin, likely avoiding a runoff election.

In 2016, the Dominican economy will continue expanding at one of the fastest paces in the region, although it will moderate slightly over 2015. Low inflation, together with an improving labor market, will support consumption, and the upgrading of public infrastructure will boost investment. On the other hand, the potential tightening of U.S. monetary policy and post-election fiscal adjustment could cause growth to moderate. Analysts expect the economy to grow 5.3% in 2016, which is unchanged from last month’s projection. For 2017, the panel projects GDP to increase 4.4%. 

GUATEMALA | Economy likely decelerated in the first quarter

According to the Guatemalan Central Bank’s Monthly Indicator of Economic Activity (IMAE), the economy appears to be decelerating. The IMAE moderated for the seventh consecutive month in March. On 29 April, Fitch affirmed both Guatemala’s credit rating at ‘BB’ and outlook at ‘stable’. Fitch cited the country’s macroeconomic stability, as well as relatively low government debt as the main drivers behind its decision, however it saw low levels of revenue collection by the government as a significant weakness. Guatemala has managed to keep its debt levels low in comparison to its regional peers. Such progress is reflected in the price for Guatemalan debt. A USD 700 million bond issuance in April was the least expensive in Guatemalan history and demonstrated investors’ confidence in the macroeconomic progress the country is experiencing.  

Guatemala will become more inviting to both foreign and domestic investors if it continues its progress toward structural reforms and fiscal consolidation. However, it is crucial that this progress continues, particularly regarding measures to improve government revenue collection, which is currently the lowest in the region. FocusEconomics panelists see the economy rising 3.4% in 2016, which is down 0.1 percentage points from last month's projection. In 2017, the panel sees GDP expanding 3.5%.

PANAMA | Robust growth projected this year on implementation of important infrastructure projects

The planned opening of the Panama Canal on 26 June and the execution of new large-scale infrastructure projects is set to make Panama the fastest-growing economy in the region this year.  Monthly economic activity accelerated in February—the latest month for which data are available—and remains resilient despite a challenging external scenario and depressed economic activity in the Colón Free Trade Zone.  The government has taken steps to mitigate any negative consequences from the leak of confidential papers that exposed the country’s opaque system of tax exchange information. The government pledged to sign more bilateral tax information exchange agreements with other states and stated that it is committed to implementing the OECD model of automatic exchange of tax information in 2018 without any caveats. 

Ongoing strength in Panama’s diverse service-oriented sectors and substantial public investment will continue to foster growth going forward. However, a weakening external scenario will weigh on the outlook. Analysts expect the economy to expand 5.9% in 2016, which is down 0.1 percentage points from last month’s projection. For 2017, the panel forecasts growth of 6.0%. 

INFLATION | Inflation inches down in March

A more complete set of data shows that inflation in the Central America and the Caribbean region eased slightly to 2.8% in March from 3.2% in February—the highest reading in over a year. March’s decrease was broadly due to lower inflation in Panama and the Dominican Republic, while in Costa Rica consumer prices dropped on an annual basis for the first time in five months. A preliminary estimate for April elaborated by FocusEconomics shows that inflation picked up to 2.9%. Looking forward, inflationary pressures are expected to remain broadly stable this year.

Panelists polled by FocusEconomics in May expect the region’s inflation to tally 2.7% this year, which is unchanged from last month’s estimate. The forecast was kept unchanged for 7 of the 12 countries surveyed, including the Dominican Republic and Puerto Rico. Conversely, the inflation outlook was upgraded for three other countries including Guatemala and Nicaragua. Finally, the forecast was downgraded only for Panama and Trinidad and Tobago. For 2017, the panelists expect regional inflation to accelerate to 3.1%. 

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Written by: Dirina Mançellari, Senior Economist

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