Central America Economic Outlook November 2016

Economy keeps up positive momentum in Q3

Central America: Economy keeps up positive momentum in Q3

November 9, 2016

Economic activity in the Central American and the Caribbean region accelerated in the second quarter and monthly data for key countries suggest that the economy maintained the positive momentum in the third quarter. The Dominican Republic, which is the biggest economy in the region, expanded 5.8% year-on-year in the third quarter. While the reading was a deceleration compared to the impressive growth rate recorded in the previous quarter, it remains robust relative to other economies in the region. Meanwhile, Guatemala’s economy likely accelerated in Q3 as the Central Bank’s economic activity index picked up and remittances grew robustly in September.

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In the political arena, Nicaragua held presidential elections on 6 November and results show a landmark victory for Daniel Ortega, who is now headed for his third presidential term. The outcome was widely expected due to Ortega’s substantial popularity and his lack of any real rival. Ortega’s approval has been boosted by Nicaragua’s stable economic progress and low level of crime compared to the other countries in the region. Even though the country has shown robust GDP growth rates in recent years, its economy remains far from strong and it still needs to attract foreign investment. Elsewhere in the region, Puerto Rico will hold gubernatorial elections on 8 November and there are doubts about the future of the financial plan recently submitted by Governor Alejandro García Padilla since he is not standing for reelection. The plan aims to address the island’s disastrous debt situation and to put public finances on a more sustainable path. 

GDP growth forecast for this year remains stable 

Economic growth is forecast to decelerate from last year’s rate, though the region will still expand more than Latin America’s economy. For the sixth consecutive month, our analysts expect the region’s GDP to grow 3.0% this year. This month, estimates were left unchanged for four of the 12 countries, including Nicaragua and Puerto Rico. Of the other economies, GDP growth forecasts were revised down for six countries including Guatemala and Panama, while they were revised up for Costa Rica and the Dominican Republic. The regional projection for 2017 was also left unchanged at the previous month’s 3.2% increase.

The Dominican Republic will be the fastest growing economy this year with an expected growth rate of 6.0%. In contrast, the economies of Trinidad and Tobago and Puerto Rico, in that order, are expected to be the worst performers with contractions of 2.4% and 1.4%, respectively. 

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COSTA RICA | Economy slows towards year-end 

Costa Rica’s economy is gradually losing momentum as it approaches year-end. The July and August readings of the index of monthly economic activity point to a deceleration of GDP growth in Q3. This comes after the economy had already slowed down slightly in the second quarter following Q1’s strong reading. Poor political legitimacy and a widening budget deficit are preventing the government from taking a strong stance on reforms. The government recently presented a bill to Congress to slow public wage growth, which the opposition had stipulated as a necessary condition before it would discuss the introduction of new taxes. The government is pressing the parliament to approve tax increases by early next year.

Solid private consumption will still prop up Costa Rica’s economy, though it will also be constrained by a feeble external sector and weak public finances. Analysts surveyed by FocusEconomics expect the economy to expand 4.0% in 2016, which is up 0.1 percentage points from last month’s projection. For 2017, the panel also expects GDP growth of 4.0%.

DOMINICAN REPUBLIC | Construction sector slowdown drags on economy in Q3

Although the Dominican Republic’s economy continued to grow at a robust pace in Q3, it decelerated compared to the impressive performance recorded in the previous quarter, mainly due to a slowdown in construction activity. The deceleration was likely caused by the fiscal tightening that the government undertook following May’s elections. In spite of this, the economic expansion was still solid and came on the back of the strong performance of both the mining and quarrying sector, supported by strong inflows of FDI, and the agricultural sector. In the first nine months of the year, the economy benefited from a substantial increase in remittances, bolstered by a strengthening US labor market. Moreover, the tourism sector saw a considerable surge in tourism receipts in the same period, mainly from North America.

The economy should decelerate somewhat this year, but will nevertheless remain one of the most dynamic in the region, supported by robust domestic demand, expanding gold production and a buoyant tourism sector. Analysts expect the economy to expand 6.0% in 2016, which is up 0.2 percentage points from last month’s projection. For 2017, the panel projects that GDP will increase 5.1%.

GUATEMALA | Tense political situation will harm growth

The Guatemalan economy seems to be picking up steam in the second half of the year, after GDP growth accelerated in Q2. The Central Bank’s economic activity index was up again in September, while remittances continued to grow in October, albeit at a slower pace. S&P Global Ratings affirmed Guatemala’s BB rating but nevertheless downgraded its outlook from stable to negative because of continued political uncertainty. The tense political climate is impeding the restoration of trust in institutions and keeping business confidence and tax receipts low. As a result, investment levels have remained subdued, jeopardizing future growth and the government’s ability to service its debt. 

Political uncertainty remains the main barrier to economic growth this year and next. FocusEconomics Consensus Forecast panelists forecast that GDP will grow 3.5% in 2016, which is down 0.1 percentage points from last month's estimates. In 2017, the panel expects GDP growth to accelerate to 3.7%.

PANAMA | Economy constrained by flagging global trade  

The economy has been unable to capitalize on the early gains of the expanded Panama Canal as the challenging external scenario has been constraining its growth prospects. The latest monthly economic activity data from July and August suggest that GDP growth moderated in Q3. Nevertheless, the economy is expected to remain on a steady growth path and the recently approved 2017 budget envisages increased spending and salary hikes for public employees. The budget is not expected to derail the government’s fiscal consolidation efforts since tax revenues are expected to increase on the back of higher Panama Canal earnings and improved tax collection. In other tax-related developments, the government took an important step to mitigate the consequences of the Panama Papers scandal by signing an OECD tax convention on tax information sharing.

Large-scale infrastructure projects and higher Panama Canal revenues will support growth but it will still suffer from flagging global trade. Analysts expect the economy to expand 5.4% in 2016, which is down 0.3 percentage points from last month’s projection. For 2017, the panel forecasts growth of 5.8%.

INFLATION | Inflation stabilizes in September     

Inflation was 2.6% in September, which matched the previous month’s reading, remaining at the lowest level in eight months. Higher inflation in six countries, including Panama, offset lower inflation in four countries, including the Dominican Republic. Meanwhile, in September, the annual variation in consumer prices was negative in Costa Rica and Puerto Rico

Our November Consensus Forecast estimates inflation of 2.4% this year, which is down 0.1 percentage points from last month’s forecast. Inflation forecasts were downgraded for five countries, while estimates were revised up for four countries including Guatemala and Haiti. For next year, our panelists expect regional inflation to accelerate to 3.1%. 

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Written by: Dirina Mançellari, Senior Economist

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