El Salvador: Economic Snapshot for Central America
Regional economy picked up speed in Q3; further acceleration likely in Q4
According to a comprehensive estimate, the economy of Central America and the Caribbean expanded 3.2% in the third quarter, up from Q2’s 3.0% growth but down from the preliminary estimate of 3.3%.
The downward revision was largely due to a weaker-than-expected outturn in Costa Rica, due to softer private consumption growth on higher unemployment and limp consumer confidence, and widespread strikes over the government’s fiscal reform bill. In Panama, growth was still subdued despite an uptick compared to Q2—when the economy was hit by a month-long strike in the construction sector. Q3’s soft reading was largely due to lingering weakness in the industrial sector.
In contrast, the Guatemalan economy gained speed in the third quarter, on the back of faster retail growth, which was in turn likely spurred by surging remittances. Meanwhile, the Dominican Republic expanded at a blistering pace, propelled by robust private credit growth and a solid manufacturing sector, and Puerto Rico showed signs of recovery from 2017’s devastating hurricanes.
The region’s smaller economies lost momentum in Q3. The contraction in Nicaragua deepened due to the ongoing toxic effect of social instability, while growth in El Salvador lost steam on slower private consumption growth and momentum in Honduras ebbed on falling fixed investment. The expansion in Jamaica softened, although this was in part due to a less favorable base effect, and underlying economic fundamentals continued to improve.
Despite dipping, Belize’s expansion was still solid on rising visitor numbers, while in Trinidad and Tobago, depressed hydrocarbon production likely held back the economy, although firm figures are still outstanding. Haiti recently released figures for FY 2018—which ended in September last year—showing a slight uptick in growth compared to FY 2017. However, the expansion was still paltry and fell far short of the government’s own target.
The regional economy likely sped up in the final quarter, with growth currently forecast at 3.8%. A flash estimate for the Dominican Republic suggested the economy ended the year with a bang, with growth for 2018 as a whole likely by far the fastest in CENAM. Monthly economic activity readings for the other big-hitters are mixed. Puerto Rico surged in October thanks to a very favorable base effect, while growth in Panama was subdued in the same month. In Guatemala, economic activity readings for October and November averaged slightly lower than Q3 but were still robust, nonetheless. In Costa Rica, output growth slowed for the sixth consecutive month to hit a near five-year low in November.
On the political front, Costa Rica finally approved the long-awaited fiscal reform in December. Although this will go some way to alleviating the massive fiscal shortfall, it doesn’t appear to go far enough; a substantial budget deficit will remain, and the public debt-to-GDP ratio is expected to continue rising over the forecast horizon.
El Salvador is gearing up for presidential elections to be held in February. Nayib Bukele, head of the right-wing Grand Alliance for National Unity (GANA) party, is the current favorite to clinch victory, which would mark the first time in decades that neither of the two main parties—namely the Nationalist Republican Alliance (ARENA) and the Farabundo Martí National Liberation Front (FMLA)—has won. As such, his victory could spell increased political instability in the near-term.
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Growth should be healthy going forward, but downside risks remain
In 2019, Central America and the Caribbean should continue to benefit from solid—albeit moderating—momentum in the U.S., the region’s key trading partner, 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 there—global trade tensions and tighter global financial conditions are the key external risks. Internally, key risks include a further deterioration of the political situation in Nicaragua and potential political uncertainty in Guatemala leading up to elections this year.
FocusEconomics panelists expect regional growth of 3.6% this year, which is unchanged from last month’s forecast. Costa Rica, Nicaragua, Puerto Rico and Trinidad and Tobago had their 2019 growth forecasts downgraded this month, while Haiti had its upgraded. The region’s remaining economies saw their 2019 projections unchanged. Our panelists see regional growth at 3.3% in 2020.
The Dominican Republic and Panama are expected to log the region’s fastest growth this year, with both economies forecast to expand by 5.0%. Conversely, Nicaragua is expected to be the region’s laggard with a 0.4% contraction, as the fragile political situation continues to weigh on the economy.
GUATEMALA | Growth picks up in Q3; momentum likely solid in the final quarter
Economic growth picked up pace in the third quarter of 2018 on the back of resilient domestic demand and despite a weak external sector performance. Although easing slightly, growth in private consumption remained sturdy and benefited from strong growth in remittances. Meanwhile, public consumption and fixed investment growth shifted into a higher gear in the quarter, picking up some of the slack. On the other hand, exports contracted at a sharper pace while import growth accelerated. With that said, strong import growth is normally a sign of robust domestic demand. Looking at the final quarter of 2018, economic activity kept up pace in October and November, while growth in remittances remained strong through the quarter. Overall, a preliminary estimate from the Central Bank suggests annual growth accelerated slightly in 2018. In other news, after a year of tensions between the government and the UN, Guatemala pulled out of the UN’s anti-corruption commission and expelled its commissioners. This followed an investigation into government officials and top presidential aides.
Firming domestic demand should support economic growth this year, with private consumption benefiting from a tight labor market and resilient remittances inflows. On the other hand, heightened political risk in the lead-up to this year’s elections poses a downside risk to economic activity, threatening consumer and investor confidence. FocusEconomics Consensus Forecast panelists expect the Guatemalan economy to expand 3.1% in 2019, which is unchanged from last month’s forecast, and 3.0% in 2020.
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DOMINICAN REPUBLIC | Economy ends 2018 on a high
The economy continued to boom in the fourth quarter according to preliminary data, rounding off an impressive 2018 during which growth was likely by far the highest in the CENAM region. Q4’s performance was underpinned by the construction and services sectors, with construction benefiting from ongoing projects in the private residential housing, tourism and energy sectors, and services from solid credit growth and low price pressures. Over 2018 as a whole, flash Central Bank figures point to healthy growth in exports, remittances and tourism revenue. This is largely thanks to strong dynamics in the U.S. economy, the Dominican Republic’s key trading partner. On the political scene, the government recently announced its intention to sell a stake in the new Punta Catalina power plant, which could provide a one-off boost to public coffers. The plant, when fully operational, will significantly increase domestic electricity production.
Growth will likely soften this year on easing momentum in the U.S. and tough prior-year comparatives. However, strong fixed investment and private consumption should support the economy, which will continue to perform well compared to regional peers. Downside risks include tighter global financial conditions and vulnerability to severe weather conditions. FocusEconomics panelists expect GDP growth of 5.0% in 2019, which is unchanged from last month’s forecast. For 2020, panelists see the economy expanding 4.6%.
PANAMA | Economic activity still limp according to recent data
The economy modestly accelerated in the third quarter from the second quarter’s dismal performance, halting three consecutive quarterly slowdowns. The print was largely led by the service sector—particularly dynamic trade flows buttressing activity in the Panama Canal and the Colón Free Trade Zone—as well as by a recovery of construction activity after a strike-driven slump in Q2. Moreover, FDI inflows increased nearly a tenth year-on-year in January-September. Nevertheless, growth remained feeble in the quarter compared to past years. Turning to the fourth quarter, construction growth likely continued to pick up as the government boosted its infrastructure development efforts. In less positive news, early data suggests growth momentum might have remained modest in the last quarter, as signaled by a subdued economic activity indicator in October. On 12 December, the IMF completed its Article IV consultation with Panama, praising the government’s commitment to prudent fiscal management and encouraging further improvements on tax transparency.
The economy appears poised to regain steam this year after a weak showing in 2018. A recovery in construction amid a public infrastructure push and the ramp up of the colossal Cobre Panama copper mine—set to open in February and expected to generate up to USD 2 billion of annual exports once at full capacity—should power the acceleration. However, delays in the project due to recently heightened legal uncertainty could present a key downside risk. A slowdown of global trade flows, at risk due to trade protectionism and slowing global growth, also clouds the outlook. FocusEconomics Consensus Forecast panelists project that the economy will grow 5.0% in 2019, which is unchanged from last month’s forecast, and 4.8% in 2020.
COSTA RICA | Fiscal reform bill finally enacted against backdrop of meager growth
The economy lost its footing in the third quarter, with annual economic growth slowing to an over five-year low. The slowdown primarily came on the back of lackluster private and government consumption. Private consumption was weighed on by rising unemployment, a large decrease in consumer confidence and widespread protests in September related to the fiscal reform bill (which passed on 3 December). Government consumption stalled in the quarter, with no change observed compared to the same quarter a year earlier. On a brighter note, fixed investment growth held up well—although only because of a low base effect—and exports outpaced imports. The fourth quarter, meanwhile, began on an unconvincing note: Growth in economic activity slumped to a near five-year low in November, according to the Central Bank’s monthly index; consumer confidence deteriorated further in November and fiscal reform protests lasted until mid-December.
The economy should be supported this year by stronger export growth—likely linked to a weaker colón and robust U.S. demand—and a more certain fiscal outlook. However, the immediate effects of fiscal austerity and tighter monetary conditions, in addition to ongoing instability in neighboring Nicaragua, are likely to limit growth prospects. FocusEconomics Consensus Forecast panelists expect GDP to grow 2.9% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.2% in 2020.
INFLATION | Inflation falls in December
According to an estimate produced by FocusEconomics, regional inflation was 2.8% in December, down from November’s 3.2% and marking the second consecutive monthly decline. Price pressures eased in all countries which have so far released data, on the back of a steep decline in oil prices.
On the monetary policy front, in December Jamaica’s Central Bank cut rates to address concerns that inflation could fall outside the target range going forward. In contrast, in early January the Central Bank of Honduras tightened its stance due to rising core inflation and inflation expectations.
Currency weakening and solid domestic demand will drive inflation in the Central America and Caribbean region this year. The future evolution of oil prices, which were highly volatile last year, is a key source of uncertainty to the region’s inflation outlook given its reliance on imported oil. FocusEconomics panelists see inflation coming in at 3.2% in 2019, down 0.1 percentage points from last month’s forecast. For 2020, FocusEconomics panelists expect inflation to remain broadly stable at 3.1%.
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Oliver Reynolds
Economist