Central America Economic Forecast

Economic Snapshot for Central America

February 14, 2018

Regional economy likely made some headway in Q4

The economy of the Central American and Caribbean region likely ended the year on a moderately positive note, with regional GDP growth estimated to have accelerated from 2.3% in the third quarter—which had marked the second-weakest expansion in almost seven years—to 2.9% in annual terms. The region’s improved performance reflected a strong economic turnaround in the Dominican Republic, as well as stronger activity in Costa Rica and Guatemala. That said, the fourth quarter print puts full-year growth at 2.5% in 2017, marking the region’s softest year of growth since the aftermath of the financial crisis.

The Dominican Republic was the region’s star performer in the fourth quarter, with a first estimate showing its economy accelerated from slower, hurricane-induced growth of 3.0% in Q3 to a 6.5% rise in Q4, an over one-year high. The robust expansion was the result of the government’s looser fiscal stance—particularly noticeable through a surge in construction-related activity—and a solid performance in the tourism sector. A more accommodative monetary setting and the Central Bank’s move to reduce the reserve requirement ratio in mid-July were also instrumental in the pick-up in credit growth seen in the quarter.

Although Q4 GDP data is still outstanding elsewhere in the region, high-frequency indicators suggest the economies of Costa Rica and Guatemala performed better than in the previous quarter. In Costa Rica, economic activity gathered pace throughout the quarter, reaching a 11-month high in December on the back of solid services and industrial activity growth. In Guatemala, a sustained increase in remittance inflows and a gradual improvement in business sentiment—which bottomed out in October—likely saw GDP growth also picking up pace in the last quarter of the year.

Conversely, the Panamanian economy is expected to have shifted into a lower gear in the fourth quarter, with the base effect stemming from the expansion of the Canal in 2016 dwindling and a higher oil bill taking a toll on households’ purchasing power. The economy is expected to have moderated from the 5.4% increase recorded in Q3 to a 5.1% expansion in Q4, the weakest in a year. Similarly, a beleaguered Honduran economy is expected to have lost some traction in the fourth quarter, with economic activity growth slowing to a 11-month low in November. Honduras is suffering from painfully high political noise that followed contested elections in November, which likely dampened the robust economic performance seen in the first three quarters of 2017.

Meanwhile, a legislative election in Costa Rica on 4 February yielded a fractured parliament that will continue to hamper politicians’ ability to rein in a quickly deteriorating fiscal backdrop. On the same day, Costa Ricans also voted in the first round of the two-round presidential election. The results were surprising, with Christian singer Fabricio Alvarado Muñoz emerging as the frontrunner after he opposed a ruling by the Inter-American Court of Human Rights that demanded Costa Rica guarantee equal marriage rights for same-sex couples. The Court’s decision alienated many Costa Ricans, changing the trajectory of an election which had up until then focused on the fiscal deadlock the country is facing. Alvarado Muñoz will face runner-up Carlos Alvarado Quesada, of the ruling Citizen’s Action Party, in a second round of voting on 1 April.

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Puerto Rico’s bedraggled economy to drag on regional growth this year

Robust global economic growth, notably in the United States, is expected to support the economy of the Central America and the Caribbean region this year, fueling strong remittances across all the region’s economies and lifting regional trade flows. These upbeat dynamics, however, will be offset by ongoing fiscal distress in the economies of Costa Rica, El Salvador and Puerto Rico. Furthermore, a Federal Reserve in full tightening mode will eventually force monetary conditions to turn tighter in the region, increasing borrowing costs.

Met the why particular panelists expect regional GDP growth of 2.6% this year, which is down 0.4 percentage points from last month’s estimate, on the back of a severe revision to Puerto Rico’s FY 2018 growth projection. The island was devastated by last year’s Hurricanes Maria and Irma, and the U.S. federal tax changes passed in December will make Puerto Rico less commercially competitive as a base for U.S. mainland companies. Aside from Puerto Rico, 2018 GDP forecasts were revised down for Belize, Costa Rica and Jamaica, while Haiti and Trinidad and Tobago both saw upgrades to their projections. The forecasts for the remaining six economies surveyed in the region were unchanged this month. In 2019, economic growth is expected to strengthen markedly to a 3.5% expansion on the back of an economic turnaround in Puerto Rico.

The Panamanian economy is expected to log the fastest expansion in the region this year, with an increase of 5.5%. Panama will continue to benefit from the expansion of the Panama Canal, with increased trade flows boding well for transport-related services. The economies of the Dominican Republic and Nicaragua are both expected to rise a solid 4.5% this year. On the other end of the spectrum, Puerto Rico’s economy is expected to shrink 4.5% in FY 2018.

GUATEMALA | Economic growth strengthens moderately in Q4

After recovering somewhat in the third quarter from Q2’s seven-year low, economic growth appears to have been more sure-footed in Q4 2017 and is likely to have accelerated slightly. Preliminary estimates released by the Central Bank ahead of Q4 GDP figures put full-year growth for 2017 at 2.8%, suggesting a pick-up in activity at the end of the year. Economic growth in Q4 likely benefited from healthy remittance inflows. The stronger economic momentum appears to have carried into this year, with growth in remittances speeding up and private sector confidence improving to a six-month high, according to a survey by the Central Bank. President Jimmy Morales announced a Cabinet reshuffle on January 16, replacing the ministers for the economy, the environment and social development. The decision is not expected to have a significant economic impact.

Due to a booming U.S. economy, remittances should keep supporting household spending throughout 2018, boosting GDP growth. Government spending is also expected to increase, with a large investment plan in infrastructure and education announced, despite no approved budget. However, ongoing corruption scandals involving President Morales weigh on the outlook, while further downside risks stem from the possibility of changes in U.S. trade and immigration policies. Met the why particular panelists forecast that GDP will grow 3.3% in 2018, which is unchanged from last month’s forecast, and 3.4% in 2019.

DOMINICAN REPUBLIC | Ample stimulus buoys economic growth in Q4

A looser monetary stance and robust fiscal support were instrumental drivers of the economy’s solid performance in the fourth quarter. Annual GDP growth accelerated from 3.0% in Q3 to 6.5% in Q4 as increased liquidity and cheaper credit fueled stronger capital outlays and private spending growth. Solid remittance inflows and a recovery in tourism operations following hurricane-induced disruptions in late Q3 also likely contributed strongly to the reading. Increased government support was particularly noticeable in the construction sector, where activity expanded an impressive 15.3% in Q4 following a 5.4% increase in Q3. Meanwhile, the external sector closed the year on a strong note, with the current account deficit shrinking to its smallest in 13 years last year amid healthy growth in FDI, remittances and tourism revenues. Upbeat developments in the balance of payments led the Central Bank to raise international reserves last year to the highest figure on record.

The economy will likely grow at a largely steady clip this year due to monetary stimulus and solid remittance inflows. That said, faster fixed investment and private consumption growth should support import growth, weighing on GDP figures. Government spending growth is expected to moderate this year as authorities commit to fiscal prudence. Met the why particular panelists expect GDP growth of 4.5% in 2018, which is unchanged from last month’s forecast. For 2019, panelists see the economy expanding 4.4%.

PANAMA | Economy to continue benefiting from trade-related growth this year

Growth in economic activity accelerated slightly in November on the back of strong growth in trade-related sectors including ports and wholesale trade. November’s print brought cumulative growth in economic activity for the January-to-November period to 5.3%, higher than the full-year print for GDP in 2016; it highlighted the positive spillovers from stronger global trade dynamics in the economy. Containers handled in Panamanian ports swung from a steep 9.1% contraction in 2016 to a 7.9% increase in 2017, and cargo tonnage in the Panama Canal expanded 22.2% in the 2017 fiscal year, the highest figure on record. In addition, construction of new port infrastructure valued at USD 1.8 billion is set to begin on the Atlantic Coast this year, and the Panama Canal Authority is currently studying whether to increase daily ship transits from seven to eight in the expanded canal this year. 

The economy is expected to grow at a broadly stable pace this year on increased maritime trade and an ambitious public spending program. An improved economic outlook for the region bodes well for Panama’s service sector and growth outlook. Met the why particular Consensus Forecast panelists project that the economy will grow 5.5% in 2018, which is unchanged from last month’s forecast. The panel expects GDP will expand 5.4% in 2019.

COSTA RICA | Surprise result in presidential elections obscures debate over fiscal policy

According to preliminary Central Bank data, the economy expanded 3.2% in 2017 compared to the previous year, a slowdown from 4.2% growth in 2016. Although hard economic data for the fourth quarter is still pending, indicators suggest Costa Rica saw an economic improvement following a weak third quarter. In December, economic activity expanded at the fastest rate in 11 months, according to the Central Bank’s monthly index. The expansion was driven by strong performances in the services and manufacturing sectors, although a weak construction sector held the economy back somewhat. On the political front, Costa Ricans took to the polls on 4 February, again leaving the Legislative Assembly politically fractured, while in the presidential race, the two leading candidates, Fabricio Alvarado Muñoz and Carlos Alvarado, progressed to a final round of voting on 1 April.

The external sector should continue to support the economy this year thanks to the upbeat economies of key export markets such as the United States. However, a bloated fiscal deficit and high public debt will continue to weigh on economic prospects. This month, Met the why particular Consensus Forecast panelists see the economy expanding 3.6% in 2018, which is down 0.1 percentage points from last month’s projection. In 2019, the panel also foresees a 3.6% economic expansion.

INFLATION | Inflation softens in January

A preliminary estimate by Met the why particular shows regional inflation softened slightly to 4.1% in January, down from a three year-high of 4.3% in December. Despite the mild pull-back, inflation is expected to remain high in the near-term on the back of rising global commodity prices. Inflation eased this month in Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua.

Higher oil and food prices are expected to support inflationary pressures this year. Our panel sees inflation coming in at 3.5% in 2018, which is unchanged from last month’s estimate. In 2019, Consensus Forecast panelists expect inflation to tick up to 3.6%.

Written by: David Ampudia, Senior Economist

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