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Central America Business Forecast Report Q2 2014

  • March 2014
  • -
  • Business Monitor International
  • -
  • 54 pages

Core Views

The region’s economic trajectory remains divergent. Despite our expectations for slower real GDP growth in Panama in the next several years, it will remain the regional outperformer. On the other hand, we have a more mixed outlook for growth in the ‘northern triangle’ countries, with Guatemala likely to fare better than Honduras and El Salvador. C entral American will remain heavily dependent on the performance of the US economy, which remains a major source for remittance flows, and a destination for goods exports. D rug-related violence and high levels of insecurity will remain the major concerns for most of the region’s electorate, although such concerns will be particularly elevated among the ‘northern triangle’ states of Guatemala, El Salvador and Honduras.

Major Forecast Changes

Following the release of Q313 GDP data, we have revised up our 2014 real GDP growth forecast for Nicaragua to 5.1%, from 4.2% previously, based on our view for a continued strengthening of the country’s export performance. Indeed, we believe that economic growth will be driven by strengthening US demand for manufactured exports, and a modest uptick in coffee production following the recent renovation and rehabilitation of several major farms. While we have downgraded our GDP forecasts for Honduras after incorporating the latest data provided by the central bank, we expect that growth will pick up slightly in 2014, to 2.8%, compared to our estimate of 2.2% in 2013. The improvement will be based on a better performance in the export sector and greater confidence in the country as an investment destination as political risk subsides following the presidential election. .

Key Risk To Outlook

Downside Risk: We note downside risks to our 2014 real GDP growth forecast of 7.1% for Panama, in light of significant delays in the Panama Canal expansion project in recent weeks. Should work continue to progress slowly in the coming months, we could be encouraged to revise down our real GDP growth forecast for this year.
Downside Risk: Should Nicaragua’s export performance remain poor, the central bank may consider modestly accelerating the rate of the córdoba’s depreciation in order to bolster economic competitiveness. Indeed, given that the córdoba has appreciated in real effective exchange rate terms in recent years, a significantly weaker exchange rate could provide a boost to Nicaragua’s export sector, particularly its burgeoning textile manufacturing industry.

Table Of Contents

Central America Business Forecast Report Q2 2014
Executive Summary 15
Core Views 15
Major Forecast Changes 15
Key Risk To Outlook 15
Political Outlook - Regional 17
SWOT Analysis 17
Central America Facing Continued Challenges To Political Stability 18
Political stability will remain elusive for much of Central America over the next decade.
Economic Outlook - Regional 21
SWOT Analysis 21
Economic Outlook 22
Energy Security Questions To Linger 22
Central America looks set to see continued pressure on energy security in the short term, with a rising fuel import burden and high
proportion of its power mix derived from unreliable hydropower.
Investment Climate 25
Mesoamerica Railway To Boost Logistics Capacity 25
The revival of the Mesoamerica railway project has the potential to greatly improve logistical capacity across Central America in the
coming years, increasing supply-chain efficiencies intra-regional trade.
Chapter 1.1: Political Outlook - Costa Rica 27
Domestic Politics 27
Surprises Pave The Way For PAC President 27
In line with our expectations, none of the candidates in Costa Rica's February 2 presidential election were able to surpass the 40.0
%threshold to win outright, setting the stage for a run-off on April 6.
Chapter 1.2: Economic Outlook - Costa Rica 29
Balance Of Payments 29
Little Improvement In Current Account Ahead 29
Chapter 2.1: Political Outlook - El Salvador 31
Domestic Politics 31
FMLN In Pole Position Heading To Second Round Of Presidential Elections 31
In line with our expectations, no candidate garnered a majority of votes in the first round of El Salvador's presidential elections held on
February 2, meaning a second round will be held on March 9.
Chapter 2.2: Economic Outlook - El Salvador 27
Balance Of Payments 33
Current Account Deficit To Reverse Trend, Narrowing In 2014 33
Following five consecutive years of deterioration in El Salvador's current account, we believe that 2014 will finally see the deficit begin to
Chapter 3.1: Political Outlook - Guatemala 27
Domestic Politics 35
Security Risk To Remain On Centre Stage Politically 35
The controversy surrounding the Guatemalan Constitutional Court's ruling that the country's attorney general must step d own in May
has again thrust drug violence, corruption, and impunity into the spotlight, both domestically and internationally.
Chapter 3.2: Economic Outlook - Guatemala 27
Balance Of Payments 37
Better Export Outlook To Bolster Current Account 37
We expect that exports will rebound significantly in 2014, following a very lacklustre year due in large part to poor coffee
Chapter 4.1: Political Outlook - Honduras 27
Domestic Politics 39
Political Divisions To Keep Progress Slow 39
Chapter 4.2: Economic Outlook - Honduras 27
Economic Activity 41
Exports, Investment To Support Stronger Growth 41
While we have downgraded our GDP forecasts after incorporating the latest data provided by the central bank, we expect that growth
will pick up slightly in 2014, to 2.8%, compared to our estimate of 2.2% in 2013.
Chapter 5.1: Political Outlook - Nicaragua 27
Domestic Politics 43
Canal Project Terms Risk Public Opposition 43
The potential expropriation of private land by the Chinese consortium overseeing the proposed Nicaraguan canal project could
engender public opposition in the coming months, increasing political risk and threatening the project's completion.
Chapter 5.2: Economic Outlook - Nicaragua 27
Exchange Rate Forecast 45
NIO: Crawling Peg Here To Stay Amidst Reliance On Exports 45
Chapter 6.1: Political Outlook - Panama 27
Domestic Politics 49
Navarro's Rise Poses Challenge To An Arias Win 49
While Panama's May 2014 presidential election was beginning to look like an easy victory for Jose Domingo Arias of the ruling Cambio
Democrático late last year, the polls have tighten ed sig nificantly in recent months .
Chapter 6.2: Economic Outlook - Panama 27
Economic Activity 51
Slower Growth Here To Stay 51
We for ecast a continued moderation in Panamanian real GDP growth in 2014, as delays to the canal expansion project temper growth
in the construction and communications and transport sectors.
Chapter 7: BMI Global Assumptions 53
Global Outlook 53
Global Growth Optimism Turning To Disappointment 53
Table: Global Assumptions 53
Table: Developed States, Real GDP GrowtH, % 54
Table: Emerging Markets, Real GDP Growth, % 55

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