Central America as a region will remain heavily dependent on the
performance of developed-state economies, particularly the US, which
remains a major source for remittance flows and demand for exports.
Drug-related violence and high levels of insecurity will remain a major
concern for most of the region, although such concerns will be particularly
elevated among the 'northern triangle' states of Guatemala,
El Salvador and Honduras.
The region's economic trajectory remains highly divergent. Even
though we expect its growth story to moderate in the coming years,
Panama is still set to experience one of the fastest real GDP growth
rates in the region, whereas El Salvador and Guatemala will struggle.
Major Forecast Changes
While we continue to expect growth to slow in Costa Rica, after
the country expanded by a robust 5.1% in 2012, we see potential
for greater than initially anticipated investment. As such, we have
modestly revised up our 2013 real GDP growth forecast to 4.2%
(from 3.7% previously) and our 2014 forecast to 3.8% (from 3.4%).
We have revised down Honduras 2013 growth forecast, from 3.8%
to 3.5%. Indeed, a virulent strain of coffee rust is likely to see net
exports weigh far more heavily on headline growth than initially
After Honduras posted an estimated budget deficit of 5.9% of GDP
in 2012, we revised our forecast from calling for a fiscal deficit
of 3.1% to 5.0% in 2013. We have long believed that increased
political pressure in the run-up to the country's November election
will make substantial fiscal consolidation difficult. However, given
evidence of limited austerity in H212, we believe the shortfall is
likely to be even more substantial than we initially anticipated.
Key Risks To Outlook
Upside Risk: The performance of the US economy, and particularly
US demand for regional exports, remains the biggest upside risk to
our growth forecasts. We currently forecast US real GDP growth of
2.1% in 2013 and 2.7% in 2014, but if growth is significantly stronger,
we would be likely to see Central American economies perform better
than we currently anticipate.
Downside Risk: If eurozone sovereign woes drag the global economy
into recession, this will have a detrimental impact on Central
American growth rates. Moreover, if the virulent strain of coffee rust
currently affecting crops in the region is more widespread than we
are anticipating, this will see net exports act as a greater drag on