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Central America Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 51 pages

Core Views

Central American outperformers Costa Rica and Panama are facing a more challenging road ahead in the coming years. As real GDP growth slows in Panama on the back of the end of canal construction, establishing fiscal discipline and ensuring adequate employment will be crucial. Should the country fail to rein in spending in an environment of lower growth, this would likely cool investor enthusiasm toward the country. Similarly, Costa Rica is also facing a challenging fiscal outlook – a situation which is only exacerbated by the fragmented political environment. In contrast, our economic outlook for most of Central America's underperformers is brightening. Guatemala, Honduras and El Salvador will benefit from stronger US demand for their manufactured goods, rising remittance inflows and relatively subdued oil prices in the quarters ahead. That said, significant security risks will temper foreign direct investment into these countries over the next five years, and the risk of prolonged social unrest in the wake of recent corruption scandals has risen. Over the next several years, the entry into force of the Trans-Pacific Partnership will also pose increased headwinds to these countries' manufacturing sectors. Nicaragua's macroeconomic position is also especially vulnerable given its strong ties to Venezuela. Our core view is for a moderate slowdown in growth in the coming years due to an end to the Tariff Preference Level programme and our view that Venezuela will modestly reduce assistance to Nicaragua. However, if Venezuela were to suddenly cut off aid under the ALBA-TCP programme, this would see a sharp downturn in Nicaraguan growth and rising pressure on the country's macroeconomic buffers.Major Forecast Changes We have downgraded our end-2016 interest rate forecast for Guatemala to 3.50% from 3.75% previously. The Banco de Guatemala has held the benchmark rate at 3.00% in the year-to-date and policymakers seem cautious to hike prematurely so as not to stymie economic activity, despite an uptick in headline inflation. We have upgraded our 2016 real GDP growth forecast for El Salvador to 2.3%, from 1.9% previously, as remittance and agricultural production growth have accelerated faster than anticipated in the year to date.

Table Of Contents

Central America Country Risk Report Q4 2016
BMI Indices - Brief Methodology.............................................................................................................................. 5
BMI Index League Tables........................................................................................................................................ 13
Executive Summary................................................................................................................................ 15
Core Views.....................................................................................................................................................................................15
Major Forecast Changes...............................................................................................................................................................15
Key Risk.........................................................................................................................................................................................15
Economic Outlook - Regional................................................................................................................ 17
SWOT Analysis......................................................................................................................................................... 17
Political Outlook - Regional................................................................................................................... 19
SWOT Analysis......................................................................................................................................................... 19
Long-Term Political Outlook................................................................................................................................... 20
Central America Facing Continued Challenges To Political Stability......................................................................................20
Political stability will remain elusive for much of Central America over the next decade. Indeed, given the limited resources of most
Central American economies, the elevated violence, corruption and social unrest that currently define the region's political risk profile
are likely to remain obstacles to growth.
Chapter 1.1: Economic Outlook - Costa Rica...................................................................................... 23
Economic Growth Outlook...................................................................................................................................... 23
Fiscal Deficits To Narrow Slowly As Political Gridlock Hinders Reform.................................................................................23
Political gridlock in Costa Rica ' s national legislature will ensure that reforms to address the fiscal deficit will have to be passed in a
piecemeal manner, narrowing the budget shortfall gradually in the next few years.
Chapter 1.2: Poltical Outlook - Costa Rica........................................................................................... 25
Domestic Politics..................................................................................................................................................... 25
Fiscal Compromise Key To Breaking Legislative Deadlock.....................................................................................................25
The outlook for breaking Costa Rica's legislative deadlock may be improving, as the government and the opposition coalition recognise
the need to address the fiscal shortfall. Nevertheless, it remains to be see n how willing each side is to compromise to indicate a turning
point in the country's stalled reform process.
Chapter 2.1: Economic Outlook - El Salvador..................................................................................... 27
Economic Growth Outlook...................................................................................................................................... 27
External Accounts To Benefit From US Tailwinds.....................................................................................................................27
Stronger US demand for manufactured goods and rising remittance inflows will drive a narrowing of El Salvador's current account
deficit. This will contribute to greater balance of payments stability and an uptick in foreign reserves.
Chapter 2.2: Political Outlook - El Salvador......................................................................................... 29
Domestic Politics..................................................................................................................................................... 29
Intensified Security Measures Will Stoke Political Risk............................................................................................................29
The Salvadoran government's decision to double down on its aggressive anti-crime campaign will increase the level of uncertainty
among investors and others in the country.
Chapter 3.1: Economic Outlook - Guatemala...................................................................................... 31
Economic Growth Outlook...................................................................................................................................... 31
Security And Drought Will Weigh On Growth.............................................................................................................................31
Real GDP in Guatemala will decelerate in the coming quarters, the result of an uptick in violent crime, emigration, and adverse weather
conditions. As headwinds gradually diminish over the coming years, growth will pick back up, but remain below recent trends.
Chapter 3.2: Political Outlook - Guatemala.......................................................................................... 33
Domestic Politics..................................................................................................................................................... 33
Gridlock Will Prevent Reforms, Weighing On Sentiment..........................................................................................................33
Guatemala will continue to face political gridlock in the National Congress in the coming quarters. This will prevent much-needed
reforms to address impunity, gang activity and chronic funding shortfalls for national institutions, weighing on investor sentiment and
limiting real economic growth.
Chapter 4.1: Economic Outlook - Honduras........................................................................................ 35
Economic Growth Outlook...................................................................................................................................... 35
Current Account Deficit To Narrow On Increased Exports.......................................................................................................35
Honduras' current a ccount deficit will narrow in 2016 and 2017 on the back of rising exports, steady secondary income flows, and a
thriving PPP programme. However, over the remainder of the decade the implementation of the TPP and continued weakness in the
country's business environment will offset these strengths and lead to a widening of the current account deficit.
Chapter 4.2: Political Outlook - Honduras............................................................................................ 37
Domestic Politics..................................................................................................................................................... 37
Opposition Will Not Prevent Hernández's Second Term...........................................................................................................37
Honduras' President Juan Orlando Hernández is likely to stand for and win re-election next November, despite efforts by the opposition
to hold a referendum that might prevent him from seeking a second term. As a result, we expect Honduras to experience broad policy
continuity over the next several years, improving investor sentiment.
Chapter 5.1: Economic Outlook - Nicaragua....................................................................................... 39
Economic Growth Outlook...................................................................................................................................... 39
Widening Fiscal Deficits To Increase The Likelihood Of Unrest..............................................................................................39
Nicaragua's fiscal deficit will be modestly wider in the coming years, as decreased transfers from Venezuela and a slowing economy
temper revenues. In response, the government of President Daniel Ortega will cut social spending, increasing the likelihood of public
unrest.
Chapter 5.2: Political Outlook - Nicaragua........................................................................................... 41
Domestic Politics..................................................................................................................................................... 41
Public Doubts Over Legitimacy Likely To Mar Ortega's Third Term........................................................................................41
Political risk will rise in Nicaragua as the country nears the November general election. Moreover, increasing public doubts about the
election's legitimacy are likely to undermine President Daniel Ortega's near-certain third term.
Chapter 6.1: Economic Outlook - Panama........................................................................................... 43
Economic Growth Outlook...................................................................................................................................... 43
Investment And Private Consumption Will Bolster Growth......................................................................................................43
Panama's headline real GDP growth will be among the highest in Latin America in the coming years , driven by continued capital
expenditure and the consumer and financial services sectors. A favourable business environment will support a robust infrastructure
project pipeline underpinned by foreign investment.
Chapter 6.2: Political Outlook - Panama.............................................................................................. 45
Domestic Politics..................................................................................................................................................... 45
Government Efforts To Increase Transparency Will Have Modest Success...........................................................................45
Panamanian officials will enact reforms to repair the country's international reputation in the wake of the 'Panama Papers' scandal.
However, low approval ratings and domestic challenges will weigh on the administration's mandate.
Chapter 7: BMI Global Macro Outlook................................................................................................... 47
Global Macro Outlook.............................................................................................................................................. 47
EMs Past The Worst, But Structural Problems Persist.............................................................................................................47
TABLE: GLOBAL ASSUMPTIONS.......................................................................................................................................................................... 47
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %..................................................................................................................................48
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %.................................................................................................................................49
TABLE: CENTRAL AMERICA - MACROECONOMIC DATA and FORECASTS........................................................................................................ 51

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