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Central America Country Risk Report Q2 2016

  • March 2016
  • -
  • Business Monitor International
  • -
  • 55 pages

Core Views Central American outperformers Costa Rica and Panama are facing a more challenging road ahead in future. As real GDP growth slows in Panama on the back of the end of canal construction, establishing fiscal discipline will be crucial. Should the country fail to rein in spending in an environment of lower growth, this would likely cool investor enthusiasm towards 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 short-term 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 lower 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 corruption scandals has risen. Over the longer term the entry into force of the Trans- Pacific Partnership will offer 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 future due to an end to the Tariff Preference Level programme and our view 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 A significant revision to the Banco Central de Costa Rica (BCCR)’s GDP calculation, which places greater weight on the more dynamic sectors of the economy including services and telecoms, will see growth pick up from last year’s estimated expansion of 2.6%. We forecast the Costa Rican economy will grow by 3.3% in 2016 (revised up from 2.9%) and 3.5% in 2017.

Table Of Contents

Central America Country Risk Report Q2 2016
BMI Indices - Brief Methodology 5
BMI Index League Tables 13
Executive Summary 15
Core Views 15
Major Forecast Changes 15
Key Risks 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 Stability20
Chapter 11: Economic Outlook - Costa Rica 23
Economic Growth Outlook 23
Headwinds Remain, But The Worst Is Over23
TABLE: GDP BY EXPENDITURE23
Chapter 12: Political Outlook - Costa Rica 25
Domestic Politics 25
Municipal Elections A Vote For The Status Quo25
Chapter 21: Economic Outlook - El Salvador 27
Economic Growth Outlook 27
Weak Security Environment Will Weigh On Growth27
TABLE: GDP BY EXPENDITURE27
Chapter 22: Political Outlook - El Salvador 31
Domestic Politics 31
Anti-Corruption Cases May Undermine Long-Term Reforms31
A spate of investigations into bribery and embezzlement represent an important first step in cracking down on the rampant corruption in
El Salvador
Chapter 31: Economic Outlook - Guatemala 33
External Trade And Investment Outlook 33
Poor Operating Environment Will Undermine Textile Sector33
Guatemala's unattractive operating environment will weigh on the cost competitiveness of its large textile sector, undermining trade and
investment over the long term
TABLE: CURRENT ACCOUNT33
Chapter 32: Political Outlook - Guatemala 37
Domestic Politics 37
Lack Of Reforms Will Undermine Corruption Crackdown37
The CICIG's plan to crackdown on local-level corruption in Guatemala will have only a modest near-term impact
Chapter 41: Economic Outlook - Honduras 39
Fiscal Policy And Public Debt Outlook 39
Debt Servicing Will Slow Fiscal Consolidation39
Honduras' elevated debt servicing costs will keep government spending high in 2016 While strong revenue growth will ensure a
continued narrowing of the budget deficit, consolidation will occur at a slower pace than in recent years
TABLE: FISCAL POLICY39
Chapter 42: Political Outlook - Honduras 41
Domestic Politics 41
Newly Established Corruption Mission Is No Panacea41
Corruption will remain a long-standing problem in Honduras, even despite the establishment of OAS-backed Misión de Apogo contra la
Corrupción y la Impunidad en Honduras
Chapter 51: Economic Outlook - Nicaragua 43
Economic Growth Outlook 43
Operational Challenges Will Hamper Business Climate Gains43
The Nicaraguan government's business environment reforms will be a welcome development in the country, given its longstanding
reputation as a difficult place to operate
TABLE: GDP BY EXPENDITURE43
Chapter 52: Political Outlook - Nicaragua 45
Domestic Politics 45
Despite Challenges, Ortega Well-Positioned To Extend Presidency45
Although the approval ratings of Nicaraguan President Daniel Ortega have fallen from the lofty heights seen a year ago, his party still
holds a commanding lead versus the fractured opposition and is set to win in the general election in November
Chapter 61: Economic Outlook - Panama 47
External Trade And Investment Outlook 47
Strong Dollar Will Weigh Heavily On Current Account47
External headwinds on Panama's external sector will weigh on the country's balance of payments and the current account shortfall will
remain wide compared to regional peers
TABLE: CURRENT ACCOUNT47
Chapter 62: Political Outlook - Panama 49
Domestic Politics 49
Slow Progress Ahead On Anti-Corruption Drive49
Panama's anti-corruption drive, spearheaded by President Juan Carlos Varela, will progress in the coming months
Chapter 7: BMI Global Macro Outlook 51
Global Macro Outlook 51
Tail Risks Mounting Amid Sub-Par Growth51
TABLE: GLOBAL ASSUMPTIONS 51
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %52
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%) 52
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %53
TABLE: COSTA RICA - MACROECONOMIC DATA and FORECASTS55
TABLE: EL SALVADOR - MACROECONOMIC DATA and FORECASTS55
TABLE: GUATEMALA - MACROECONOMIC DATA and FORECASTS55
TABLE: HONDURAS - MACROECONOMIC DATA and FORECASTS55
TABLE: NICARAGUA - MACROECONOMIC DATA and FORECASTS55
TABLE: PANAMA - MACROECONOMIC DATA and FORECASTS55

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