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Central America Business Forecast Report Q4 2014

  • September 2014
  • -
  • Business Monitor International
  • -
  • 53 pages

Core Views
T he 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. While they will likely benefit from improved agricultural
yields and stronger US demand for manufactured goods, Guatemala,
Honduras and El Salvador are still vulnerable to significant structural
macroeconomic weaknesses.
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
We have downgraded Guatemala’s long-term political risk ratings,
from 45.8 to 45.3, on the back of recent increased threats to judicial
independence in the country. In recent months we have seen the
ousting of Attorney General Claudia Paz y Paz from office, and
the 2014 selection process for Supreme Court justices allegedly
marked by irregularities. If this weakening of judicial independence
continues, we believe it risks undermining efforts to improve security
in Guatemala and will make it more difficult for foreign businesses
to conduct operations in the country.
We have revised our 2014 policy rate forecast for Guatemala, from
4.50% to 4.25%, with sluggish inflation set to offer some additional
room for cuts to the policy rate in the coming months. That said, we
believe we are nearing the end of the easing cycle, with stronger
growth and an uptick in price pressures to see less accommodative
monetary policy by late 2014.

Table Of Contents

Central America Business Forecast Report Q4 2014
Executive Summary... 15
Core Views ...15

Major Forecast Changes .15
Key Risks To Outlook .15
Political Outlook - Regional... 17
SWOT Analysis 17
Long-Term Political Outlook . 18
Central America Facing Continued Challenges To Political Stability..18
Economic Outlook - Regional 21
SWOT Analysis 21
Trade Outlook.. 22
Central American Trade Policy To Remain US-Focused...22
Investment Climate 24
Central American Yields Set For A Spike..24
Chapter 1.1: Political Outlook - Costa Rica.. 27
Domestic Politics ... 27
Public Policy To Orient In Business-Friendly Direction27
Chapter 1.2: Economic Outlook - Costa Rica.. 29
Economic Activity... 29
On Track For A Pick-Up In Growth.29
Table: GDP By Expenditure...29
Chapter 2.1: Political Outlook - El Salvador. 31
Domestic Politics ... 31
Government To Have Little Success In Reducing Violence..31
A sharp uptick in violence following the breakdown of El Salvador's gang truce will put pressure on the newly-elected president to take
Chapter 2.2: Economic Outlook - El Salvador 33
Balance Of Payments.. 33
External Dynamics Bode Well For Current Account..33
El Salvador's current account deficit will narrow significantly in the coming quarters, thanks to an improving outlook for the US consumer
sector and broader economy.
Table: Current Account...33
Chapter 3.1: Political Outlook - Guatemala.. 35
Domestic Politics ... 35
Judicial Independence Under Threat.35
Guatemala appears to be backsliding on its previous efforts to boost judicial independence.
Chapter 3.2: Economic Outlook - Guatemala.. 37
Economic Activity... 37
Government Spending To Partially Offset Growth Headwinds.37
Guatemala's latest growth data are in line with our expectations, and we maintain our full-year real GDP expansion forecast of 3.1%.
Table: GDP By Expenditure...37
Chapter 4.1: Political Outlook - Honduras 39
Domestic Poltics 39
Limited Security Gains Ahead39
Honduran authorities' attempts to crack down on drug trafficking groups operating in the country represent a positive step toward
improving the security environment.
Chapter 4.2: Economic Outlook - Honduras 41
Economic Activity... 41
Growth On The Upswing As Agricultural Production Improves...41
We expect that real GDP growth in Honduras will pick up to 2.8% in 2014, compared to 2.6% in 2013, as agricultural production
continues to improve.
Table: GDP By Expenditure...41
Chapter 5.1: Political Outlook - Nicaragua... 43
Domestic Politics ... 43
Investment Profile Headed In A Stronger Direction...43
Nicaragua's business environment is headed in a more investor-friendly direction, owing to a strong security environment and a
moderate shift in the government's rhetoric toward the private sector.
Chapter 5.2: Economic Outlook - Nicaragua... 45
Fiscal Policy. 45
Spending Restraint To Bolster Fiscal Position.45
Nicaragua's budget shortfall will narrow this year due to spending restraint by the government.
Table: Fiscal Policy45
Chapter 6.1: Political Outlook - Panama.. 47
Domestic Politics ... 47
Party Infighting Suggests Rising Risk of Gridlock47
Infighting within Panama's Partido Revolucionario Democrático threatens the efficacy of the governing alliance made between the party
and the president's Partido Panameñista. This could stymie the new government's policy making abilities, leading to gridlock.
Chapter 6.2: Economic Outlook - Panama... 49
Economic Activity... 49
Construction Sector To Weigh On Growth49
A deceleration in construction industry growth and a relatively slow expansion of the transportation and communications sector underpin
our forecast for real GDP growth in Panama to moderate to 6.5% this year, from 7.6% in 2013.
Table: Economic Activity..49
Chapter 7: BMI Global Assumptions. 51
Global Outlook. 51
Eurozone Downgrade On Poor Q214..51
Table: Global Assumptions.51
Table: Developed States, Real GDP GrowtH, %...52
Table: Emerging Markets, Real GDP Growth, %..53

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