Current risks and opportunities for the Central American economy

Central America is currently experiencing a gradual economic recovery. This comes as the most challenging days of the coronavirus pandemic have passed. As was the case with many countries, the pandemic was one of the most significant challenges that the region has had to deal with in recent decades. Now that a state of increasing normalcy has returned to Central America, each country continues to have its unique situation with which to contend to restore their economies to health.

The Central American economy and fiscal realities

“The main fiscal risk in the region is in the area of current accounts. This is the case even though there is a divergence in individual situations between the countries that make up the Central American economy. For instance, in Panama, which has the highest credit rating in the region (BBB),  we have seen that the debt in previous years has gone up. With the improvements in the outlook for economic growth, we will see a downgrade,” said Carlos Morales, director of Fitch’s sovereign team for Latin America.

Fiscal policy was considered the primary measure of how the countries that comprise Central America faced the crisis that Covid-19 triggered.

According to the Economic Commission for Latin America and the Caribbean (ECLAC), the countries of Latin America used large packages of fiscal measures that were equivalent to an average of 4.6% of the GDP. Therefore, dealing with this financial burden is paramount to the health of the Central American economy.

“Costa Rica has made a lot of effort to reduce its fiscal deficit, which in recent years has grown significantly. This has naturally led to a significant increase in public debt. However, according to the agreement between Costa Rica and the International Monetary Fund, we are seeing an effort to reduce the fiscal deficit and stabilize the debt in the coming years,” Morales pointed out.

The action of making an agreement with the IMF is gaining strength in recovering economies that require funds to be able to stabilize the Central American countries.

“In El Salvador, we have seen that the current Bitcoin decision has deteriorated the possibility of reaching an agreement on debt liability with the International Monetary Fund. For this reason, the country has had a negative risk rating. Moreover, the current situation reduces the possibility of an agreement that leads to sources of financing from the International Monetary Fund”, details the Fitch member for Latin America.

Growth and Recovery

“External demand has significantly helped the economic growth of some Central American countries. For example, in Guatemala and El Salvador, we see that a significant increase in remittances from their citizens overseas has greatly improved growth prospects,” Morales mentioned.

These factors already significantly boosted the economy last year. As an example, remittances exceeded 32 billion dollars. This is a record figure that the World Bank reported. As a result, this organization viewed the effect of this income and the progress made in treating Covid as factors leading to the projected growth of 4.7% in the Central American economy for this year.

“In Costa Rica, growth is going to be significantly higher. In this case, we also have seen that convergence with the GDP of 2019 had already occurred in 2021 in both Costa Rica and Guatemala and, finally, El Salvador,” says the director from Fitch’s sovereign team for Latin America.

Another vital factor in helping the growth of the region is exports. The Secretariat for Central American Economic Integration (SIECA) reported that exports in the 2nd half of 2021 reported a value of $20.9 billion. This figure represents an increase of 27.5% compared to the same period of 2020.

“Exports have increased significantly. Exports of Panamanian products went from about 600 million dollars in 2019 to about 3 billion at the end of 2021. This increase in overseas sales has brought the country’s growth rate to 15%”, highlights Carlos Morales.

Inflation in the Central American Economy

Another of the most talked about risks for the economy is inflation. This is an issue that is gaining more and more importance in the global economy. Recently the United States Bureau of Labor Statistics estimated that annual inflation in this country reached 8.5%, its highest rate in almost 40 years.

“ The Central American economy has not seen an uncontrolled increase in prices as has been experienced in other countries. Although this is a risk, it will not be at the level of what we are seeing in other countries where inflation has been well above historical levels,” said Morales.

Inflation has not had the same impact on the Central American economy as in other countries. By September of last year, ECLAC recorded that Central America and Mexico had an inflation rate of 5.3%. This figure represented an increase of 2.2 percentage points compared to December 2020. However, it has been suggested that this rate jump originated from factors external to the region.

“In Panama, we have seen that the price increases correspond mainly to the increase in fuels. This is because the rise in the price of oil has increased the cost of gasoline. This has resulted in higher transportation costs, which has been one of the factors by which inflation has been an effect that comes from abroad, not necessarily from within the countries”, concluded the Fitch official for Latin America.

In 2022, the Central American economy is gradually returning to the levels seen before the pandemic due to the resurgence of different economic sectors. Above all, the reopening of markets has allowed exports to improve steadily.   Despite this, there are still risks that are still latent. At this point, however, agreements with the International Monetary Fund seem to be the best option for accelerating the economic recovery of the region’s countries.