Central America’s Migration Wave Slap

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Central American credits joined Mexico in absorbing the brunt of post-Trump election repositioning with their own close trade and remittance ties through the CAFTA agreement, coupled with fiscal and political doubts as investors prepare for tougher commodity and tourism terms. The Dominican Republic remains in favor as El Salvador is shunned, with Costa Rica and Panama under increased skepticism. In the sub-region only Honduras is under a formal IMF program, but that protection is unable to stoke confidence in the face of harsher US import and immigration restrictions in the next administration. The President-elect has vowed immediate deportations of millions of illegal workers starting with convicted criminals, and wholesale renegotiation of hemispheric commercial accords since original ratification decades ago. El Salvador’s 2 percent growth is the area’s slowest as mining hopes were dashed, and the 3.5 percent of GDP fiscal deficit is to be funded by $550 million in external bond issuance following delayed congressional approval. Half the 65 percent of GDP public debt is domestic, and $1 billion in short-term Treasury bill flotation the latest cycle was a record. The trade shortfall has been roughly offset by remittances above 15 percent of output, but annual 5 percent growth could halve under new Washington curbs, also expected to slash anti-poverty and economic reform foreign aid which fell under a special program during the Obama years. The Dominican Republic’s 6 percent expansion pace is triple its neighbor’s, with gold exports and domestic financial service and retail demand notable fresh drivers. Inflation is half the 4 percent target, but could creep up in 2017 with higher energy costs. The current account gap is modest at 1.5 percent of GDP, as visitor earnings jumped 10 percent to $5 billion through September, with 15 percent from South American vacationers. Remittance flows are the number three foreign exchange earner, and finance local small business as well as basic household needs according to studies, so a northern crackdown could quickly translate into depressed consumer and corporate sentiment.

Costa Rica’s economy has advanced 4 percent with telecoms and transport sector strength, on negligible 1 percent inflation. The 6.5 percent of GDP budget hole continues to defy consolidation efforts pledged by the government in its core platform, but politically untenable with its weak parliamentary influence. Currently 95 percent of spending comes from legal and constitutional mandates that remain sacrosanct and require annual double-digit borrowing increases. The large trade deficit is also structural and despite high-tech hub ambitions, tourism and related industries are still the competitive mainstays, with potential employers criticizing the local skills base. Panama is growing a healthy 6 percent and budget retrenchment has progressed under a responsibility law, with the investment-grade sovereign rating intact. However inflation is approaching the 4 percent target and infrastructure development may have peaked with completion of the Canal widening project. Revenue was projected to rebound 15 percent next year before the prospect of trade conflict, on the heels of the Panama papers anti-corruption and money laundering setbacks. The Trump team backs a push to repatriating offshore funds parked for tax and regulatory advantages to spur a cash migration wave for its own public works schemes, according to bankers bewildered by the successive sagas.