Central America’s Rich Cost Ream
Costa Rica lost investment grade status as the sub-region felt debt and growth pressures prompting investor wariness despite almost double-digit gains for JP Morgan’s NEXGEM frontier through Q3. President Solis has submitted tax legislation to congress in an effort to address the 5 percent fiscal deficit and public debt at 55 percent of GDP, but his party controls less than one-quarter of seats. Growth has fallen below 4 percent with Intel’s plant shuttering and the currency depreciated almost 10 percent against the dollar in the first half although the current account gap remains at 5 percent of output. Panama is the last BBB rating holder but growth there too has slowed to 6 percent and the deficit will breach the 2.7 percent of GDP set in the fiscal responsibility law, which the Varela administration dedicated to higher social spending has criticized as rigid. FDI up one-quarter to $2.5 billion in the first half continues to comfortably cover the current account hole but reinvested profits are two-thirds of the total with flat new inflows. The Canal widening should soon be completed after construction contract delays as Nicaragua has commissioned a Chinese company feasibility study for a potential second cross-continent shipping channel. The Dominican Republic likewise experienced a 15 percent direct investment surge in the period after a mining dispute was cleared with tourism a big draw as arrivals jumped 10 percent. The current account imbalance has narrowed with reduced oil import costs as remittances were again up 10 percent on better US employment prospects. A citizenship clash with Haiti has been resolved as resort builders look to both sides of the island for fresh destinations that can be cross-marketed. English-language training has been stressed to draw visitors from competing islands like Barbados, where activity has leveled off amid continued recession. After a ratings downgrade government debt is still near 100 percent of GDP and borrowing has come from domestic bank and non-bank sources that were hit otherwise by a financial asset tax.
El Salvador has been an underweight recommendation since the leftist FMLN retained the presidency and growth lags the rest of Central America at only 2 percent. Dollarization keeps inflation minimal at 1.5 percent but also embeds a stubborn trade deficit at 15 percent of GDP. Remittances rose 8 percent through August as the main offset with 2.5 million workers in the US. A Millennium Challenge bilateral grant is designed to overhaul the investment climate and infrastructure but has come under fire from democracy and human rights campaigners for alleged regime abuses. Guatemala’s economy will expand 3.5 percent with commodities and financial services key contributors, with low public debt as an exception at 25 percent of GDP. Honduras is the latest to join sovereign debt issuance and the business-friendly government has moved to slash the budget deficit to 5 percent of GDP heading into an IMF program. However such progress has been overshadowed by the hefty toll of drug and street crime spurring child immigration to the US where status is unclear.
