Still Growing Despite Woes

Central America is set to maintain above-average economic expansion in 2020.

GDP growth rates of over 3% have not been uncommon in Central America, and the trend is expected to continue, albeit at a slower pace. That’s what the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) forecasts for the region: an average growth of 2.6% in 2020 in spite of a worldwide economic slowdown and unpredictable developments from the coronavirus outbreak.

Good macroeconomic administration that reduced public debt by up to 2% in some of these countries has been one of the factors that has helped Central America experience a flourishing economy in past years while many of its bigger and more heavily indebted neighbors—especially in South America—have seen sluggish development or have fallen into recession.

Growth can also be explained by a few commonalities AMONG these nations. According to Arnoldo López Marmolejo, the lead economist for Mexico and Central America for the Inter-American Development Bank (IADB), soaring remittances from migrants have been a leading drive in Central American growth.

“The region is dependent on the US economy, with every country in Central America relying in different degrees on the remittances sent from migrants, especially in the US. The tougher immigration policies introduced by the Trump administration fueled fears of deportation, as well as a threat of taxation on those remittances,” says López Marmolejo. “That, along with the buoyancy of the American economy and historically low unemployment rates of Hispanics, has generated an enormous surge in the amount of money being sent home by migrants.”

In some cases, these foreign remittances account for a large proportion of the economy and are a primary push in private household consumption. According to Coface, a French-headquartered credit insurer providing risk analysis for the region, 18% of the GDP of El Salvador, for instance, is currently made up by foreign remittances. Coface expects consumption to be “less vigorous” this year due to slower growth in remittances, but the importance of the inflow of money sent by migrants to the region should not be understated.

The regional economic outlook is also being positively impacted by stable-to-higher market prices of traditional agricultural exports, namely coffee and sugar. The price of sugar has risen more than 10% this year, and more than 55% since late 2018, and coffee prices have started to go up after more than a year of low prices related to a surplus in Brazilian production, although with some volatility. This rebound is welcome news in the face of slower US economic growth that, combined with low oil prices, should help keep the balance of trade stable across the region.

“Oil is the main import throughout Central America, and thus, even when exports don’t grow as strongly, low oil prices help compensate for this,” López Marmolejo explains.

Throughout the region, public and private construction and infrastructure building have been key to growth in the past. These sectors are still expected to contribute to growth, even if at a slower rate. In fact, construction is one of the factors mitigating the damage to Nicaragua, the ugly duckling of Central America. Plagued by enormous political instability under self-proclaimed Bolivarian president Daniel Ortega, as well as chronic violence, the Nicaraguan economy has been contracting since 2018.

According to Daniel Titelman, director of the economic development division at ECLAC, Nicaragua’s economy contracted by 5.3% in 2019, but it’s expected to contract only 1.4% in 2020—an improvement even in recession terms. “Our projection of -1.4% for Nicaragua reflects the stabilization of some sectorial areas, fundamentally construction, financial intermediation and trade. These areas have been showing more-stabilized dynamics, which explains why we are projecting a milder contraction than last year,” Titelman explains.

Nicaragua is also dogged by corruption, currently ranking 161 out of 180 territories analyzed by Transparency International, a German nonprofit monitoring global corruption. Corruption—along with drug trafficking and violence—continue to be common issues in the region. Guatemala and Honduras are tied at 146 in the same ranking, while El Salvador ranks 113 and Panama 101. Only Costa Rica fares better, placed at 44.

Nonetheless, the quandary in Nicaragua still impacts the flow of trade with neighboring Costa Rica and the other countries in the area, according to Mélina London, a Ph.D. fellow and economist covering Central America at Coface. “Costa Rica is definitely one of the better-positioned countries in the region to deal with this disruption and attract foreign direct investment,” she says. “It has more solid democratic institutions, more diversified trade and an industrial base that includes pharmaceuticals and electronics manufacturing. These are institutional strengths that generate confidence.”

“The greatest concern with Costa Rica is the unsustainable fiscal deficit, which at 7% was much higher in 2019 than originally forecast,” London explains. In her latest Coface report, she points out that Costa Rica’s public accounts feature a chronically high deficit with revenues being insufficient to cover expenditure. “This creates uncertainty for 2020,” she says.

Tourism is shrouded in uncertainty due to the Covid-19 outbreak. Costa Rica has the most developed tourism sector thanks to its stability. “FDI and tourism suffer in other parts of this region,” explains Joan Domene, Mexico City–based senior economist at global forecasting and quantitative analysis firm Oxford Economics, because  “violence, political instability and corruption are not conducive to investment or to people coming for vacations.” London points out that Costa Rica reliance on tourism makes it more vulnerable to a pandemic-inspired travel restrictions. Central America overall “is more economically insulated from the outbreak,” Domene says. “The main issue in the region would be the lack of resources to combat a viral epidemic and care for the population if people get sick.”

Countries in the so-called Northern Triangle—Guatemala, Honduras and El Salvador—are the ones poised to suffer the most in that respect. Their health care infrastructure is more precarious, and they have vast numbers of people living under the poverty line. Even without a COVID-19 outbreak, El Salvador is poised to grow only 2% this year, says Coface. The country continues to contend with a higher rate of gang violence, crime and corruption than that of its neighbors, hampering the country’s ability to attract FDI.

Meanwhile, Guatemala (see next page) and Honduras are expected to grow around 3% in 2020. “Honduras should see stable FDI on the order of $1.1 to $1.2 billion, and there are opportunities in the agricultural sector and in retail, as well as improving the infrastructure,” Domene explains. “The GDP growth remains stable but is being capped by electricity shortages and rationing to industries in the north of the country and the great level of informality of the labor market.”

To the south, Panama’s prospects rest on a more diversified base. The country is set to grow 4.5% in 2020, according to the World Bank, partly due to the start of operations of the Cobre Panama complex—a mammoth copper mining plant operated by Canada-based First Quantum Minerals. According to IDB Panama economist Carlos Garcimartín the mine is expected to export $2 billion worth of the mineral in its first full year being operational­—despite falling copper prices.

The country is also promoting investment in its tourism and logistics infrastructure with a recently approved law formalizing public-private partnerships. Panama City’s international airport has consolidated its place as an aviation hub connecting the Americas. A second terminal started operating in 2019. The direct and indirect economy associated with aviation and the airport already stands at 1.3% of the GDP according to Garcimartín. “The biggest challenge for Panama currently is finding new sectors to propel growth. Logistics, tourism and technology all seem like good opportunities,” he says.

The country is undergoing a fiscal adjustment period until 2022, which could lead to economic tensions and lower growth in the medium term. However, in a scenario where the impact of Covid-19 is relatively mild, Garcimartín projects Panama could still grow an average of 4% a year for the next five years.