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Central America Country Risk Report Q2 2016

Central America Country Risk Report Q2 2016

Core Views Central American outperformers Costa Rica and Panama are facing a more challenging road ahead in future. As real GDP growth slows in Panama on the back of the end of canal construction, establishing fiscal discipline will be crucial. Should the country fail to rein in spending in an environment of lower growth, this would likely cool investor enthusiasm towards the country. Similarly, Costa Rica is also facing a challenging fiscal outlook – a situation which is only exacerbated by the fragmented political environment. In contrast, our short-term outlook for most of Central America’s underperformers is brightening. Guatemala, Honduras and El Salvador will benefit from stronger US demand for their manufactured goods, rising remittance inflows and lower oil prices in the quarters ahead. That said, significant security risks will temper foreign direct investment into these countries over the next five years and the risk of prolonged social unrest in the wake of corruption scandals has risen. Over the longer term the entry into force of the Trans- Pacific Partnership will offer increased headwinds to these countries’ manufacturing sectors. Nicaragua’s macroeconomic position is also especially vulnerable, given its strong ties to Venezuela. Our core view is for a moderate slowdown in growth in future due to an end to the Tariff Preference Level programme and our view Venezuela will modestly reduce assistance to Nicaragua. However, if Venezuela were to suddenly cut off aid under the ALBA-TCP programme, this would see a sharp downturn in Nicaraguan growth and rising pressure on the country’s macroeconomic buffers. Major Forecast Changes A significant revision to the Banco Central de Costa Rica (BCCR)’s GDP calculation, which places greater weight on the more dynamic sectors of the economy including services and telecoms, will see growth pick up from last year’s estimated expansion of 2.6%. We forecast the Costa Rican economy will grow by 3.3% in 2016 (revised up from 2.9%) and 3.5% in 2017.


BMI Indices – Brief Methodology
BMI Index League Tables
Executive Summary
Core Views
Major Forecast Changes
Key Risks
Economic Outlook – Regional
SWOT Analysis
Political Outlook – Regional
SWOT Analysis
Long-Term Political Outlook
Central America Facing Continued Challenges To Political Stability
Chapter 1.1: Economic Outlook – Costa Rica
Economic Growth Outlook
Headwinds Remain, But The Worst Is Over
TABLE: GDP BY EXPENDITURE
Chapter 1.2: Political Outlook – Costa Rica
Domestic Politics
Municipal Elections A Vote For The Status Quo
Chapter 2.1: Economic Outlook – El Salvador
Economic Growth Outlook
Weak Security Environment Will Weigh On Growth
TABLE: GDP BY EXPENDITURE
Chapter 2.2: Political Outlook – El Salvador
Domestic Politics
Anti-Corruption Cases May Undermine Long-Term Reforms
A spate of investigations into bribery and embezzlement represent an important first step in cracking down on the rampant corruption in
El Salvador.
Chapter 3.1: Economic Outlook – Guatemala
External Trade And Investment Outlook
Poor Operating Environment Will Undermine Textile Sector
Guatemala’s unattractive operating environment will weigh on the cost competitiveness of its large textile sector, undermining trade and
investment over the long term.
TABLE: CURRENT ACCOUNT
Chapter 3.2: Political Outlook – Guatemala
Domestic Politics
Lack Of Reforms Will Undermine Corruption Crackdown
The CICIG’s plan to crackdown on local-level corruption in Guatemala will have only a modest near-term impact.
Chapter 4.1: Economic Outlook – Honduras
Fiscal Policy And Public Debt Outlook
Debt Servicing Will Slow Fiscal Consolidation
Honduras’ elevated debt servicing costs will keep government spending high in 2016. While strong revenue growth will ensure a
continued narrowing of the budget deficit, consolidation will occur at a slower pace than in recent years.
TABLE: FISCAL POLICY
Chapter 4.2: Political Outlook – Honduras
Domestic Politics
Newly Established Corruption Mission Is No Panacea
Corruption will remain a long-standing problem in Honduras, even despite the establishment of OAS-backed Misión de Apogo contra la
Corrupción y la Impunidad en Honduras.
Chapter 5.1: Economic Outlook – Nicaragua
Economic Growth Outlook
Operational Challenges Will Hamper Business Climate Gains
The Nicaraguan government’s business environment reforms will be a welcome development in the country, given its longstanding
reputation as a difficult place to operate.
TABLE: GDP BY EXPENDITURE
Chapter 5.2: Political Outlook – Nicaragua
Domestic Politics
Despite Challenges, Ortega Well-Positioned To Extend Presidency
Although the approval ratings of Nicaraguan President Daniel Ortega have fallen from the lofty heights seen a year ago, his party still
holds a commanding lead versus the fractured opposition and is set to win in the general election in November.
Chapter 6.1: Economic Outlook – Panama
External Trade And Investment Outlook
Strong Dollar Will Weigh Heavily On Current Account
External headwinds on Panama’s external sector will weigh on the country’s balance of payments and the current account shortfall will
remain wide compared to regional peers.
TABLE: CURRENT ACCOUNT
Chapter 6.2: Political Outlook – Panama
Domestic Politics
Slow Progress Ahead On Anti-Corruption Drive
Panama’s anti-corruption drive, spearheaded by President Juan Carlos Varela, will progress in the coming months.
Chapter 7: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: COSTA RICA – MACROECONOMIC DATA & FORECASTS
TABLE: EL SALVADOR – MACROECONOMIC DATA & FORECASTS
TABLE: GUATEMALA – MACROECONOMIC DATA & FORECASTS
TABLE: HONDURAS – MACROECONOMIC DATA & FORECASTS
TABLE: NICARAGUA – MACROECONOMIC DATA & FORECASTS
TABLE: PANAMA – MACROECONOMIC DATA & FORECASTS

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