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Central America Country Risk Report Q4 2017

Central America Country Risk Report Q4 2017

Core Views

Central American outperformer Costa Rica will post among thestrongest real GDP growth rates in Central America over the comingyears, underpinned by a strong expansion of public and privateinvestment as well as resilient private consumption. However, we notea challenging fiscal outlook – a situation which is only exacerbatedby the fragmented political environment.

In contrast, our economic outlook for most of Central America's underperformersis brightening somewhat. Guatemala, Honduras and ElSalvador will benefit from stronger US demand for their manufacturedgoods, rising remittance inflows and relatively subdued oil prices inthe quarters ahead. That said, significant security risks will temperforeign direct investment into these countries over the next five years,and the risk of prolonged social unrest in the wake of recent corruptionscandals has risen. Nicaragua's macroeconomic position is alsoespecially vulnerable given its strong ties to Venezuela. While risksstemming from the Trans-Pacific Partnership have been removed,the potential for a re-evaluation of trade and immigration policy in theUS under President Donald Trump's administration could threatenexports and remittance moving forward.

Major Forecast Changes

Guatemala's current account will remain in surplus in 2017, but narrowto 1.0% of GDP, from 1.3% in 2016. A surge in remittances anddeclining imports drove Guatemala's current account into surplus in2016, for the first time since 2009.

Costa Rica's fiscal deficit will widen in 2017 due to rising interestpayments and mandated public spending. Although revenue gainsfrom improved tax collection helped to narrow the fiscal shortfall in2016.

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
Political stability will remain elusive for much of Central America over the next decade. Indeed, given the limited resources of most
Central American economies, the elevated violence, corruption and social unrest that currently define the region's political risk profile
are likely to remain obstacles to growth.
Chapter 1.1: Economic Outlook – Costa Rica
External Trade And Investment Outlook
Export Growth Will Narrow Deficit, Though Debt Could Risk Investment
Costa Rica's strong goods exports will drive a modest narrowing of the current account deficit over the coming years. However
persistent current account shortfalls and the increasing cost of government financing will raise risks to the external account's stability
over time.
Chapter 1.2: Political Outlook – Costa Rica
Domestic Politics
PLN Favoured To Return To Power
Costa Rica's February 2018 general elections will likely see the opposition Partido Liberación Nacional return to power, winning the
presidency and the most seats in the Legislative Assembly. This will likely signal a shift in fiscal policy, with cuts reining in social
spending moving forward.
Chapter 2.1: Economic Outlook – El Salvador
Economic Growth Outlook
Remittances Will Narrow Current Account Deficit
Elevated remittances driven by stronger US economic activity will narrow El Salvador's current account deficit in 2017. While higher oil
prices will widen the deficit gradually from 2018, risks to external stability will be contained.
Chapter 2.2: Political Outlook – El Salvador
Domestic Politics
Legislative Gridlock Will Intensify Ahead Of 2018 Elections
El Salvador will struggle to make necessary fiscal adjustments and promote growth-friendly policies due to an intensifying legislative
gridlock ahead of 2018 legislative elections. Additionally, a potential shift in US policy towards El Salvador amid escalating tensions
would threaten critical remittance and aid inflows.
Chapter 3.1: Economic Outlook – Guatemala
Economic Growth Outlook
Corruption Allegations To Undermine Investment
Economic activity in Guatemala will decelerate in 2017 as corruption allegations undermine business confidence and halt infrastructure
projects. However, robust remittance inflows will underpin private consumption and support a modest growth acceleration in 2018.
Chapter 3.2: Political Outlook – Guatemala
Domestic Politics
Political Crisis Will Test Guatemala's Fragile Institutions
Guatemala's political and judicial institutions will be severely tested in the coming weeks, after President Jimmy Morales expelled an
UN-backed anti-corruption commission chief and defied a court order overturning the expulsion. Morales will face public outrage and
mounting political opposition as a result, with his ability to stay on as president likely to become increasingly tenuous.
Chapter 4.1: Economic Outlook – Honduras
Economic Growth Outlook
Agriculture And Manufacturing Exports Will Underpin Growth
Economic growth in Honduras will accelerate in 2017 and 2018, underpinned by robust agricultural and manufacturing exports. Both
sectors will be supported by improving demand in the US, which will also buoy private consumption via increasing remittance inflows.
Chapter 4.2: Political Outlook – Honduras
Domestic Politics
Hernández Will Win Re-Election Among Crowded Field
President Juan Orlando Hernández will likely win his re-election bid in November, supporting policy continuity and investor sentiment
in Honduras. While Hernandez only garners 36% support, low turnout, a fragmented opposition and the lack of a runoff system will all
benefit the incumbent.
Chapter 5.1: Economic Outlook – Nicaragua
Economic Growth Outlook
Deficit To Narrow, Though Risks On The Rise
Nicaragua's current account deficit will narrow in 2017 and 2018 due to robust growth in exports and continued remittance inflows from
the US. That said, risks to the country's external stability are rising, most notably from Venezuela and the US.
Chapter 5.2: Political Outlook – Nicaragua
Domestic Politics
FSLN Control Unlikely To Be Challenged
The FSLN will maintain its grip on power in Nicaragua following November 2017's municipal elections. While this will bolster political
continuity in the short term, the erosion of the country's institutions poses risks over a longer time horizon.
Chapter 6: BMI Global Macro Outlook
As Good As It Gets?

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