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Central America Economic growth accelerates in Q4, 2017

Central America Economic growth accelerates in Q4, 2017


Central America:
Economic growth accelerates in the fourth quarter


Date: March 14, 2018



The economy of Central America and the Caribbean staged a moderate recovery in the fourth quarter, largely the result of stronger growth dynamics in the Dominican Republic. A second GDP estimate for the region shows the economy expanded 2.8% in the fourth quarter, a tad below the 2.9% increase estimated last month but above the 2.2% rise recorded in the third quarter. The downward revision reflects weaker-than-expected growth in the Panamanian economy, as well as a severe slowdown in Honduras, where political noise hampered economic activity.


Available GDP data for Panama indicates that the economy lost some steam in the fourth quarter, with growth in the country’s key sectors moderating from the previous quarter. Despite the sequential deceleration, economic growth was robust throughout the year, aided by the expanded Panama Canal—which became operational in June 2016—and a pick-up in global trade flows. In Honduras, the economy hit a speed bump in the fourth quarter against a backdrop of contested elections in November, which were won by incumbent Juan Orlando Hernández amid irregularities. Political noise has moderated since his inauguration in late January, particularly following U.S. envoy Nikki Haley’s meeting with Hernández in late February.


On a more positive note, the Nicaraguan economy ended the year in good shape, with growth likely higher in the fourth quarter over the previous quarter on the back of increased public outlays and healthy growth in the external sector. Similarly, preliminary full-year GDP estimates released by the Central Bank indicate growth in Guatemala accelerated in the fourth quarter, buttressed by solid remittance inflows and improved sentiment. Elsewhere in Central America, growth is also expected to have increased to an extent in major player Costa Rica, where monthly economic activity gathered pace throughout the quarter, suggesting the economy regained some traction after a third-quarter slowdown.


In the Caribbean, growth is seen having sped up in the fourth quarter. The economy of the Dominican Republic was more sure-footed in Q4 following a subdued hurricane-induced performance in Q3. A looser fiscal stance shored up construction activity, while a more accommodative monetary stance led credit growth to regain momentum. A robust performance in the country’s all-important tourism sector was also instrumental. The Jamaican economy is expected to have accelerated on the back of strong inbound tourism, solid mining and quarrying activity, and improving labor conditions. Conversely, economic activity data for debt-ridden Puerto Rico shows the island’s economy recorded its worst contraction in history in the fourth quarter following Hurricanes Maria and Irma.


Meanwhile, recent fiscal developments provide a glimpse of hope for the region’s outlook. In Costa Rica, the congress unanimously agreed to fast-track a bill that would transform the current sales tax into a 13% Value Added Tax. A lack of fiscal reform has eroded Costa Rica’s debt profile and exposed the country to external shocks. Against this backdrop, the bill is expected to be regarded as credit-positive, since it shows authorities’ increased commitment to tackle the issue and could finally put the country’s finances on the right track. Nonetheless, uncertainty continues to cloud the fiscal outlook, with polls showing a virtual tie between the two presidential candidates ahead of a second vote on 1 April. Meanwhile, the Nicaraguan government approved a reform in mid-February to reduce electricity subsidies and VAT exemptions, which should go a long way in strengthening the country’s fiscal position.



OUTLOOK | 2018 GDP growth prospects revised upwards despite diverging trends


Economic growth in the Central America and Caribbean region should remain subdued this year, the result of a sizeable GDP contraction in Puerto Rico’s economy and persistent fiscal woes in several countries in the region. In addition, tighter monetary conditions in the United States will cause domestic financing conditions to turn more expensive this year, which should drag on credit growth in the region. Nonetheless, solid economic growth in the United States is expected to continue supporting remittances, tourist arrivals and regional trade flows.


FocusEconomics panelists expect regional GDP growth of 2.7% this year, which is up 0.1 percentage points from last month’s estimate. The slightly improved outlook reflected stronger 2018 GDP forecasts for the Honduran and Nicaraguan economies outweighing weaker economic prospects for the economies of Costa Rica,Haiti and Jamaica. The Puerto Rican economy is also expected to contract less than previously estimated on account of increased federal aid to the hurricane-devastated island. The forecasts for the remaining six economies surveyed were unchanged this month. In 2019, the region’s economy is expected to grow a more solid 3.7% on the back of improved economic dynamics in Puerto Rico.


t is expected to register the fastest expansion in the region for a second consecutive year in 2018, with an increase of 5.5%. The country should continue benefiting from the expanded Panama Canal, which is fueling strong growth in the country’s trade-related sectors. The Nicaraguan economy is also expected to rise a solid 4.6% this year. On the other end of the spectrum, Puerto Rico’s economy is expected to shrink 4.0% in FY 2018.


GUATEMALA | Economy strengthens as political noise wanes

Available data suggests the economy got off to a steady start in the first quarter, again buoyed by robust consumer spending. In January, economic activity was broadly stable from December on the strength of the transport and trade sectors, in line with the pace of growth recorded through most of 2017. Moreover, economic sentiment has been trending upwards in recent months as uncertainty in the wake of last year’s political crisis has eased. Although remittances have moderated somewhat since the outset of the fourth quarter, transfers from abroad are still reaping the benefits of the tightening U.S. labor market and hint that households remain the engine of recent economic gains.
Household spending will support brighter growth prospects this year as remittances from abroad benefit from the booming U.S. economy. Government spending is also expected to tick up on stronger infrastructure outlays. Although scandals surrounding Jimmy Morales should fade over the short term, their previously crushing effect on investor confidence will be slow to undo. Moreover, debilitating levels of corruption and the threat of a U.S. immigration crackdown will continue weighing heavily on the outlook. FocusEconomics panelists expect GDP growth of 3.3% this year, which is unchanged from last month’s forecast. Next year, they expect GDP growth of 3.4%.
Get the Full FocusEconomics Central America & Caribbean Report


DOMINICAN REPUBLIC | Central Bank coffers benefit from improved external profile

Incoming data suggests that robust momentum persisted early this year, following an outstanding economic recovery in the final quarter of 2017. In January, economic activity maintained a solid pace of expansion, likely aided by a buoyant tourism sector. More than half a million tourists arrived in the country in the month, the best January reading on record. Similarly, remittance inflows recorded double-digit growth in January, benefiting from tight labor conditions in the U.S. and supporting domestic household spending. Meanwhile, favorable developments in the current account—which last year recorded its smallest deficit in 13 years—continued facilitating an accumulation of foreign exchange, as international reserves reached a new all-time high in February. Despite strong economic fundamentals, the IMF noted at the conclusion of its Article IV mission in mid-February that weaknesses in the fiscal position remain. It consequently recommended broadening the tax base and simplifying the tax system.


Economic growth is expected to remain robust this year on the back of rising credit to the private sector. A U.S. economy running at full speed should continue to boost growth, stimulating stronger remittance inflows and tourism revenues. Downside risks to the outlook include higher oil prices pushing up the import bill and more restrictive external financing conditions. FocusEconomics panelists expect GDP growth of 4.5% in 2018, which is unchanged from last month’s forecast. For 2019, panelists see the economy expanding 4.4%.


PANAMA | Trade-related sectors fuel solid 2017 GDP out-turn

The economy picked up steam in 2017, again becoming the fastest-growing economy in the Central American region for the year, despite a slowdown in annual GDP growth in the fourth quarter. The expansion observed last year largely reflected positive spillover effects from the recovery in global trade on the country’s service sectors, including on ports, airports and the Panama Canal. The transportation, warehousing and communication sector, which includes Panama Canal trade-related activities, expanded at a double-digit rate in 2017, and wholesale and retail trade accelerated notably. Against the backdrop of strong economic growth, Fitch Ratings reaffirmed Panama’s BBB rating and stable outlook in February. The agency commented that the economy is in good health thanks to robust growth in infrastructure spending, improving global trade and the government’s commitment to maintaining fiscal discipline.


Economic growth is expected to maintain a broadly steady pace this year and in 2019. It will be supported by the government’s ambitious infrastructure plans and solid activity in the country’s service sector. FocusEconomics Consensus Forecast panelists project that the economy will grow 5.5% in 2018, which is unchanged from last month’s forecast. The panel expects GDP will expand 5.4% in 2019.


COSTA RICA | Congress agrees to fast-track bill aimed at tackling the country’s fiscal issues

Preliminary data showed a slowdown in private consumption growth and a contraction in investment weighed on annual economic growth in 2017, particularly in the third quarter, the last period for which quarterly GDP data is available. Since Q3, however, economic growth appears to have remained subdued but increased slightly. According to the Central Bank’s monthly index, average economic activity grew year-on-year at a faster pace in Q4 than in Q3. Meanwhile, on 28 February, representatives voted to put a bill to improve the public finances on a fast track through the Legislative Assembly. The bill contains measures which, among other things, would transform the current sales tax into a 13% Value Added Tax. This bill could help improve the country’s credit rating. On the political front, polls were released in March indicating that the final round of voting in the presidential elections on 1 April will be incredibly close, with a virtual tie shown between the two candidates. But, despite the political uncertainty, a quarterly survey showed that consumer confidence increased modestly in February from November.


Thanks to the upbeat economies of key export markets such as the United States, the external sector should continue to support growth this year. However, persistent fiscal deficits and high public debt will continue to weigh on prospects. This month, FocusEconomics Consensus Forecast panelists see the economy expanding 3.5% in 2018, which is down 0.1 percentage points from last month’s projection. In 2019, the panel also foresees a 3.7% expansion.


INFLATION | Inflation moderates further in February

A preliminary set of data for the region shows inflation eased in February across most economies surveyed by FocusEconomics. Regional inflation was 3.8%, the lowest print in half a year and below January’s 4.0%. In particular, inflation was softer compared with the previous month in major-players Costa Rica, the Dominican Republic and Guatemala.


Against a backdrop of soft economic growth and relatively subdued price pressures, central banks in the region are largely maintaining accommodative monetary stances. In February, the Bank of Jamaica lowered the Overnight Deposit Rate in a bid to spur credit growth and support a nascent economic recovery. The central banks of the region’s heavy hitters all stood pat in the month.


Higher food and oil prices should support inflation this year. Our panel sees inflation coming in at 3.4% in 2018, which is down 0.1 percentage points from last month’s estimate. In 2019, Consensus Forecast panelists expect inflation to remain broadly stable at 3.5%



https://www.focus-economics.com/regions/central-america?utm_source=Newsletter+Subscribers&utm_campaign=2356faf904-Newsletter+Latin+America+March+2018&utm_medium=email&utm_term=0_4652a08ed6-2356faf904-563665789
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Dr. Chao Yuang Shiang (PH.D in management), Assistant professor,Dep.of Finance,Nanhua University,Taiwan.
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