LatinFinance - May/June 2017 - 42

Trade
CAFTA questions

FOCUS
CENTRAL AMERICA

PAGE 46

Repressed potential
Compared with much of Latin America, the Central American economies show healthy
growth. Can they overcome political and social issues - and the Trump administration - to
reach their potential? By Rodrigo Amaral
As the global economy shows new signs of life this year, Central America appears poised to
reap the benefits of a disciplined approach adopted by a number of governments in recent
years. It needs it, too: Extreme poverty remains a daily reality for millions of people in the
region, which has some the highest levels of violence in the world.
The optimism comes off a relatively robust 2016, when Central American economies
achieved the much-sought cocktail of solid GDP growth rates and low inflation. The region
has benefited from low oil prices and, for the second year running, resilient domestic demand has compensated for a less favorable external environment. With sovereign ratings
trending upwards in most economies of the region, countries such as Guatemala and Nicaragua have drawn the attention of investors and appear set to join Panama and Costa Rica as
regional presences in emerging markets portfolios.
However, the road to prosperity looks somewhat bumpier in 2017. Political deadlock has
strained the finances of Costa Rica and El Salvador, and recovering oil prices, along with rising interest rates in the US, could affect domestic demand across the region, according to the
United Nations' Economic Commission for Latin America and the Caribbean (ECLAC).
The US Federal Reserve's monetary policy is not the only cloud from the US. Trade and immigration policies supported by President Donald Trump could significantly damage economies that rely heavily on what happens up north.
But the general outlook for Central American economies continues to be positive, especially in comparison with their Latin American peers. "Central American economies tend
to behave much differently from the rest of Latin America," says Carmen Aída Lazo, dean of
economics and business at ESEN, a Salvadoran business school.
The main difference, she notes, is that economies in the region do not have much to offer
in terms of commodities. Although that means they failed to benefit from the China-fueled
boom of the 2000s, they were not brought to their knees when the commodity bubble dramatically deflated in recent years.
"After the 2012 crisis, when oil prices came down, Central America recovered relatively
quickly," Lazo says, noting that the region imports almost all its oil.
ECLAC has forecast that the Central American economies, plus the Dominican Republic,
will expand by an average of 4.5% in 2017, repeating last year's performance, which is a significantly faster pace than the sluggish 1.3% expected for Latin America as a whole.
Within the region, growth rates are set to vary considerably, with Panama reaching 5.9%
and Nicaragua achieving 4.7%, compared with El Salvador, which is forecast to grind out

42 L ATINFINA NCE.COM - May/June 2017

ESTEBAN BRENES,
INCAE

"HONDURAS SHOULD
DO PRETTY WELL IN
THE NEXT FEW YEARS.
THE GOVERNMENT
HAS DONE AN
EXTRAORDINARY
JOB WITH THE
ECONOMY"

Population in 2017 (millions)
Costa Rica

5.0

El Salvador

6.2

Guatemala

17.1

Honduras

8.3

Nicaragua

6.2

Panama

4.1

Source: IMF (estimated)

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