LatinFinance - May/June 2017 - 44

a mere 2.2% increase. External factors
account for some of the disparity, but
economists put much of the blame on local
political and economic conditions.
Wrangling debt
Exhibit number one is El Salvador, which
in April defaulted on part of its internal
debt, triggering sovereign downgrades that
took the country's ratings to Greek and
Venezuelan levels. "El Salvador is an outlier
in Central America," Lazo says. "We have a
chronic economic growth problem."
In her view, the main impediment to
economic expansion is the inability of the
Salvadoran government to reduce the country's growing public debt, which reached
65% of GDP in 2016. The country's politics
are dominated by two parties whose origins
date back to the civil war, which ended in
1992, and who seem unable to reach any
agreements on tax reform or issuing new
debt to pay old obligations.
As a result, a string of Salvadoran governments regularly passed stop-gap budgets
that only delayed the day of reckoning. "El
Salvador needs a structural solution for its
fiscal problems," Lazo says. "And it needs
to happen soon. In October, a new electoral cycle will begin, and any chance of an
agreement will then be closed."
To make matters worse, El Salvador's
dollarized economy gives the government
no leverage to counter its fiscal imbalances with monetary action. The situation
discourages investment that could create

much needed jobs. "The Salvadoran government does not promote foreign investments and has generated some doubts
about institutional security," says Esteban
Brenes, strategy and entrepreneurship
professor at INCAE, a business school, and
a partner at BAC y Asociados, a consulting
firm in San José, Costa Rica. "El Salvador
has first-quality entrepreneurs, but they are
investing abroad due to their doubts about
the country's politics." He forecasts that El
Salvador will grow by a miserly 1.5% to 2% in
the next few years.
Political wrangling has similarly hobbled
Costa Rica, formerly a model student in the
region. Abelardo Medina, an economist at
the Instituto Centro Americano de Estudios Fiscales (ICEFI), a Guatemala-based
think-tank, noted that the Costa Rican
government has run large deficits for the
past several years and, as result, government debt has spiraled ever higher. "It is
true that most debt is held by banks, which
are owned by the government, but it could
generate solvency issues in the banking
system down the road," he says. According
to ECLAC, total public Costa Rican debt
increased to $34.4 billion last year, or more
than 60% of GDP, from $16.1 billion, or
43.3% of GDP, in 2010.
As in El Salvador, the crux of the problem
is that fiercely opposed political groups are
unable to address the country's deteriorating fiscal position. "Costa Rica faces a serious governability problem," Brenes says.
"We have too many laws and institutions."

Rising partnership
US exports to and imports from CAFTA-DR countries, $ billion

ABELARDO MEDINA,
ICEFI

"ESPECIALLY IN
GUATEMALA,
HONDURAS, EL
SALVADOR AND
NICARAGUA, THE
PRIVATE SECTOR IS
VERY OPAQUE,
AS COMPANIES FEAR
THAT, IF THEY
RELEASE TOO MUCH
INFORMATION, THEY
WILL HAVE TO PAY
MORE TAXES"

Rating agencies have taken note of the
problems and started to downgrade Costa
Rica. In mid-2015, Moody's slapped the
country with a Baa3 rating. By February,
the rating had already fallen two notches
to Ba2, with a negative perspective to boot.
The flip side is that the economy is still
expected to grow, with ECLAC expecting
GDP to expand 3.9% this year.

35
30

Exports

Imports

25
20
15
10
5
0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Census.gov

44 L ATINFINA NCE.COM - May/June 2017

How much austerity is too much?
Other governments in the region have done
a better job of putting their books in order.
A particularly successful example has been
Honduras, where tax reforms implemented
in 2014 have cleared the path for future
investments. "Honduras should do pretty
well in the next few years," Brenes says.
"The government has done an extraordinary job with the economy."
ECLAC expects Honduras to grow by
3.4% this year, which is down slightly from
last year's 3.5% and hardly an Asian pace,
but beats the 2.8% rate posted before the
reform. Brenes believes the economy has
the potential to expand at more than 4%
annual clips in years to come.
In Medina's opinion, Honduras' newly
found ability to promote public invest-

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