Paths diverging for region’s economies
From the print edition
Central American countries are following increasingly diverging paths in terms of economic growth and public finance, according to a new report issued by Fitch Ratings, an international ratings agency.
The report, “Central America’s Fiscal Dilemma: Growth Versus Debt,” describes two different types of economies in the region: dynamic, export-oriented service economies and slow-growing remittance-based economies.
Costa Rica and Panama fall into the former category and Guatemala and El Salvador the latter.
“Central America is unlikely to regain its pre-crisis growth rates,” said Lucila Broide, director of Fitch Ratings, in a press release. “Protracted slow growth in the U.S., weaker fiscal positions, moderate credit growth and expected high oil prices will constrain regional growth over the next two years.”
The report projects aggregate economic growth in the region will slow to 4.2 percent next year – down 0.5 percent from the 4.7 percent aggregate growth seen in 2011 – and recover slightly to 4.5 percent growth in 2013. Panama, the report noted, is the region’s fastest-growing economy while El Salvador is seeing the slowest growth.
According to Fitch, over-reliance by regional economies on the United States as a major source of hard currency, with the exception of Panama, threatens growth in Central America. Regional economies are also characterized by “modest debt burdens compared to peers” and recurring structural deficits due to low tax-revenue bases and “rigid expenditure profiles,” the report said.
Despite these similarities, two distinct paths for economic development and public finance have appeared in the region.
The debt burdens of Costa Rica and Panama decreased “significantly” from 2006 to 2010 due to unexpected growth and surpluses, the report indicated, despite both countries having run overall fiscal deficits during the time frame. Fitch predicted that growth in the two countries will continue to favor the governments’ debt standings, but the agency also suggested shoring up fiscal policy.
Meanwhile, Costa Rican President Laura Chinchilla’s tax reform plan is showing progress in the Legislative Assembly.
Beset by violence and social problems, El Salvador and Guatemala saw debt burdens increase over the 2006-2010 period. The governments of both countries have demonstrated fiscal restraint, but economic growth has not been strong enough to compensate for primary deficits in their largely remittance-reliant economies, according to Fitch. Solving ongoing security and social problems may require more government spending.
A recent report from the International Monetary Fund and the Honduran Central Bank pegged that country’s public debt at the end of 2011 at $5.7 billion, Honduras Weekly reported. Approximately 56 percent – $3.2 billion – is external debt, with the remaining $2.5 billion held internally. The 2011 end-of-year figure represents an increase of $379.9 million in external debt and an increase of $563.8 million in internal debt, Honduras Weekly reported. Honduran President Porfirio Lobo’s administration said the country’s debt load, which equals approximately 37 percent of gross domestic product, is manageable, Honduras Weekly reported.
According to the Fitch report, the Dominican Republic splits the middle between the two divergent paths described in the document. There, high growth has been supported by a competitive tourism sector augmented by a strong reliance on remittances from abroad. Fitch indicated that the country’s debt burden increased from 2006 to 2010. The report also indicated that the debt burden could have decreased, but the government issued debt to the tune of 4 percent of the country’s GDP to recapitalize the central bank for funds it lost in a 2003 banking crisis.
The World Bank reported in December it expected remittances to developing countries worldwide to reach some $351 billion in 2011, with that number expected to grow to $441 billion by 2014. Remittances to Latin America grew by 7 percent in 2011, according to the World Bank.
Regionally, the Fitch report indicated, Panama has seen the most dynamic growth in recent years and has received two credit-rating upgrades since 2008. Costa Rica’s credit rating was upgraded in 2011 and the Dominican Republic’s ratings were given a “Positive Outlook” that year. El Salvador’s credit ratings, on the other hand, were downgraded in 2009 and Guatemala’s sovereign ratings haven’t changed since 2006, according to the ratings agency
You may be interested
Adaptive surfing, part III: Riding the waves with NoahEllen Zoe Golden - May 25, 2018
Part III in a series on adaptive surfing in Costa Rica. Read Part I, about the country's association for disabled…
It’s frog orgy seasonLindsay Fendt - May 25, 2018
The rainy season is upon us. For many of us that means hiding indoors for the next few months, but for Costa…