Central America Country Risk Report

Published 25 March 2015 | Quarterly

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Central America Country Risk Report

External Tailwinds Supporting Regional Underperformers

Core View

Central American outperformers Costa Rica and Panama are facing a more challenging road ahead in the coming years. As real GDP growth slows in Panama on the back of the end of canal construction, establishing fiscal discipline will be crucial. Should the country fail to rein in spending in an environment of lower growth, this would likely cool investor enthusiasm toward the country. Similarly, Costa Rica is also facing a challenging fiscal outlook - a situation which is only exacerbated by the fragmented political environment.

In contrast, our outlook for most of Central America's underperformers is brightening. Guatemala, Honduras and El Salvador will benefit from stronger US demand for their manufactured goods, rising remittance inflows and lower oil prices in the quarters ahead. That said, significant security risks will temper foreign direct investment into these countries over the next five years. Nicaragua's macroeconomic position is also especially vulnerable given its strong ties to Venezuela. Our core view is for a moderate slowdown in growth in the coming years due to an end to the Tariff Preference Level programme and our view that Venezuela will modestly reduce assistance to Nicaragua. However, if Venezuela were to suddenly cut off aid under the ALBA-TCP programme, this would see a sharp downturn in Nicaraguan growth and rising pressure on the country's macroeconomic buffers.

Major Forecast Changes

  • We have revised our fiscal deficit forecasts for Nicaragua, and now expect the country's budgetary shortfalls (including grants) to widen from an estimated 1.4% of GDP in 2014 to 1.9% in 2015 and 2.4% in 2016. We have long highlighted that weak economic growth and slowing financial assistance from Venezuela will weigh on revenues, while expenditures will remain robust in the run-up to the 2016 election. This will only be exacerbated by recent government legislation which will extend tax...

Table of Contents

Executive Summary
15
Core Views
15
Major Forecast Changes
15
Key Risk To Outlook
15
Political Outlook - Regional
17
SWOT Analysis
17
Domestic Politics
18
Falling Oil Prices To Give Central America A Boost
18
A sustained drop in global oil prices will offer substantial benefits to Central America, strengthening macroeconomic buffers and
A sustained drop in global oil prices will offer substantial benefits to Central America, strengthening macroeconomic buffers and
boosting growth
Economic Outlook - Regional
21
SWOT Analysis
21
Economic Activity
22
US Acceleration A Tailwind For Central American Growth
22
Robust remittance inflows and rising demand for manufactured goods will buoy the Guatemalan economy in coming quarters
Chapter 1
25
Domestic Politics
25
Credit Rating Downgrade To Prompt Fiscal Consolidation
25
Costa Rica's budget shortfall will begin to narrow in 2015 after the country posted its largest deficit on record in 2014
Chapter 1
27
Economic Activity
27
FX Stability Removing Impetus For Rate Hikes
27
Costa Rica-s benchmark policy rate will remain at 5
The central bank-s focus will be on supporting the
country-s fragile economic recovery, particularly as exchange rate stability and a moderation in inflation reduce the impetus for further
country-s fragile economic recovery, particularly as exchange rate stability and a moderation in inflation reduce the impetus for further
monetary tightening
Table: Monetary Policy
28
Chapter 2
29
Domestic Politics
29
Flores Corruption Scandal Boosting FMLN's Election Prospects
29
Corruption allegations against a former Alianza Republicana Nacionalista president will bolster the ruling Frente Farabundo Mart- para
Corruption allegations against a former Alianza Republicana Nacionalista president will bolster the ruling Frente Farabundo Mart- para
la Liberaci-n Nacional (FMLN)-s performance in El Salvador-s March 2015 legislative election
Chapter 2
31
Economic Activity
31
Private Consumption Facing Long-Term Headwinds
31
Stronger remittance inflows and a falling unemployment rate will boost El Salvador-s private consumption growth moderately in the
Stronger remittance inflows and a falling unemployment rate will boost El Salvador-s private consumption growth moderately in the
short term
However, with a significant proportion of the population living in poverty, household spending will remain highly exposed to
economic shocks
Table: Long-Term Macroeconomic Forecasts
31
Chapter 3
33
Domestic Politics
33
Judicial Weakness Weighs On Business Environment
33
Alleged irregularities in the selection of Guatemala's Supreme and Appellate Court judges underpin our view that the country is
Alleged irregularities in the selection of Guatemala's Supreme and Appellate Court judges underpin our view that the country is
backsliding on efforts to bolster judicial independence
Chapter 3
35
Economic Activity
35
Investment Opportunities Boost FDI, But Structural Weaknesses To Persist
35
Opportunities in the power, logistics and autos sectors will support an uptick in FDI inflows in the coming years, underpinning our view
Opportunities in the power, logistics and autos sectors will support an uptick in FDI inflows in the coming years, underpinning our view
for stronger average real GDP growth over the next half decade
Table: Long-Term Macroeconomic Forecasts
35
Chapter 4
39
Domestic Politics
39
Prison Reform Will Not Cure Security Challenges
39
Ongoing reforms to increase prison capacity in Honduras will cut down on overcrowding in the coming quarters
Chapter 4
41
Economic Activity
41
Fiscal Deficit To Narrow, But Will Miss Government Projections
41
Honduras will narrow its fiscal deficit in the years ahead on the back of efforts to boost tax revenues and cut the public wage bill
Table: Fiscal Policy
41
Chapter 5
43
Domestic Politics
43
Canal Development To Drive Public Unrest
43
Nicaragua-s inter-oceanic c anal project will prompt a deterioration in the country's political risk profile as it moves toward the f irst phase
Nicaragua-s inter-oceanic c anal project will prompt a deterioration in the country's political risk profile as it moves toward the f irst phase
of construction
Chapter 5
45
Economic Activity
45
End Of Oil Alliance Would Threaten Macroeconomic Stability
45
Nicaragua faces rising threats to its economic stability, as falling oil prices increase the risk that Venezuela will end its energy
Nicaragua faces rising threats to its economic stability, as falling oil prices increase the risk that Venezuela will end its energy
cooperation agreement with the Central American country
Table: Long-Term Macroeconomic Forecasts
45
Chapter 6
47
Domestic Politics
47
Security And Corruption Greatest Challenges For Varela
47
There will be limited improvement in Panama's political risk profile in the coming years
Chapter 6
49
Economic Activity
49
Construction To Drive Growth Uptick
49
Real GDP growth in Panama will accelerate moderately in the coming quarters on the back of increasing construction activity related to
Real GDP growth in Panama will accelerate moderately in the coming quarters on the back of increasing construction activity related to
the final stages of the Panama Canal expansion
Table: Long-Term Macroeconomic Forecasts
49
Chapter 7: BMI Global Assumptions
51
Global Outlook
51
Warning Signs Growing
51
Table: Global Assumptions
51
Table: Developed States, Real GDP GrowtH, %
52
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
52
Table: Emerging Markets, Real GDP Growth, %
53

The Central America Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras. It is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market.

An influential new analysis of Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras's economic, political and financial prospects through end-2019, just published by award-winning forecasters, Business Monitor International (BMI).

Key Uses

  • Forecast the pace and stability of Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras's economic and industry growth through end-2019.
  • Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
  • Assess the critical shortcomings of the operating environment that pose hidden barriers and costs to corporate profitability.
  • Contextualise Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras's country risks against regional peers using BMI's country comparative Risk Index system.
  • Evaluate external threats to doing business in Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras, including currency volatility, the commodity price boom and protectionist policies.

The Central America Country Risk Report by Business Monitor International (BMI) includes two major sections: Economic Outlook and Political Outlook.

Economic Outlook:

How will the Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras' economic policy-making and performance impact on corporate profitability over 2015-2019?

BMI provides our fully independent 5-year forecasts for Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras through end-2019 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.

Economic Outlook Contents

The Central America Country Risk Report features BMI's forecasts with supporting analysis for 2015 through to end-2019, set against government views and BMI's evaluation of global and regional prospects.

Key Areas Covered:

Data:

  • Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
  • BMI's comprehensive Risk Index system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.

Written Analysis:

  • Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
  • Balance of Payments - trade and investment, current and capital account.
  • Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
  • Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
  • Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
  • Foreign Direct Investment - approvals, inflows and climate.
  • External Debt - debt profile (short and long-term plus public and private sector obligations).
  • Global Assumptions - forecasts for each year to end-2019 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.

Key Benefits

  • Rely upon BMI's 100% independent forecast scenarios for Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras and underlying assumptions - we take no advertising and are privately-owned.
  • Exploit the benefits of BMI's comprehensive and reliable macroeconomic database on Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras, sourced and fully maintained by BMI from an extensive network of private sector, government and multilateral contacts.
  • Gain key insights into the current and future direction of government economic policy, which could significantly affect your company's business prospects, from BMI's team of analysts and economists.

Political Outlook:

What are the political risks to doing business in Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras over the next 5-years?

BMI's Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras country Risk Index evaluates the short- and medium-term threats to political stability.

Political Outlook Contents

  • SWOT Analysis for the Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras Market - Political Strengths, Weaknesses, Opportunities and Threats facing Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras.
  • Political Stability and Risk Assessment - BMI's Risk Index assesses explicit short- and long-term risks to political stability; latest positioning and trends for Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras's risk are compared with regional and global averages.
  • Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.
  • Long-Term Political Outlook BMI examines the structural risks to the stability of Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras’s political system and the dominant public policy issues likely to affect decision-makers, and outlines scenarios for how the state could evolve in the medium to long term.

Key Benefits

  • Benchmark Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras's risk profile against its neighbours, the global and regional average, allowing easy comparison of risks between key business markets.
  • Identify, evaluate and anticipate political and security risks to the business environment, and to your company's current operations and future plans.
  • Gain valuable insights into government and policy-making, through BMI's specialist team of analysts and economists, and their network of private and public sector sources.

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Testimonials

The sections that I find most interesting and useful are the macroeconomic data and forecasts for the country, top export destinations and economic activity. The indicators/analysis of these areas helps us orient our thinking, our assumptions and, consequently, our decisions in the commercial area.

Country Manager, DHL Express