Drop off in growth – and remittances
In Costa Rica, GDP growth slowdown will continue in the next 18 months. According to the Central Bank’s estimates in its April 30th Monetary Policy Report, GDP growth for 2024 and 2025 will be lower. The latest estimates showed that the economy had a mediocre start during Q1. The latest Monetary Policy Report showed other interesting highlights. First, there was a strong decrease in the expansion rate of private investment, which dropped from double-digit figures at mid-2023 to 1.6% y/y in Q1. A second element was the strong decline in export and import growth. A third element was the persistent negative inflation rate, which accumulated 11 consecutive months with negative variations in the Consumer Price Index. As of May, the FX has started to rise from its lowest value of 501.9 colons per dollar (as of April 18th) to 512.6 colones. The export slowdown, the end of the peak season in tourism and a change in the devaluation expectations are among the main contributors to this small change. It is too early to predict whether the exchange rate has entered a new phase. In his May 2nd speech before Congress, President Rodrigo Chaves stated that he wants a referendum on several bills his government is promoting. There are three legal ways to hold a referendum in Costa Rica, but none are easy or fast.
Guatemala´s economy is stable, and in line with our forecast. As we stated earlier, there is a slight slowdown in 2024. GDP growth was 3.5% y/y in Q1, slightly less than the 4% recorded in Q1 2023. Private sector confidence remained high in the first four months of the year. The Confidence Index (estimated by the Central Bank) maintained its value of 70 points during April. Growth in merchandise exports and imports kept showing negative rates during Q1. The Bank of Guatemala Monetary Board decided to keep the Monetary Policy Rate (MPR) unchanged. The rate has now accumulated 12 months with a value of 5%. A new reduction of the MPR could be approved in H2. We don´t foresee risks of capital outflows. President Bernardo Arevalo continued seeking a way to remove District Attorney Consuelo Porras. Arevalo announced on May 5th on national TV that he would present a reform in Congress to modify the law, in order to remove the district attorney. Porras refuses to resign, despite criticism for allegedly protecting corrupt officials, and also for attempting to nullify last year´s presidential election results.
For the first time over a decade, remittances sent to families in El Salvador dipped. This raised several questions we want to address. Is the fall the result of the improvement in El Salvador’s security situation? Are Salvadorans migrating less? Could remittances start declining in the future? Much of the Salvadoran population relies heavily upon remittances to cover basic needs, such as food, healthcare, transportation, and housing. According to a 2017 UN survey, remittance flows benefitted more than 20% of households, and were a support mechanism for reducing poverty and boosting consumption. We think the recent trend in remittances could be temporary. There are forces that could easily boost transfers sent to El Salvador in the near future. The first is the reform to eliminate income taxes on remittances, approved by Congress in March; the second was a recent announcement made by ex-U.S. president and current presidential candidate Donald Trump, vowing to step up deportations. This could drive some Salvadorans abroad to send a bigger share of their savings home, just in case they get deported.
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