Growth engine losing power
Guatemala enters 2026–2027 with strong macroeconomic fundamentals, but moderating growth momentum. In 2025, GDP expanded by 4.1%, supported by resilient domestic demand, strong remittances ($25.5 billion), improved investment (particularly in construction) and strong services performance. But consumption growth slowed, and there are signs that remittances are increasingly being allocated toward savings and asset accumulation rather than immediate consumption, implying lower marginal support to demand. Inflation declined to 1.6%, enabling monetary easing, while the currency remained stable, amid record-high reserves. Fiscal policy turned mildly expansionary, with the deficit widening to 1.9% of GDP, though public debt remains low (below 30% of GDP), supporting continued investor confidence. Growth is expected to slow to 3.7% in 2026, and 3.5% in 2027, reflecting a weaker external impulse as front-loaded trade effects fade, remittance inflows could moderate amid a softer U.S. outlook, and there is increased uncertainty from geopolitical tensions and oil prices. Domestically, investment may slow as the electoral cycle approaches, and structural revenue constraints will limit fiscal space. The outlook overall remains one of stability rather than risk, but is increasingly dependent upon external conditions, and characterized by lower growth elasticity to traditional drivers.
El Salvador’s economic performance reverted the booming trend suggested three months ago by the Monthly Index of Economic Activity Q3 2025 figures, which decelerated again in Q4. Fiscal results in 2025 look to us to be outside of the targets agreed upon with the IMF in the February 2025 Extended Fund Facility. Divergences with the IMF also include the continued government purchases of bitcoin. So, we believe the EFF is off track. Inflation remains low at just over 1%, with upside risks associated with the war in the Middle East and its effects on oil international prices. Political and social conditions remained the same during Q1 2026, reinforcing the signs of evolution toward what some consider one of the most centralized political systems in Latin America. The robust popularity of President Nayib Bukele continued at around 80%, fed by successes in public security. But criticism from abroad of erosion of the rule of law and human rights concerns have persisted. In addition to strong popular support for the government, protests and street unrest are very low, and the potential hotspots of social instability are partly enforced and partly consent-based, under the continued state of exception.
Costa Rica’s economic performance presents a paradox: while headline indicators suggest stability and resilience, underlying dynamics point to growing structural imbalances. The IMF’s 2026 Article IV highlights that, despite solid growth and strong external accounts, the economy is increasingly characterized by weak domestic demand and persistent disinflation. Inflation fell to –2.7% y/y in February 2026, and has remained below the Central Bank’s target for over 34 consecutive months, reflecting subdued internal conditions rather than strength. In the domestic economy this environment constrains nominal wage growth and compresses business margins, limiting both consumption and investment. Fiscal dynamics are simultaneously deteriorating. Key tax revenues (VAT and income tax, accounting for 67% of total revenues) are growing below GDP, weakening tax buoyancy in a context where public debt exceeds 60% of GDP, thus reducing fiscal space. Monetary policy is also contributing to a strong colon through capital inflows and reserve accumulation that, while strengthening external buffers, undermines competitiveness in non-export sectors. So the economy is becoming increasingly dual, with growth driven by exports and free trade zones, while the domestic sector remains stagnant.
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