Growth wanes as external risks mount
Costa Rica’s economy entered a slower-growth phase during H1 2026, confirming the deceleration projected earlier in the year. Domestic demand weakened as tighter monetary conditions, persistent colón appreciation, subdued inflation, slower credit growth and softer labor market conditions constrained household spending and business investment. The external environment grew more challenging due to weaker global growth, heightened geopolitical uncertainty and the prolonged conflict in the Middle East, which increased volatility and raised commodity prices. Export growth moderated, particularly in the free-zone regime, while imports stagnated. Fiscal conditions grew more fragile, despite the government maintaining a primary surplus. Lower tax revenues driven by slower activity, persistent low inflation and colón appreciation reduced fiscal space, while public debt edged above 60% of GDP. Meanwhile, private sector credit continued to lose momentum, and inflation remained below the Central Bank’s target range. We expect economic growth to moderate further, with GDP expanding by 3.3% in 2026, and 3.4% in 2027. Growth will continue to be driven by exports, although at a slower pace, while the domestic economy is expected to remain subdued. Inflation should remain below target, despite higher international commodity prices, and the domestic currency is projected to stay strong through most of 2026, before gradually depreciating in 2027. Fiscal consolidation is also expected to weaken, as revenue growth remains constrained.
El Salvador continues to exhibit the sound economic growth seen since mid-2025, which has not yet been countered by the international unrest driven by Middle East political conflicts. Private investment in construction keeps driving the current dynamism, while traditional sources of growth, such as exports, foreign remittances and FDI, have risen slowly, or have decelerated. Available balance of payments statistics to Q1 2026 lead us to conclude that financing of this private investment boom comes from undetermined inflows registered in the BoP line of “errors and omissions.” The unknown nature of that source makes the short-term outlook uncertain. We perceive no advances in putting the IMF agreement back on track. However, external investor confidence does not seem to be worsening.
Guatemala is now one notch below investment grade, following Fitch’s upgrade to BB+ with a positive outlook in 2025, and authorities are optimistic that the country could achieve investment grade status in the coming months. Guatemala in our view already exhibits several characteristics associated with investment grade sovereigns, including long-term macroeconomic stability, low public debt and prudent fiscal management. Strong remittances, export earnings and robust international reserves further reinforce Guatemala’s external resilience. However, structural challenges continue to constrain the country’s long-term growth potential. Weak human capital, institutional shortcomings, governance concerns, low tax revenues and limited capacity to execute public investment reduce Guatemala’s competitiveness, and ability to attract higher-value investment.
Now read on...
Register to sample a report