Middle East war effects come home to roost
In Costa Rica, the Central Bank’s May 2026 Monetary Policy Report confirms a dual-speed economy. The special regime slowed in Q1 2026 as 2025’s front-loading of U.S.-bound orders faded, while the definitive regime remained weak, despite a construction-led lift from the electoral cycle. Manufacturing grew just 4.4% (vs. 12% a year ago), and transport and warehousing decelerated from 6.4% to 3.5%. Several sectors had been slowing before the Middle East conflict escalation, pointing to restrictive real rates and a multi decade-strong Colón as additional drags. Inflation has been running below target for more than 36 months, yet policy appears to prioritize currency strength. The BCCR projects growth at 3.5% in 2026 and 3.6% in 2027 (vs. 4.6% in 2025), with the domestic economy at just 3.1%. With a fiscal deficit of nearly 3.5% of GDP, and debt above 60%, the new Laura Fernández Delgado administration has limited fiscal room; the Ministry of Finance estimates a 10% colón depreciation would push debt to nearly 70% of GDP. A near-term return to investment grade looks unlikely, and there will be continuity at the BCCR, as President Roger Madrigal’s term runs until May 2027.
Guatemala is starting to absorb the first macroeconomic effects of the Middle East conflict, though the economy remains regionally resilient. Annual CPI inflation accelerated from around 1% at the start of 2026 to 3.2% y/y in April, led by transportation (+12.1% y/y), as higher global fuel and logistics costs filter through. Confidence has plunged, with the Bank of Guatemala's index falling from 66 in December to 51.5 in April, near the 50-point expansion/contraction threshold; 66.7% of respondents now consider the economy worse than a year ago, and only 44% expect improvement over the next six months (vs. 62% in December), pointing to more defensive household and business behavior ahead. Export growth moderated to 5.7% y/y in March after running above 7%, with U.S. inflation at 3.8% likely to weigh on demand for discretionary Guatemalan exports. Offsetting these signals, real activity held up well. The IMAE grew an average 4.4% in Q1 2026, above Q1 2025, supported by stable domestic demand, remittances and underlying macro resilience.
The economic outlook for El Salvador will continue to be affected by Middle East war-driven uncertainty and volatility. The obvious first effect for the domestic economy is on headline inflation, which began to be felt in March and April. Because it is a global factor, consequences extend broadly across economic activity, external trade, foreign remittances, private consumption and investment, as well as on public finances. It is of course too early to project the size of the economic implications of this external shock, whose duration and intensity are still uncertain. Economic activity continues to perform well, although a moderate slowdown has begun to be perceived from the most recent trends of exports and imports, foreign remittances and tourism indicators. The banking system took advantage of the 2025 bonanza to strengthen its liquidity reserves, in consonance with a targets in the IMF EFF agreement. The EFF is stalled, with the second review in September 2025 still pending, along with the third in March 2026. IMF disbursements stopped after the second one in June 2025. Negotiations over the EFF review continue to advance, with no clear date for a review.
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