Hanging tight
Costa Rica’s economy is entering period of underperformance, masked by currency appreciation and near-zero inflation. GDP growth is slowing more sharply than expected, driven by weakening domestic demand, restrictive monetary policy and global trade tensions, particularly due to new tariffs imposed by the U.S. Trump administration. Colón appreciation is eroding competitiveness, straining tourism and domestic industry, while negative inflation and stagnant disposable income are compressing consumption. Fiscal metrics are temporarily flattened by currency valuation effects, but public debt is increasingly exposed to currency swings. With consumer confidence eroding and structural imbalances deepening, the investment landscape in Costa Rica over the next 18 months will be shaped more by resilience than by momentum, offering selective, risk-adjusted opportunities amid macroeconomic divergence.
El Salvador’s economic indicators maintained the trends we outlined in our two previous reports, now adding the rise of international reserves as part of IMF conditionality in the EFF agreement, as well as the increase in the fiscal deficit in April and May, to us inconsistent with any adjustment purpose. A new Fiscal Responsibility Law was enacted in June, to replace the November 2016 law suspended since 2020 due to the COVID-19 pandemic. We believe the new law represents little challenge for restoring fiscal sustainability set for 20 years ahead, with a still-high public debt-to-GDP ratio of 70%. All of these issues notwithstanding, the IMF is comfortable with government actions within the EFF agreement, as signaled by the approval in the first review of the program on June 27th, 2025.
In Guatemala, foreign direct investment is showing signs of revitalization under President Bernardo Arévalo, with Q1 2025 inflows up 17% y/y, led by finance, trade and manufacturing. Regional capital from Mexico, the United States and Central America now dominates, highlighting Guatemala’s growing role as a nearshoring hub. But structural bottlenecks, especially in logistics and infrastructure, remain critical barriers to sustained investment. While investor sentiment has improved, follow-through on reforms and project execution, particularly around ports, transport corridors and governance, will determine whether this uptick marks a lasting turning point, or is just a transient rebound.
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