Preparing for global challenges
Costa Rica is facing fiscal challenges that require strong policy actions to ensure long-term sustainability. Progress made in previous years improved fiscal indicators. Nevertheless, for the second year in a row there has been a slight deterioration in some fiscal data. The lack of a formal agreement with the International Monetary Fund makes it more difficult for favorable external financing, as previously done. As a result, the government has become more dependent on domestic markets to cover its financial needs. The reduction in the value of the debt is a consequence of the positive primary balance, but also of a sharp appreciation of the local currency. Over two years, the dollar has depreciated by 21% against the colón, and 40% of the central government’s debt is in dollars. The government in 2024 was unable to issue external debt bonds, due to non-compliance with Article 12 bis of the Eurobond Law, which required the installation of scanners at Costa Rica’s three main port customs facilities as a condition for approval. Costa Rica's future economic stability depends upon its ability to implement effective reforms, and to restore confidence among domestic and international stakeholders.
El Salvador will be negatively influenced by global developments in coming years. The world faces many disruptive forces, increasing risks for the economic order. Implications will be bigger for small and very open economies like those in Central America, widely exposed to external shocks and to global events of every type. The outlook only worsens if U.S. President Donald Trump acts upon his threats, as he has started to do. Salvadoran vulnerabilities are exacerbated due to the country’s little-diversified economic activity, along with its high dependence upon a single partner: the United States. Though El Salvador has some positive features, it faces the expected policy turnaround from a relatively weak position. Macroeconomic indicators in 2024 pointed to low economic activity and foreign remittance inflows, stagnant merchandise exports and a higher fiscal deficit in the post-pandemic years. On the positive side, the successful combatting of crime and violence is very beneficial for residents, and bolsters tourism inflows. The medium-term fiscal adjustment program supported by the IMF agreement improves confidence in coming policies to overcome current economic disequilibrium. Perspectives of multilateral banks financing at extended terms and low rates will help support the adjustment program.
In Guatemala, Bernardo Arévalo's first year as president concludes with a combination of achievements and challenges. From the beginning of his administration on January 15th, 2024, Arévalo was committed to transparency and democratic governance, and the year ended with high expectations for his presidency. Many Guatemalans continue to view Arévalo’s government with hope, and are eager to see tangible progress in strengthening democracy and reducing inequality and corruption. The main economic results have focused on reducing inflation and the fiscal deficit, and on improving private sector confidence. Nevertheless, Arévalo’s administration faces significant hurdles in advancing transparency and fighting corruption. Trump’s return to the U.S. presidency may complicate Guatemala’s economic situation. Arévalo’s administration is likely to ask for more cooperation on security, particularly to combat organized crime and drug trafficking.
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