Weathering the storms

CENTRAL AMERICA - Report 29 Sep 2026 by Fernando Naranjo and Felix Delgado

Economic activity in El Salvador is performing better than expected six months ago. The construction sector investment boom is lasting longer, and negative external factors are hitting more softly than expected. The usual belief that departure from democracy and movement towards authoritarianism harms investor confidence is not being borne out, at least not during these years. Some key assumptions have deviated from our April outlook, leading us to reconsider our perceptions about business actions and reactions. Our revised short-term economic outlook raises economic growth for 2026, and anticipates fiscal improvement as an effort toward complying with the adjustment targets of the EFF agreement with the IMF, now back on track after the terms settled this month with the IMF staff. Headline inflation and the current account deficit will exceed the 2025 readings. Pension reform is not expected to advance this year; we instead expect it to be taken up after the February 2027 general elections.

Costa Rica’s economic growth is slowing, as temporary post-pandemic drivers fade. Economic activity grew 2.5% in July 2026, down from 5.7% a year earlier, with exports and free-zone activity weakening. Earlier U.S. orders ahead of tariff changes boosted 2025 growth, but created a higher comparison base. Employment and investment are also under pressure, as multinational companies reduce or relocate some operations. Domestic demand shows signs of weakness, with declining tax revenues, VAT collections and slower private-sector credit growth. High oil prices, tighter U.S. monetary policy and fiscal uncertainty create additional risks for growth in late 2026 and early 2027.

Guatemala is enjoying strong economic fundamentals and resilient domestic demand in Q4 2026. Economic activity grew an average of 4.4% during the first seven months of the year, while remittances increased 18.8% y/y, supporting household consumption. International reserves have risen to nearly $34 billion, providing a powerful buffer against external shocks. Fiscal conditions also remain favorable, with public debt expected to stay below 26% of GDP, although government budget execution, especially in public investment, remains slow. Growth could finish 2026 slightly above forecasts. Institutional weaknesses nonetheless continue to limit Guatemala’s progress toward investment-grade status.

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