América Latina

A look at Central America

Alberto Trejos | 2014

A AMÉRICA LATINAE AS NOVAS CONDIÇÕESECONÔMICAS MUNDIAIS

seminário

A look at Central America

Alberto Trejos INCAE

From the very big picture standpoint, excellent news

• Central America has not had again, since 1980s – Another significant financial crisis

– War

– Any major setbacks regarding democracy (almost)

– Significant disagreement among its member nations

• The regional integration process has made strides

• Most of the countries still abide by the conventional wisdom of the post-crisis reforms – With some fragilities here and there, significant steps

in some areas

2

From a slightly shorter timeframe, bad news

• The shift in the “industrial organization” of the international drug trade has had Central America as its main victim – Goodbye to the North Triangle?

• The fast reformers and more prosperous countries –CR & Pan– seem to be in difficult junctures, losing their steam

• Politically, things look complex

• A commodity boom and big financial inflows have been a problem, not a blessing

3

This talk

• Understanding Central America

• How the region as a whole is doing. News

• The future from a longer term perspective

4

UNDERSTANDING CENTRAL AMERICA

5

Central America is very heterogeneous and becoming more so

Panama and Costa Rica

Middle-income countries near the top of Latin American GDP pc

Very different in style

Dependent on services, advanced manufactures, some ag

Very fast pace of reform and growth in a relevant period

Guatemala and El Salvador

Lower income, more basic economies (like Dom.Rep or Ecuador)

Dependence on ag and basic manufactures

Implemented “Washington Consensus”, no meaningful reform on top of that

Nicaragua and Honduras

Very poor nations, akin to Bolivia or Haiti. HIPC members.

Deep problems and peculiar political histories

Recently moving in different directions

6

PPP real per capita income

7

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

CR PAN ES GUA HON NIC

2002

2008

2012

Very dependent on exports for growth

• Costa Rica of hi-tech manuf and services

• Panama of its logistics and financial industries

• Nicaragua of agriculture

• The North Triangle of textiles

• The region has been differently hit by global terms of trade changes – We all buy what China buys, the NT also sells what

China sells...a double hit

8

Export growth

9

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

20.000

CR ES GUA HON NIC PAN

2002

2008

2013

How they close their trade gap

• Costa Rica and Panama with a big surplus of (different) services

• Nicaragua with massive foreign aid, nowadays mostly from Venezuela

• The North Triangle with remittances from emigrants, mostly in the US

10

The region is very open to trade

• Unilaterally

• With a large web of trade agreements, especially Costa Rica´s – The region as a whole has trade agreements with

the US, the EU and many other players

• The Central American Common Market

11

The Central American Common Market

• In terms of barriers removed and common standards applied, arguably the most advanced regional integration after the EU – The challenge: a Costums Union by end of decade

• Corporate Central America sees the region as one domestic market – Plus logistic, electric integration

• Interesting role of Panama, Mexico and nowadays more Colombia

12

Comercio inter-regional ($MM)

0

600

1200

1800

2400

3000

3600

4200

4800

5400

6000

6600

1960 1969 1978 1987 1996 2005

13

RECENT PERFORMANCE

14

Key forces of the last few years

Financial stability but moderate growth

A shift towards populism: slowdown of reform, loss of “love for democracy”

The enormous security challenge

Policy fatigue

Terms of trade deterioration

Financial inflows and some property bubbles

15

Stable but slowing down

8,7%

9,7%

1,5%

5,3% 5,7%

4,0% 3,7%

4,8%

0%

2%

4%

6%

8%

10%

12%

20072008200920102011201220132014

Central America average inflation

16

-1,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

Average regional GDP growth

The politics

• In Guatemala and Honduras, afraid of the new crime phenomena, people voted for traditional parties and alternatives

• In El Salvador, after testing with the “light” version, a core FMLN candidate is new president

• In Nicaragua, its still Ortega... • In Costa Rica, a “pro-1970s” populist is elected

with an anti-reform language and no mandate • In Panama, new government and some signs that

the recent dynamism may be fading out

17

The dark spot in the globe...

18

Financial flows and currency appreciation

19

70%

75%

80%

85%

90%

95%

100%

105%

110%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

CR

GUA

HON

ES

NIC

PAN

Costa Rica: Between a rock and a hard place

• The peculiar political situation

• Currency appreciation and the costly way of reducing inflation – Growth and modernization, getting choked by the

exchange rate, doubts about the direction of policy, crucial competitiveness problems unsolved

• The fiscal disaster

• So close, and yet so far: after significant successful reform, country may be walking backwards

20

Currency appreciation and labor-cost uncompetitiveness

80%

100%

120%

140%

160%

180%

200%

Relative CR to US manufacturing wages, 1990=100

Min

Avg

Competitiveness improvements due to only one factor: telecom reform

2,0

2,5

3,0

3,5

4,0

4,5

5,0

5,5

6,0

2008 2009 2010 2011 2012 2013 2014

Educación superior y entrenamiento Mercado de bienes Mercado laboral

Mercado financiero Preparación tecnológica Tamaño del mercado

Fuente: Informe de Competitividad Global varios años, Foro Económico Mundial

The source of the fiscal mess...

7,1%

33,2%

78,6%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Salario No Profesional

Salario Profesional Menor

Salario profesional mayor

Real growth of remuneration of government employees: 2009-13

23

...and the consequence

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014

Costa Rican public debt

Central Bank Other public Government

Spoiling a very nice run

Extreme poverty ($1.25 pd) Poverty ($2 pd)

0 5 10 15 20

MEX

CHL

PAN

CRI

BRA

SLV

HND

URY

COL

ARG

BOL

PRY

VEN

GTM

2008-10 1989-91

0 5 10 15 20 25 30

CHL

CRI

BRA

PAN

HND

SLV

MEX

URY

COL

ARG

BOL

PRY

VEN

GTM

2008-10 1989-91

Source: World Bank, World Development Indicators (2013)

Key competitive attribute of manufacturing exports, by sector

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1994 2011

Cheap labor

Natural resources

Scale or capital

Differentiated products

Science and human cap

Panama: another year of growth, but the seams begin to show

• The growth of the last few years has been remarkable

• New conflicts – Wage adjustment, Canal expansion conflicts, tax

reform

• Growth keeps coming from the same sources: infrastructure and gradually improving as a hub – Problematic implications

– Clear positioning

• Fears that the real estate bubble may explode

27

Growth...fading?

28

0%

2%

4%

6%

8%

10%

12%

14%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Panama GDP growth

Public investments require tax reform, that has gotten stuck politically

0,8%

-0,1%

2,1%

3,3%

3,8% 3,8%

4,7% 4,4%

-1%

0%

1%

2%

3%

4%

5%

2007 2008 2009 2010 2011 2012 2013 2014

PANAMÁ: DÉFICIT FISCAL (COMO % DEL PIB)

29

El Salvador: annus horribilis

• Electoral polarization to the highest degree

• Cronic lack of growth

– Dollarization, low productivity growth, very poor human capital, lowest savings rate in the world

• “The best pupil...”

• The side effects of massive emigration

– On productivity, incentives, demography, savings, growth, crime, public finances...

30

Where is the growth?

3,8%

1,3%

-3,1%

1,4%

2,2% 1,9% 1,8%

2,1%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2007 2008 2009 2010 2011 2012 2013 2014

EL SALVADOR: GDP growth

31

Early CAFTA effect eroding in the light of new competitiveness challenges and uncertainty

7,6%

15,6%

-16,7%

16,4% 18,0%

0,6%

4,5% 7,0%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2007 2008 2009 2010 2011 2012 2013 2014

EL SALVADOR: EXPORTACIONES (variación % anual)

32

The size and importance of remittances

0%

5%

10%

15%

20%

25%

30%

2007 2009 2011 2013

Trade deficit as % of GDP

33

14%

15%

16%

17%

18%

19%

2.000

2.500

3.000

3.500

4.000

4.500

2007 2009 2011 2013

Remittances

Guatemala: stable but stagnant

• The new second most dangerous place on Earth

• Its economy going through less dramatic change

• Unimpressive growth, but very committed to financial stability

• Politics may be getting complicated, a polarized environment, etc.

34

The same mix of slow growth...

6,3%

3,3%

0,5%

2,9%

4,2%

3,0% 3,2% 3,3%

0%

1%

2%

3%

4%

5%

6%

7%

2007 2008 2009 2010 2011 2012 2013 2014

GUATEMALA: PRODUCTO INTERNO BRUTO REAL (Tasa de variación anual porcentual)

35

… and remittance dependency

36

0%

2%

4%

6%

8%

10%

12%

14%

2.000

2.500

3.000

3.500

4.000

4.500

5.000

5.500

6.000

2007 2008 2009 2010 2011 2012 2013 2014

GUATEMALA: REMESAS (US$ MILLONES)

Remesas (En millones de US$) Remesas (Como % del PIB)

With stability

Precios al consumidor Mercado cambiario

37

1,0% 1,9%

7,3%

-4,0%

-2,5%

0,9%

-0,4%

1,5%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2007 2008 2009 2010 2011 2012 2013 2014

GUATEMALA: TIPO DE CAMBIO (variación % anual)

6,8%

11,4%

1,9%

3,9%

6,2%

3,8% 4,4%

4,8%

0%

2%

4%

6%

8%

10%

12%

2007 2008 2009 2010 2011 2012 2013 2014

GUATEMALA: TASA DE INFLACIÓN (variación % anual)

Honduras… another complex scenario

• The new MOST dangerous place on Earth

• New president, J.O. Hernández, facing a complex economic and political front – Electoral fragmentation. Hangover from the

pijamas

– Slow growth and fading competitiveness position of the once unique textile arrangement

– Fiscal and exchange rate policies unsustainable, but policy tied down by politics

– Depend on foreign capital

38

Slowing growth

6,2%

4,2%

-2,4%

3,7% 3,7% 3,3%

2,5% 2,0%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

2007 2008 2009 2010 2011 2012 2013 2014

HONDURAS: PRODUCTO INTERNO BRUTO REAL (Tasa de variación anual porcentual)

39

An unsustainable fiscal situation...in a former HIPC country

3,0% 2,5%

6,0%

4,7% 4,6%

6,0%

7,4% 7,4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2007 2008 2009 2010 2011 2012 2013 2014

HONDURAS: Government deficit as % of GDP

40

Putting off adjustment...

Inflation Devaluation

41

0,0% 0,0%

0,0% 0,0%

0,6%

4,1%

3,3%

6,1%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

2007 2008 2009 2010 2011 2012 2013 2014

HONDURAS: TIPO DE CAMBIO (Variación % anual)

8,9%

10,8%

3,0%

6,5%

5,6% 5,4% 4,9%

6,7%

0%

2%

4%

6%

8%

10%

12%

20072008200920102011201220132014

Nicaragua… political noise but surprisingly good politics

• A political paradox

– Populist discourse, especially abroad, with very orthodox management of the macroeconomy, and proximity to the private sector

• Manages to remain cheap, and FDI/Exports follow from that

• Very dependent on foreign aid, especially from Venezuela

42

Better growth than the rest

43

5,0%

2,9%

-1,4%

3,9%

5,4% 5,2% 4,7%

4,2%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2007 2008 2009 2010 2011 2012 2013 2014

NICARAGUA: PRODUCTO INTERNO BRUTO REAL (Tasa de variación anual porcentual)

Largely export-led growth

10,1% 9,5%

-5,5%

30,9%

24,7%

16,5%

-3,2%

9,3%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2007 2008 2009 2010 2011 2012 2013 2014

NICARAGUA: EXPORTACIONES (Tasa de variación anual porcentual)

44

La paradoja del Comandante…

-0,3%

0,9%

1,7%

0,7%

-0,5% -0,5% -0,4% -0,3%

-1%

-1%

0%

1%

1%

2%

2%

2007 2008 2009 2010 2011 2012 2013 2014

NICARAGUA: DÉFICIT FISCAL (COMO % DEL PIB)

45

The long term issues for Central America

• Migration and remittances, weaker societies

• Violence and crime of a different kind

• Growth without equity or human capital (exc. CR)

• Need for a new strategy

• New politics and lack of responsiveness

• The pending aspects of regional integration

• The role of outsiders: Mexico, Colombia, Venezuela and the US

• Can the smaller two lead again? Can the rest follow?

46