Alberto Trejos - Latin America | A look at Central America. FGV’s Brazilian Institute of Economics (IBRE) held, on 19 September 2014, the international seminar “Latin America and new global economic conditions”. The event addressed the issue of Latin American perspectives given imposed change, among other factors, caused by the slowdown in China and the gradual normalization of US monetary policy. The meeting was organized in three panels, which included national case studies from Argentina, Brazil, Chile, Colombia and Mexico. Visit FGV/IBRE's website at: http://www.fgv.br/ibre

1. América Latina
A look at Central America
Alberto Trejos | 2014
A AMÉRICA LATINA
E AS NOVAS CONDIÇÕES
ECONÔMICAS MUNDIAIS
seminário

2. A look at Central America
Alberto Trejos
INCAE

3. 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

4. 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

5. This talk
• Understanding Central America
• How the region as a whole is doing. News
• The future from a longer term perspective
4

6. UNDERSTANDING CENTRAL
AMERICA
5

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. Comercio inter-regional ($MM)
0
600
1200
1800
2400
3000
3600
4200
4800
5400
6000
6600
1960 1969 1978 1987 1996 2005
13

15. RECENT PERFORMANCE
14

16. 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

17. 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

18. 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

19. The dark spot in the globe...
18

20. 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

21. 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

22. Currency appreciation and labor-cost
uncompetitiveness
80%
100%
120%
140%
160%
180%
200%
Relative CR to US manufacturing wages, 1990=100
Min
Avg

23. 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

24. 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

25. ...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

26. 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)

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. … 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)

38. 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)

39. 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

40. 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

41. 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

42. 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

43. 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

44. 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)

45. 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

46. 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

47. 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