Central America Country Risk Report Q3 2016 - New Market Study Published

External Tailwinds Supporting Regional Underperformers

Core View

Central American outperformers Costa Rica and Panama are facing a more challenging road ahead in the coming years. As real GDP growth slows in Panama on the back of the end of canal construction, establishing fiscal discipline and ensuring adequate employment will be crucial. Should the country fail to rein in spending in an environment of lower growth, this would likely cool investor enthusiasm toward the country. Similarly, Costa Rica is also facing a challenging fiscal outlook - a situation which is only exacerbated by the fragmented political environment.

In contrast, our economic outlook for most of Central America's underperformers is brightening. Guatemala, Honduras and El Salvador will benefit from stronger US demand for their manufactured goods, rising remittance inflows and relatively subdued oil prices in the quarters ahead. That said, significant security risks will temper foreign direct investment into these countries over the next five years, and the risk of prolonged social unrest in the wake of recent corruption scandals has risen. Over the next several years, the entry into force of the Trans-Pacific Partnership will also pose increased headwinds to these countries' manufacturing sectors. Nicaragua's macroeconomic position is also especially vulnerable given its strong ties to Venezuela. Our core view is for a moderate slowdown in growth in the coming years due to an end to the Tariff Preference Level programme and our view that Venezuela will modestly reduce assistance to Nicaragua. However, if Venezuela were to suddenly cut off aid under the ALBA-TCP programme, this would see a sharp downturn in Nicaraguan growth and rising pressure on the country's macroeconomic buffers.

Full Report Details at
- http://www.fastmr.com/prod/1191572_central_america_country_risk.aspx?afid=301

Major Forecast Changes

We have downgraded our end-2016 interest rate forecast for Guatemala to 3.50% from 3.75% previously. The Banco de Guatemala has held the benchmark rate at 3.00% in the year-to-date and policymakers seem cautious to hike prematurely so as not to stymie economic activity, despite an uptick in headline inflation.

Key Risks

Should US growth underperform our expectations, coming in below our 1.9% forecast for 2016, this would translate into relatively weaker US demand for Central American manufactured goods. In turn, this would dampen economic activity throughout the sub-region.

A significant deterioration in the security environment of one of the countries, either due to rising social unrest following anti-corruption demonstrations or a spike in cartel- or gang-related violence, could temper investment into that economy, weighing on economic activity.

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