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