October 5, 2017 – This post was written by Boyang Xue, FSG’s Research Intern for Latin America
The economies in Central America have been growing steadily in recent years, outperforming their South American counterparts as a group, largely thanks to the sub-region’s close economic ties to an expanding US economy. These dynamics have resulted in a higher prioritization of these markets by multinationals in recent years.
2017 has seen more of the same, as a robust U.S labor market (where unemployment is at its lowest level in 16 years) has helped drive an acceleration in remittances inflows and tourist arrivals in the region. Furthermore, a relatively strong US economy has helped boost exports from the region, while lower global oil and gas prices have widely helped to suppress inflation in local markets (and allowing some governments to reduce costly subsidies on fuel and raise investment expenditures).
Nonetheless, deep seated challenges persist that make doing business hard in many of these markets. Such challenges include continued political instability and social upheavals in Central America’s Northern Triangle (Guatemala, Honduras, El Salvador), and longstanding fiscal issues that have still not been addressed in markets such as Costa Rica and Nicaragua.
While the sub-region will continue to average growth above Latin America, individual country performance will be uneven in 2018. Nevertheless, opportunities exist across most markets. Let’s take a closer look at the big themes across the largest markets in Central America:
- Guatemala continues to show a large upside but cracks appear as new political crisis is developing: FSG is currently forecasting growth in Guatemala at 3.6% in 2018, and with a population of 16 million, the market represents an increasingly attractive opportunity for B2C companies. Nonetheless, Guatemala is facing a new bout of political uncertainty after a recent announcement by President Jimmy Morales that he would expel the head of a UN-backed anti-corruption commission (CICIG). There has since been significant backlash from civil society and media, and the Guatemalan Supreme Court suspended the action. Now, Morales’ mandate appears at stake and his immunity from corruption charges is challenged by both the Constitutional Court and Congress. Uncertainty over the direction of policy threatens to worsen the near-term outlook for the market. The heightened political uncertainty is already weighing on business sentiment, and FSG expects the situation to drag on at least through the remainder of October. In such a case, multinationals should prepare for a potential slow-down in investment, alongside probable further currency depreciation over the short-term.
- Panama is benefitting significantly from its recent canal expansion as global trade outperforms: Panama continues to show the highest growth rate in Latin America, as its economy expanded by more than 6% YoY for H1 2017. Thus far it has withstood uncertainties stemming from the external environment, such as trade frictions between the US and China. Instead, Panama has seen global trade boost revenues from its newly expanded canal in 2017. In the first quarter of the year, government revenues from the canal were up by 6% to US$ 565.5 million. The increased activity has led the government to project expenditure growth of 7% in its 2018 budget, with a significant portion of this increase destined to infrastructure investment.
- Costa Rica continues relatively high growth rate even as government announces liquidity crisis: Last month Costa Rica’s President Solís stated that the government was facing liquidity challenges and that public services could be curtailed. The government submitted a fiscal reform proposal to Congress, including new tax measures and legislation to allow the government to borrow more from the international market. The approval of such proposals is unlikely, however, given the current political climate and election cycle (presidential elections are scheduled for February). One-third of the government’s 2018 budget will be used for debt payment, and more debt will be issued to finance the repayment of old debt. Under these circumstances, the government is also planning to freeze spending on education and other current expenditures, measures that will likely weigh on private consumption.
Following the government’s recent announcement, consumer confidence retreated, pointing toward a possible near-term deceleration of consumer demand. Multinationals should be closely monitoring potential outcomes of February’s presidential elections to understand where the market might be moving. Currently, Antonio Álvarez Desanti (a former Congressman) is leading in the polls, but a full 30% of potential voters are declaring themselves undecided, making the electoral outcome highly uncertain.
Apart from monitoring these ongoing potential market disruptors, and how economic performance in key global markets affects activity in Central America, multinationals looking to take advantage of these relatively fast-growing markets will need to ensure they establish the right footprint in the region. This includes an adequate go-to-market strategy to be competitive as more companies arrive to these markets. Additionally, product, packaging, and pricing decisions can differ significantly in Central America compared to normal tactics for the rest of Latin America.
FSG clients can read our new piece on the Distribution Landscape in Central America and the Caribbean to see how their current positioning in the sub-region compares to that of other multinationals.
Not a client? You can purchase a copy of our Central America Market Spotlight on our online store.