Where is the growth?

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)
Nicaragua
and
Honduras
Very poor nations, akin to Bolivia or Haiti. HIPC members.
Dependence on ag and basic manufactures
Implemented “Washington Consensus”, no meaningful reform on top
of that
Deep problems and peculiar political histories
Recently moving in different directions
6
PPP real per capita income
18000
16000
14000
12000
10000
2002
8000
2008
6000
2012
4000
2000
0
CR
PAN
ES
GUA
HON
NIC
7
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
20.000
18.000
16.000
14.000
12.000
2002
10.000
2008
8.000
2013
6.000
4.000
2.000
0
CR
ES
GUA
HON
NIC
PAN
9
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)
6600
6000
5400
4800
4200
3600
3000
2400
1800
1200
600
0
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
Central America average
inflation
Average regional GDP growth
8,0%
12%
7,0%
10%
9,7%
8,7%
6,0%
5,0%
8%
6%
5,7%
5,3%
4,8%
4,0%3,7%
4%
2%
4,0%
3,0%
2,0%
1,5%
1,0%
0,0%
0%
20072008200920102011201220132014
-1,0%
16
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
110%
105%
100%
CR
95%
GUA
90%
HON
85%
ES
NIC
80%
PAN
75%
70%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
19
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
Relative CR to US manufacturing wages, 1990=100
200%
180%
160%
140%
120%
100%
80%
Min
Avg
Competitiveness improvements due to only
one factor: telecom reform
6,0
5,5
5,0
4,5
4,0
3,5
3,0
2,5
2,0
2008
2009
2010
2011
2012
2013
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
2014
The source of the fiscal mess...
Real growth of remuneration of government employees: 200913
Salario profesional mayor
78,6%
Salario Profesional Menor
33,2%
Salario No Profesional
23
7,1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
...and the consequence
Costa Rican public debt
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1984
1987
1990
1993
Central Bank
1996
1999
2002
Other public
2005
2008
Government
2011
2014
Spoiling a very nice run
Extreme poverty ($1.25 pd)
Poverty ($2 pd)
GTM
GTM
VEN
VEN
PRY
PRY
BOL
BOL
ARG
ARG
COL
COL
URY
URY
HND
MEX
SLV
SLV
BRA
HND
CRI
PAN
PAN
BRA
CHL
CRI
MEX
CHL
0
5
10
2008-10
15
20
1989-91
Source: World Bank, World Development Indicators (2013)
0
5
10
2008-10
15
20
1989-91
25
30
Key competitive attribute of manufacturing exports, by
sector
100%
90%
80%
70%
Cheap labor
60%
Natural resources
50%
Scale or capital
40%
Differentiated products
30%
Science and human cap
20%
10%
0%
1994
2011
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?
Panama GDP growth
14%
12%
10%
8%
6%
4%
2%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
28
Public investments require tax reform,
that has gotten stuck politically
PANAMÁ: DÉFICIT FISCAL
(COMO % DEL PIB)
5%
4,7%
4%
3,8%
3,8%
2011
2012
4,4%
3,3%
3%
2,1%
2%
1%
0,8%
0%
-0,1%
-1%
2007
2008
2009
2010
2013
2014
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?
EL SALVADOR: GDP growth
5%
4%
3,8%
3%
2,2%
2%
1,9%
1,8%
2012
2013
1,4%
1,3%
2,1%
1%
0%
-1%
-2%
-3%
-3,1%
-4%
2007
2008
2009
2010
2011
2014
31
Early CAFTA effect eroding in the light of new
competitiveness challenges and uncertainty
EL SALVADOR: EXPORTACIONES
(variación % anual)
18,0%
16,4%
15,6%
20%
15%
10%
7,6%
7,0%
4,5%
5%
0,6%
0%
-5%
-10%
-15%
-16,7%
-20%
2007
2008
2009
2010
2011
2012
2013
2014
32
The size and importance of remittances
Trade deficit as % of GDP
30%
25%
Remittances
4.500
19%
4.000
18%
3.500
17%
3.000
16%
2.500
15%
2.000
14%
20%
15%
10%
5%
0%
2007
2009
2011
2013
2007
2009
2011
2013
33
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...
GUATEMALA: PRODUCTO INTERNO BRUTO REAL
(Tasa de variación anual porcentual)
7%
6,3%
6%
5%
4,2%
4%
3,3%
3,0%
2,9%
3%
3,2%
3,3%
2013
2014
2%
1%
0,5%
0%
2007
2008
2009
2010
2011
2012
35
… and remittance dependency
GUATEMALA: REMESAS
(US$ MILLONES)
6.000
14%
5.500
12%
5.000
10%
4.500
8%
4.000
6%
3.500
4%
3.000
2.500
2%
2.000
0%
2007
2008
2009
2010
Remesas (En millones de US$)
2011
2012
2013
2014
Remesas (Como % del PIB)
36
With stability
Precios al consumidor
Mercado cambiario
GUATEMALA: TASA DE INFLACIÓN
(variación % anual)
12%
8%
11,4%
GUATEMALA: TIPO DE CAMBIO
(variación % anual)
7,3%
6%
10%
4%
8%
6,8%
2% 1,0%
6,2%
1,9%
0,9%
6%
3,9%
4%
2%
4,4%
4,8%
1,5%
0%
3,8%
-0,4%
-2%
1,9%
-4%
-2,5%
-4,0%
0%
-6%
2007 2008 2009 2010 2011 2012 2013 2014
2007 2008 2009 2010 2011 2012 2013 2014
37
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
HONDURAS: PRODUCTO INTERNO BRUTO REAL
(Tasa de variación anual porcentual)
7%
6,2%
6%
5%
4,2%
3,7%
4%
3,7%
3,3%
2,5%
3%
2%
2,0%
1%
0%
-1%
-2%
-2,4%
-3%
2007
2008
2009
2010
2011
2012
2013
2014
39
An unsustainable fiscal situation...in a
former HIPC country
HONDURAS: Government deficit as % of GDP
8%
7,4%
7,4%
2013
2014
7%
6,0%
6,0%
6%
5%
4,7%
4,6%
2010
2011
4%
3,0%
3%
2,5%
2%
1%
0%
2007
2008
2009
2012
40
Putting off adjustment...
Inflation
Devaluation
12%
HONDURAS: TIPO DE CAMBIO
(Variación % anual)
10,8%
7%
10%
6,1%
8,9%
6%
8%
6,7%
6,5%
5,6% 5,4%
6%
4%
5%
4,1%
4%
4,9%
3,0%
3,3%
3%
2%
0,6%
1%
2%
0%
0,0% 0,0%
0,0% 0,0%
0%
-1%
20072008200920102011201220132014
2007 2008 2009 2010 2011 2012 2013 2014
41
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
NICARAGUA: PRODUCTO INTERNO BRUTO REAL
(Tasa de variación anual porcentual)
6%
5%
5,4%
5,0%
5,2%
4,7%
4,2%
3,9%
4%
2,9%
3%
2%
1%
0%
-1%
-1,4%
-2%
2007
2008
2009
2010
2011
2012
2013
2014
43
Largely export-led growth
NICARAGUA: EXPORTACIONES
(Tasa de variación anual porcentual)
35%
30,9%
30%
24,7%
25%
20%
16,5%
15%
10%
10,1%
9,5%
9,3%
5%
0%
-5%
-3,2%
-5,5%
-10%
2007
2008
2009
2010
2011
2012
2013
2014
44
La paradoja del Comandante…
NICARAGUA: DÉFICIT FISCAL
(COMO % DEL PIB)
2%
1,7%
2%
0,9%
1%
0,7%
1%
0%
-1%
-0,3%
-0,5%
-0,5%
2011
2012
-0,4%
-0,3%
2013
2014
-1%
2007
2008
2009
2010
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