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Central America: bolstered by the US recovery but hampered by internal weaknesses

5/12/2021

This segment highlights how Central American economies stand to gain from the change of administration in the United States as well as benefit from the stimulus package (American Rescue Plan) announced by President Biden in March. Improving economic prospects across the region are however likely to contrast with rising social risks.

TRANSCRIPT // Central America: bolstered by the US recovery but hampered by internal weaknesses : May 2021

CHART OF THE MONTH

 

François Doux: The US is not the only economy that will benefit from the country’s massive stimulus package. Neighbouring countries also stand to benefit. We are here with Salim Hammad to talk about Central America. Hello Salim.

Salim Hammad: Hello François.

François Doux: Can you tell us about the channels through which Central American economies stand to benefit from more dynamic economic conditions in the US.

Salim Hammad: There are mainly three transmission channels. The first is a trade channel, which operates via exports from the region to the United States. The second is a financial channel, which operates via investment flows from American entities to the region. And the last one, is a monetary channel, which refers to money transfers sent by migrant workers based in the United States. The chart illustrates the importance of these three transmission channels for each of the economies in the region. We can see in each case, the share that the United States’ represents in the country’s exports, foreign direct investment (FDI), and remittances, which are respectively captured by the green, red and orange bars. For the sake of simplicity, we can see that, on average, roughly 35% of the region’s exports are shipped to the United States. Also, about 1 out of 3 US dollars in foreign direct investment originatesfrom the US. Finally, we see, and this is probably the most striking feature of this chart, that on average about 80% of the remittances that flow back intothe region find their source in the United States. And the amounts being sent are substantial: for countries like Honduras or El Salvador, these transfers represent theequivalent of almost a quarter the size of their economy.  And we have already started to see the impact of a strong US recovery on such transfers. Point in case, remittances in Honduras, were up almost 30% year-on-year in the first quarter.

François Doux: Now let us talk diplomacy. Under the Trump administration, we saw three countries cut their diplomatic ties with Taiwan in order to operate a rapprochement with China. These included Panama, El Salvador and the Dominican Republic. With the Biden administration, what= can we expect in terms of US diplomatic behaviour towards Central America?

Salim Hammad: We expect to see a more active, less antagonistic   and more cooperative foreign policy from the Biden administration. This will likely translate into increased development aid which if you recall was cut during the Trump years.

President Biden has already revoked a number of measures from his predecessor, for instance by stopping the expulsion of unaccompanied children, a phenomenon which witnessed an upward trend in recent years. Above all, the Biden administration has just announced a 4 billion dollar plan to address the “push” factors that drive migration flows from the region to the United States. These are closely linked to issues of poverty, violence, and governance as well as environmental factors, given that many economies in the region are highly dependent on agriculture.

François Doux: When looking at economic prospects, the outlook appears more favourable for Central American economies. But they have been weakened by the Covid-19 crisis, so tell us about the risks these economies face in the months ahead. 

Salim Hammad: The main risk at this stage is social in nature, insofar as many countries face a cocktail of factors that are hardly favourable. First, we saw a rise in social tensions ahead of the health crisis in some countries. This was the case in Costa Rica with clashes surrounding public sector reform.  We also saw a rise in social demands in Guatemala and Panama while Nicaragua has been embroiled in a rather violent political crisis since 2018. Second, many countries  exhibit   very limited fiscal space, and are having to cope with deteriorating inequality and poverty metrics as well as rising unemployment , especially amongst the youth... The IMF estimated recently that for many countries, per capita GDP would not return to pre-pandemic levels before 2024. We must also add two aggravating factors to this list: the rise in oil prices, since most of these countries are net oil importers, and the risk of hurricanes and droughts, which if you recall were one of the main causes behind the migrant caravans observed in recent years.

François Doux: Thank you, Salim Hammad, for this update on the economies of Central America. We will be back in a moment with Three Questions on the United States and a look back at the 1970s with William De Vijlder.

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