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 ISSN: 0265-9085

July 2017 Contents

Vol 34 Issue 7

Latin America Monitor

Panama: Surging Canal Usage To
Brighten Fiscal Outlook 3
Guatemala: Remittances Will Keep
Central America Current Account In Surplus 5
Honduras: Hernández Likely To
Nicaragua: Growth To Be Robust, Although Risks Win Re-Election Bid  6
Remain
BMI View: Nicaragua will see robust economic growth over the next two years. However, Costa Rica: Central Bank To Focus
falling infrastructure investment will weigh on growth and we cannot discount downside On Inflation And Currency 7
risks from events in Venezuela and the US. El Salvador: Legislative Gridlock
Creates Fiscal Uncertainty,
Nicaragua's economy will outperform its peers in Central America in 2017 and 2018, on the Heightened Political Risk  8
back of robust private consumption and increased activity in the agricultural and tourism
Latin America: Odebrecht Fallout
sectors. We forecast the country's growth to decelerate in each of the next two years due
Brings Threats, Opportunities  10
to a decline in public investment. After estimated 4.6% growth in 2016, we forecast growth
to slow modestly to 4.3% and 4.1% in 2017 and 2018, respectively. This is an upward revision
from other previous forecasts of 4.2% and 3.9% as the government has maintained higher
spending levels in Q117 than we had anticipated.

Positive Performance Across Sectors

Nicaragua will see an expansion in a variety of sectors over coming quarters. Employment Copy Deadline: 25 May 2017
and real wage growth have been buoyant, activity has remained solid in the fishing, mining
Analysts: Fily Camara, Andrew Trahan,
and manufacturing sectors, and tourism has played an increasingly large role in the Jesse Wheeler
territory's economy. While 2016 data is not yet available, tourism has shown consistent
...continued on page 2 Editor: Katherine Weber

Sub-Editor: Clynton Wraten

Panama: Surging Canal Usage To Brighten Fiscal Outlook  3
Subscriptions Manager: Lyan Chan
Higher than expected shipping activity will bolster the Panamanian government’s intakes from
canal and port usage, helping to narrow the fiscal deficit in 2017. Beyond 2017 the narrow Marketing Manager: Julia Consuegra
revenue base and elevated expenditures will leave its fiscal standing vulnerable to deterioration.
Production: Neeraj Kumar

Guatemala: Remittances Will Keep Current Account In Surplus  5

Surging remittance flows will see Guatemala’s current account remain in surplus. However,
we expect this surplus to then narrow over our five-year forecast as remittance flows slow
to some degree and imports actually start to outpace weakened export growth .

REGIONAL INDICATORS
Central America 2015 2016e 2017f 2018f Head Office
Nominal GDP, USDbn 231.7 242.9 260.3 279.1
2 Broadgate Circle, London
Population, mn 45.4 46.0 46.7 47.3
EC2M 2QS, UK
GDP per capita, USD 5,108.3 5,279.1 5,579.6 5,900.3
Real GDP growth, % 4.1 3.8 4.2 4.1
Inflation, % 1.4 2.0 2.7 3.1 Company Locations
Goods Exports, USDbn 48.7 50.2 52.8 55.8 London | New York | Singapore
Goods Imports, USDbn 79.8 81.9 86.4 91.6 Hong Kong | Dubai | Pretoria
Notes: e/f = BMI estimate/forecast. Central America = Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua,
Panama. Weighted by nominal GDP. Source: BMI
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 Central America | July 2017

CENTRAL AMERICA RISK INDEX

BMI's Country Risk Index scores countries on a 0-100 scale, evaluating short-term and long-term political stability, short-term economic
outlook, long-term economic potential and operational barriers to doing business. For a detailed methodology, visit bmiresearch.com or
contact us using the details on page 1.

RISK INDEX TABLE

Short Term Long Term Operational Country
Political Economic Political Economic Risk Risk
Panama 74.8 59.8 69.0 66.1 57.1 64.0
Costa Rica 61.9 53.5 71.8 59.1 55.1 59.4
El Salvador 48.5 47.3 60.4 53.6 42.5 49.1
Guatemala 45.4 57.9 48.9 54.2 40.3 47.6
Honduras 46.0 53.3 47.5 51.2 39.8 46.3
Nicaragua 63.8 42.3 45.2 45.5 40.4 46.3
Regional Average 56.7 52.4 57.1 55.0 45.9 52.1
Global Average 63.7 51.8 62.1 52.8 49.8 55.0
Source: BMI.

NICARAGUA – ECONOMIC OUTLOOK

...continued from front page
growth over the past decade, and will likely continue to provide tailwinds to the national Consistently Strong Activity
Nicaragua – IMAE Economic Activity Index
economy as growth recovers in source markets such as the US.

Moreover, strong remittance inflows will continue to fuel private consumption growth.
Since January 2016, remittances have averaged 6.2% y-o-y growth per month, fuelled
largely by concerns about the policies of US President Donald Trump. In total, remittances
in 2016 reached USD1.3bn, the highest ever, amounting to nearly 10.0% of nominal GDP. As
many households are dependent on remittances to supplement their purchasing power,
we expect this inflow will allow for continued growth in private consumption in the quarters
ahead.

Source: BCN, BMI

Risks Have Not Abated
We see substantial downside risks to our forecasts from the crisis in Venezuela and US
policy on trade, aid and migration. Venezuela has long been a key ally of Nicaragua and
has provided the country with heavily subsidised fuel through its Petrocaribe programme.
Nicaragua has used the savings to fund highly popular social programmes such as housing
subsidies. While data on oil shipments from Venezuela is scarce, we believe they have fallen
off significantly in the last few quarters.

We expect the Nicaraguan government to respond to this fall in external funding by cutting Employment Growth Still Robust, Despite Modest
Deceleration
capital expenditures, rather than risk the political backlash that would come from cuts to Nicaragua – National Employment
social spending. The government will attempt to fill this void with public private partnerships,
although on the whole we expect investment to modestly decline in the years ahead. In
addition, the government may reduce social spending, given how reliant the country's
finances are on support from Venezuela. While this is not our core view, this would reduce
the income of significant numbers of Nicaraguans, undercutting private consumption.

Moreover, the presidency of Donald Trump poses substantial downside risks to the growth
outlook for all of Central America, as we have previously noted. For Nicaragua, Trump's
policies can have an impact in three ways. First, a drastic increase in border enforcement
or deportations would slow the flow of remittances to the country, severely hampering Source: BCN, INSS, BMI

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 Central America | July 2017

consumption. Second, the US is by far Nicaragua's largest trading partner, accounting for Remittance Flows To Support Purchasing Power
Nicaragua – Remittances
roughly 40% of goods exports in 2016. While we do not expect Trump will enact protectionist
measures, such policies would greatly undermine Nicaragua's export-driven economy.

Finally, the US Congress is currently considering the Nicaragua Trade & Investment Act,
which would require the US to veto any international aid to Nicaragua until the country
makes democratic reforms. Should Trump sign the bill into law, Nicaragua would be cut off
from a key source of funding and international investors would likely react negatively to
the uncertainty it would cause. A decline in investment would pose risks to the stability of
Nicaragua's external accounts, given the country's wide current account shortfall.

Source: BCN, BMI

DATA & FORECASTS

2013 2014 2015 2016e 2017f 2018f 2019f
Population, mn 5.9 6.0 6.1 6.2 6.2 6.3 6.4
Nominal GDP, USDbn 10.9 11.8 12.7 13.4 14.0 14.7 15.4
GDP per capita, USD 1,829 1,960 2,087 2,175 2,250 2,335 2,416
Real GDP growth, % y-o-y 4.5 4.6 4.9 4.6 4.3 4.1 3.7
Industrial production, % y-o-y, ave -0.4 5.2 3.5 3.5 3.5 3.5 3.5
Consumer price inflation, % y-o-y, ave 7.1 6.0 4.0 3.5 4.0 5.1 4.9
Consumer price inflation, % y-o-y, eop 5.7 6.5 3.1 3.1 4.8 5.4 4.4
Exchange rate NIO/USD, ave 24.72 25.96 27.25 28.55 29.98 31.48 33.05
Exchange rate NIO/USD, eop 25.33 26.60 27.93 29.32 30.79 32.33 33.94
Budget balance, NIObn -3.1 -4.6 -5.4 -4.2 -6.3 -6.5 -5.5
Budget balance, % of GDP -1.1 -1.5 -1.6 -1.1 -1.5 -1.4 -1.1
Goods and services exports, USDbn 4.7 5.0 4.8 4.7 4.8 5.1 5.4
Goods and services imports, USDbn 6.9 7.1 7.0 7.1 7.3 7.6 8.0
Current account balance, USDbn -1.2 -0.9 -1.0 -1.1 -1.1 -1.0 -1.1
Current account balance, % of GDP -10.8 -7.7 -8.2 -8.1 -7.6 -7.1 -7.0
Foreign reserves ex gold, USDbn 2.0 2.3 2.5 2.4 2.2 2.3 2.4
Import cover, months 3.5 3.9 4.3 4.2 3.6 3.6 3.6
Total external debt stock, USDbn 9.8 10.2 10.5 11.8 13.3 14.9 16.6
Total external debt stock, % of GDP 89.9 86.6 82.6 88.5 94.9 101.3 108.2
e/f = BMI estimate/forecast. Source: National sources, BMI

PANAMA – ECONOMIC OUTLOOK

Surging Canal Usage To Brighten Fiscal Outlook
BMI View: Higher than anticipated shipping activity will bolster the Panamanian government's intakes from canal and port usage,
helping to narrow the fiscal deficit in 2017. However, beyond 2017 the country's narrow revenue base and elevated expenditures will
leave its fiscal standing vulnerable to deterioration.

A gradual increase in global shipping volume will boost usage of the newly renovated Panama Canal and nearby ports, driving an uptick
in the government's intakes from transport-related activity. The higher revenues will compliment the consolidation measures put in
place by the administration of President Juan Carlos Varela and cause Panama's fiscal deficit to narrow in 2017. While overall throughput
volume was weak in the initial months after the canal expansion was completed in June 2016, data from H117 reveal 7.0% y-o-y increase
in passages in April and a 17.0% y-o-y increase in toll revenues through February. The government's fiscal law requires that windfall from
the canal contribute to deficit reduction.

In line with our view global trade modestly improves in coming quarters, we expect these trends to continue, bolstering the country's
fiscal standing. Overall we forecast revenue growth of 7.8% in 2017 and 6.0% in 2018, helping narrow the fiscal shortfall from 2.4% in 2016
to 1.8% and 1.9% in 2017 and 2018. This represents an upward revision from our previous forecast of 2.0% in 2017 and 2.2% in 2018.

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 Central America | July 2017

Long-Term Fiscal Standing Still Tenuous Canal Revenue To Support Deficit Narrowing
Panama – Fiscal Account
Despite likely near-term improvements, Panama's fiscal position will remain vulnerable over
the coming years due to its narrow revenue base and unique exposure to global trends.
Over the past three years, the Varela administration has taken steps to enhance revenue
collection by overhauling the tax collection agency and improving auditing procedures.
However, the government's revenue from taxes remains the lowest in the region. As a
result, fiscal accounts are dependent on fees from the vast shipping and logistics sector.
The possibility of a prolonged global economic downturn as well as uncertainty regarding
international trade policies could periodically weigh on canal usage.

Moreover, the government's continued emphasis on infrastructure and public works e/f = BMI estimate/forecast. Source: MEF, BMI
initiatives suggest expenditure levels are set to remain elevated. The aforementioned fiscal
law allows for expenditure growth of 8.0% y-o-y in 2017, however government plans to
enhance transport networks such as ports, metros and airports will likely require regular
government contributions despite private sector involvement. Additionally, cuts to current
Expenditure Growth To Keep Debt Elevated
expenditure will likely become more difficult in the quarters leading up to elections in 2019. Panama – Central Government Debt
From 4.90% in 2017, we forecast expenditure growth to average 6.2% through 2022.

Strong Economy Will Aid Deficit Sustainability

Panama's robust economic growth and openness to foreign financing will enable it to
sustain its persistent fiscal shortfalls. We forecast real GDP growth of 5.1% over the next ten
years, outpacing the regional average of 2.7% and maintaining steady government intakes
from economic activity. While we forecast central government debt to remain around
40.0% of GDP over the coming years, Panama's investment-grade sovereign credit ratings
enable it to enjoy relatively cheap access to international financing, which sustains about
80.0% of its total debt. e/f = BMI estimate/forecast. Source: Contraloria, BMI

DATA & FORECASTS

2013 2014 2015 2016e 2017f 2018f 2019f
Nominal GDP, USDbn 48.9 53.2 56.6 59.8 64.1 68.5 73.5
Real GDP growth, % y-o-y 8.4 6.2 5.8 4.9 5.6 5.7 5.6
GDP per capita, USD 12,667 13,560 14,181 14,767 15,589 16,403 17,345
Population, mn 3.8 3.9 3.9 4.0 4.1 4.1 4.2
Consumer price inflation, % y-o-y, eop 3.7 1.1 0.9 1.9 1.2 1.0 2.4
Consumer price inflation, % y-o-y, ave 4.0 2.6 0.4 0.9 1.6 1.1 1.7
Exchange rate PAB/USD, ave 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Exchange rate PAB/USD, eop 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Budget balance, PABbn -1.0 -1.6 -1.2 -1.4 -1.2 -1.3 -1.3
Budget balance, % of GDP -2.1 -2.9 -2.2 -2.4 -1.8 -1.9 -1.8
Goods and services exports, USDbn 29.8 28.2 27.3 30.3 33.4 36.8 40.5
Goods and services imports, USDbn 31.5 30.5 27.0 29.6 32.6 35.9 39.8
Current account balance, USDbn -4.4 -4.8 -3.4 -3.5 -3.7 -4.0 -4.6
Current account balance, % of GDP -9.0 -9.0 -6.0 -5.9 -5.8 -5.9 -6.2
Foreign reserves ex gold, USDbn 2.8 4.0 4.5 5.3 6.4 7.4 7.7
Import cover, months 1.3 1.9 2.4 2.6 2.9 3.0 2.9
Total external debt stock, USDbn 68.3 78.0 87.7 92.0 97.1 104.2 111.8
Total external debt stock, % of GDP 139.6 146.6 155.1 153.9 151.6 152.2 152.2
Crude, NGPL & other liquids prod, 000b/d 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total net oil exports (crude & products), 000b/d -134.0 -148.2 -159.4 -169.9 -180.2 -190.2 -200.7
Dry natural gas production, bcm 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dry natural gas consumption, bcm 0.0 0.0 0.0 0.0 0.0 0.0 0.0
e/f = BMI estimate/forecast. Source: National sources, BMI

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 Central America | July 2017

GUATEMALA – ECONOMIC OUTLOOK

Remittances Will Keep Current Account In Surplus
BMI View: Surging remittance flows will see Guatemala's current account remain in surplus. However, we expect this surplus to
actually narrow over our five-year forecast as remittance flows slow to some degree and imports actually start to outpace weakened
export growth.
Guatemala's current account will remain in surplus in 2017, but narrow to 1.0% of GDP, from Current Account Surplus Set To Narrow
Guatemala – Current Account
1.3% in 2016. A surge in remittances and declining imports  drove  Guatemala's current
account into surplus in 2016, for the first time since 2009. With further expansion in the
US economy supporting Guatemalan exports and remittance flows, we expect the current
account to remain in surplus over the next five years.

Slowing remittance growth, however, and a resurgence in imports, will actually see this
surplus narrow to 0.5% of GDP by 2021. We also expect export growth to be dampened
by a strengthening Guatemalan quetzal  and increased competition from Asian textile
manufacturers.

e/f = BMI estimate/forecast. Source: Banguat, BMI

Current Account To Benefit From Remittance Growth
Remittance flows will underpin Guatemala's current account surplus and general economic
growth over coming years. Over the past two years, strong economic growth, increased
emigration and fears about the immigration policies of US President Donald Trump have
sent remittance flows soaring.

Total workers' remittances to Guatemala have actually more than doubled since January
2015, increasing from USD358mn to USD740mn in March 2017. While the pace of Falling Imports, Remittance Growth Drive Surplus
Guatemala – Trade In Goods & Remittances, USDmn
remittance growth will slow somewhat as concerns about the policies of President’s Trump
administration fade, continued strength in the US economy will see remittance growth
reach 7.0% in 2017.

Appreciation Of The Quetzal Will Weigh On Export Growth

A strengthening quetzal will weigh on the competitiveness of Guatemala's exports,
outweighing the positive impact of US growth on demand and also capping the growth of
shipments abroad over coming years.

The textile industry, which makes up approximately 10% of Guatemala's export basket, will Source: Banguat, BMI
increasingly lose market share to low-cost competition from Asia as appreciation in the
quetzal actually increases relative production costs.

The unit has appreciated from 7.73GTQ/USD in April 2016 to USD7.36 currently, despite the
Banco de Guatemala making purchases of USD1.2bn in 2016 and USD934mn so far in 2017
in an effort to rein in rapid gains. The agricultural sector, however, will balance textile losses
somewhat, as sugar and banana production and prices drive export growth to average 3.0%
in 2017 and 2018.

Current Account Surplus Will Limit External Financing Needs

Given our forecast of current account surpluses over the coming years, Guatemala will not
actually reamin dependent on foreign funds to maintain stability in its external account.
Additionally, stability is enhanced by the fact that 38.5% of Guatemala's external liabilities
are made up of foreign direct investment, which is much less susceptible to capital flight
risks.
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 Central America | July 2017

DATA & FORECASTS

2013 2014 2015 2016e 2017f 2018f 2019f
Population, mn 15.7 16.0 16.3 16.7 17.0 17.3 17.7
Nominal GDP, USDbn 53.8 58.7 63.8 68.8 77.7 85.2 83.4
GDP per capita, USD 3,430 3,665 3,901 4,124 4,570 4,915 4,718
Real GDP growth, % y-o-y 3.7 4.2 4.1 3.1 4.0 3.1 3.4
Consumer price inflation, % y-o-y, ave 4.3 3.4 2.4 4.4 4.5 3.9 3.3
Consumer price inflation, % y-o-y, eop 4.4 2.9 3.1 4.2 4.8 3.0 3.5
Central bank policy rate, % eop 5.00 4.00 3.00 3.00 3.50 4.50 5.50
Exchange rate GTQ/USD, ave 7.86 7.73 7.66 7.60 7.38 7.25 7.90
Exchange rate GTQ/USD, eop 7.84 7.60 7.63 7.52 7.27 7.20 7.80
Budget balance, GTQbn -9.0 -8.6 -7.0 -1.6 -1.2 -0.8 -0.1
Budget balance, % of GDP -2.1 -1.9 -1.4 -0.3 -0.2 -0.1 0.0
Goods and services exports, USDbn 12.7 13.8 13.6 13.3 13.8 14.3 14.9
Goods and services imports, USDbn 17.9 19.0 18.3 17.9 18.9 20.0 21.2
Current account balance, USDbn -1.4 -1.2 -0.1 0.9 0.8 0.6 0.5
Current account balance, % of GDP -2.5 -2.1 -0.2 1.3 1.0 0.7 0.6
Foreign reserves ex gold, USDbn 7.3 7.3 7.8 8.5 9.0 9.5 10.3
Import cover, months 5.3 5.2 5.7 6.5 6.5 6.5 6.6
Total external debt stock, USDbn 17.3 19.3 20.2 20.9 21.9 23.1 24.6
Total external debt stock, % of GDP 32.1 32.9 31.6 30.4 28.2 27.1 29.5
Crude, NGPL & other liquids prod, 000b/d 14.0 14.0 14.0 14.0 14.0 14.0 14.0
Total net oil exports (crude & products), 000b/d -55.0 -55.7 -56.4 -57.1 -57.8 -58.5 -59.2
Dry natural gas production, bcm 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dry natural gas consumption, bcm 0.0 0.0 0.0 0.0 0.0 0.0 0.0
e/f = BMI estimate/forecast. Source: National sources, BMI

HONDURAS – POLITICAL OUTLOOK

Hernández Likely To Win Re-Election Bid

BMI View: President Hernández will likely win his re-election bid in Honduras's November general elections. The opposition remains
fragmented and his popularity is supported by perceived successes in security improvement policies.

President Juan Orlando Hernández's bid for a second presidential term in Honduras's National Party Favoured Over Opposition
Honduras – Preferred Party As Of January 2017, %
November general election is becoming increasingly likely as he benefits from strong inter-
party support and perceived successes on security issues, his signature policy initiative. Early
polling shows Hernández begins the race in front of all opposition candidates. A Hernández
second term would bolster policy continuity and investor confidence despite persistent
operational risks, helping to sustain steady GDP growth over coming years.

His approval rating has, however, fallen since 2014 as corruption allegations have weighed
on support. In addition, his bid for re-election itself has attracted considerable opposition,
as serving more than one four-year term was previously forbidden under the constitution.
As a result we see scope for a united opposition, which would present a major risk to Source: CID, Gallup, BMI
Hernández's presidential re-election bid.

Hernandez Begins Race In Front

Re-Election Unpopularity Will Be A Hurdle For
Our view Hernández will likely maintain the presidency is supported by early polling and strong
Hernandez
inter-party support. Hernández's signature policy initiative to improve security in the country, Honduras – Opinion Over Presidential Re-Election

which includes deploying the military and other heavy-handed measures, has proven popular
with the majority of Hondurans. As such, President Hernández received the highest approval
rating among potential candidates from major parties at 55%, compared to 47% for Salvador
Nasralla of the center-right Anti-Corruption Party (PAC) and 44% for Xiomara Castro of the
left-leaning LIBRE, according to polling conducted in January. Additionally,  polling showed
Herández's conservative National Party to be heavily favoured over major opposition parties,
recording support from 38% of the populace, compared with 13% for the Liberal Party, 7%
for LIBRE and 4% for PAC. On March 12, Hernández claimed over 93% of the primary vote to
secure the nomination of the National Party for the November 26 election.
Source: CID, Gallup, BMI

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 Central America | July 2017

Unified Opposition Would Present Major Obstacle

However, should the major opposition parties unite behind one candidate, which remains unlikely at this time, they would pose a strong
challenge to President Hernández's hopes for a second term. Hernández has seen his popularity wane somewhat in the last few months
due to ongoing corruption charges and the widespread unpopularity of multi-term presidencies. Re-election was previously forbidden by
the Honduran Constitution, with immediate re-election opposed by over two-thirds of the population. In 2009, President Manuel Zelaya
was ousted in a coup when he moved to alter the constitution to allow himself to run for a second term – leading to the subsequent
fracture of the Liberal Party as some of its members splintered off to form LIBRE in support of Zelaya.

While the opposition remains fragmented, it has made some progress towards unification, with LIBRE and PAC reportedly close to unifying
behind Nasralla. Luis Zelaya of the Liberal Party, however, appears unwilling to accept terms that could lead to a unified bid. We will be
watching developments carefully and any further progress would increase the odds of an opposition victory in the November election.

DATA & FORECASTS

2013 2014 2015 2016e 2017f 2018f 2019f
Nominal GDP, USDbn 18.7 20.0 20.4 20.7 21.1 22.8 23.9
Real GDP growth, % y-o-y 2.8 3.1 3.6 3.5 3.7 3.8 3.5
GDP per capita, USD 2,386 2,509 2,524 2,533 2,540 2,712 2,795
Population, mn 7.8 8.0 8.1 8.2 8.3 8.4 8.5
Consumer price inflation, % y-o-y, eop 4.9 5.8 2.4 3.3 5.2 5.5 6.0
Consumer price inflation, % y-o-y, ave 5.2 6.1 3.2 2.7 4.3 5.4 5.8
Central bank policy rate, % eop 7.00 7.00 6.25 5.50 6.00 6.50 7.00
Exchange rate HNL/USD, ave 20.11 20.50 21.85 22.92 24.30 24.50 25.50
Exchange rate HNL/USD, eop 20.25 21.02 22.37 23.49 25.10 25.60 26.00
Budget balance, HNLbn -29.6 -18.0 -13.1 -12.6 -12.8 -13.5 -13.2
Budget balance, % of GDP -7.9 -4.4 -3.0 -2.7 -2.5 -2.4 -2.2
Goods and services exports, USDbn 8.8 9.2 9.1 9.2 9.7 10.1 10.6
Goods and services imports, USDbn 12.6 12.9 12.9 12.9 13.4 14.2 15.0
Current account balance, USDbn -1.8 -1.4 -1.3 -1.0 -0.9 -1.1 -1.2
Current account balance, % of GDP -9.4 -7.2 -6.3 -4.7 -4.3 -4.8 -5.0
Foreign reserves ex gold, USDbn 3.0 3.5 3.8 4.1 4.3 4.5 4.7
Import cover, months 2.9 3.2 3.5 3.8 3.8 3.8 3.8
Total external debt stock, USDbn 6.8 7.3 7.6 8.0 8.4 8.8 9.4
Total external debt stock, % of GDP 36.5 36.7 37.2 38.5 39.6 38.7 39.3
e/f = BMI estimate/forecast. Source: National sources, BMI

COSTA RICA – ECONOMIC OUTLOOK

Central Bank To Focus On Inflation And Currency
BMI View: Accelerating price growth and concerns about currency volatility will lead the Banco Central de Costa Rica to continue its
rate-hiking cycle through 2017. Although inflation is below the central bank's tolerance band, the anticipation of rising fuel prices
amid US Fed hawkishness will prompt monetary tightening.

The Banco Central de Costa Rica (BCCR) will continue to raise its benchmark interest rate Hiking Cycle Comes After Long Hold
Costa Rica – Central Bank Policy Rate, %
throughout 2017 and into 2018 in response to rising inflation and depreciatory pressure on 6

the colón. In April, inflation rose to its highest level since 2015, at 1.6% y-o-y, largely driven 5

by increasing  transportation and housing costs. Although still below the central bank's
4
tolerance range of 3.0% ± 1.0%, the uptick prompted the BCCR to hike interest rates for the
second consecutive month in May, by 25 basis points (bps) to 2.50%. The hikes were the 3

first adjustments to the benchmark rate since January 2016. 2

In H217, the likely renewal of OPEC production cuts and increasing US demand will push oil 0
prices higher. Mineral fuels are Costa Rica's largest import, comprising nearly 12.5% of the
May-12

May-13

May-14

May-15

May-16

May-17
Sep-12
Nov-12

Mar-13

Sep-13
Nov-13

Mar-14

Sep-14
Nov-14

Mar-15

Sep-15
Nov-15

Mar-16

Sep-16
Nov-16

Mar-17
Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

total goods imports. From 0.8% at end-2016, we forecast inflation to reach 1.8% by end-
Source: Bloomberg, BMI
2017 and average 3.5% y-o-y in 2018. As a result we expect the BCCR to enact 50bps of
additional hikes in 2017 and 150 in 2018, bringing the benchmark interest rate to levels not
seen since 2015, at 3.00% and 4.50% by the end of those years respectively.

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 Central America | July 2017

In addition to helping combat rising  price growth, higher interest rates will help guard Fuel Prices Will Push Inflation To Target By Year’s End
Costa Rica – Consumer Price Inflation, % y-o-y
against currency volatility, a priority for the central bank. With the Fed set to continue
tightening monetary policy, the BCCR is looking to stymie downside pressure on the
colón and preserve its stock of foreign reserves by continuing to hike rates. We forecast
one additional Fed hike in 2017 and one in 2018 alongside the beginning of balance sheet
tightening.

The continuation of its rate hiking cycle suggests the BCCR will prioritise combating
inflation and ensuring currency stability despite headwinds to economic activity. While we
forecast strong real GDP growth of 4.1% in 2017, the central bank cites concerns over excess
capacity in the economy as being a drag on productivity growth. Further, uncertainty in the
Note: Dashed line denotes central bank tolerance range. Source:
global macroeconomic environment, specifically regarding US policy direction will pose a Bloomberg, BMI

downside risk to growth. The US is the origin or destination of nearly 40.0% of Costa Rican
trade and the potential for the Trump administration to adopt a more hard-line posture
towards regional commerce will remain elevated over coming months.

DATA & FORECASTS

2013 2014 2015 2016e 2017f 2018f 2019f
Nominal GDP, USDbn 49.2 49.5 52.5 53.4 55.8 58.9 62.5
Real GDP growth, % y-o-y 3.4 3.5 2.8 4.2 4.1 4.0 3.9
GDP per capita, USD 10,097 10,027 10,492 10,540 10,891 11,359 11,927
Population, mn 4.7 4.8 4.8 4.9 4.9 5.0 5.0
Consumer price inflation, % y-o-y, eop 3.7 5.1 -0.8 0.8 2.2 4.0 4.0
Consumer price inflation, % y-o-y, ave 5.2 4.5 0.8 0.0 1.8 3.5 4.0
Central bank policy rate, % eop 3.75 5.25 2.25 1.25 3.00 4.50 5.50
Exchange rate CRC/USD, ave 500.16 538.73 535.43 546.96 555.00 564.20 574.08
Exchange rate CRC/USD, eop 501.40 539.42 537.30 553.17 560.00 568.40 579.77
Budget balance, CRCbn -1,322.1 -1,217.1 -1,453.6 -1,397.5 -1,635.0 -1,832.4 -1,887.4
Budget balance, % of GDP -5.4 -4.6 -5.2 -4.8 -5.3 -5.5 -5.3
Goods and services exports, USDbn 15.8 16.6 16.7 18.2 18.9 19.8 20.7
Goods and services imports, USDbn 16.8 17.4 17.3 18.4 19.2 20.1 21.0
Current account balance, USDbn 0.1 0.5 -2.5 -2.1 -2.3 -2.3 -2.3
Current account balance, % of GDP 0.2 1.0 -4.7 -3.8 -4.2 -4.0 -3.7
Foreign reserves ex gold, USDbn 7.3 7.2 7.8 8.2 8.6 9.1 9.5
Import cover, months 6.1 5.9 6.5 6.4 6.5 6.6 6.7
Total external debt stock, USDbn 17.1 19.6 23.7 26.2 28.9 31.5 34.3
Total external debt stock, % of GDP 34.8 39.7 45.1 49.1 51.8 53.6 54.9
e/f = BMI estimate/forecast. Source: National sources, BMI

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 Central America | July 2017

EL SALVADOR – POLITICAL OUTLOOK

Legislative Gridlock Creates Fiscal Uncertainty, Heightened Political Risk
BMI View: Legislative gridlock in El Salvador will effectively cut off access to external financing, forcing the FMLN-led government to
shift funds from the general budget to pay its obligations. With additional obligations on the horizon and no deal in sight between
the FMLN and the opposition ARENA, El Salvador's precarious fiscal position will worsen and potential further cuts will add to social
unrest, both of which will further undermine investor sentiment.
A legislative deadlock in El Salvador will prevent a fiscal deal from being reached and block external Arena, FMLN Rivalry Creating Legislative Deadlock
El Salvador – Seats In National Assembly, By Party
financing. This will result in increased social unrest as the government is forced to cut funding for (Out of 84)
popular programmes ad hoc and further undermine weakened investor sentiment. The agenda
of the ruling Frente Farabundo Marti para la Liberación Nacional (FMLN) in the National Assembly
has been held up by the Alianza Republicana (ARENA)-led opposition over the past year, who is
pushing for accelerated fiscal consolidation. This culminated in El Savador's default on USD28.
mn in debt owed to local pension funds in April, as the ARENA successfully blocked a USD70mn
bond issuance. In order to make required payments, the FMLN government has moved to cut
funding for other government programmes. With a deal between the FMLN and ARENA unlikely,
El Salvador's fiscal situation will be precarious, with further cuts to current expenditure possible.

We expect ARENA to continue to use its position in the National Assembly to block eternal Source: Government of El Salvador, BMI

financing to force fiscal consolidation by the government. With the ARENA holding 35 of
84 seats in El Salvador's Legislative Assembly it will be able to thwart the release of any new
government bonds which require two-thirds of the legislature, 56 votes, to authorise. As a
result the FLMN, will be forced to rely on independent and smaller party votes to push though
short-term financing measures. Uncertainty over the success of these measures will add to the
precarious fiscal situation until 2018, when new elections are held. El Salvador receives a score
of 48.5 out of 100 on BMI's Short-Term Political Risk Index, the fifth worst in Latin America.

In the absence of external financing, the government will be forced to shift funds from other
programmes to fill holes in the budget, provoking a public backlash and undermining inves-
tor sentiment. On April 21, the National Assembly passed a bill to reassign USD57mn from
the regular budget to pay pension obligations, after the FLMN was able to pull together votes
from minor parties GANA, PCN, and the PDC to obtain a simple majority. The funds came from
cuts to education, health, and justice and security budgets, and will be unpopular. With further
obligations and no deal in sight, more cuts will be required adding to social unrest and weighing
on investor confidence, which was rattled by the default in April.

DATA & FORECASTS

2013 2014 2015 2016e 2017f 2018f 2019f
Population, mn 6.1 6.1 6.1 6.1 6.2 6.2 6.2
Nominal GDP, USDbn 24.4 25.1 25.9 26.8 27.7 28.8 29.9
GDP per capita, USD 3,998 4,102 4,219 4,359 4,492 4,653 4,814
Real GDP growth, % y-o-y 1.8 1.4 2.5 2.4 2.7 1.8 1.6
Industrial production, % y-o-y, ave 0.4 0.6 1.0 2.1 3.0 3.0 2.9
Consumer price inflation, % y-o-y, ave 0.8 1.1 -0.7 0.6 0.5 1.8 1.8
Consumer price inflation, % y-o-y, eop 0.8 0.5 1.0 -0.9 2.0 1.5 2.0
Exchange rate USD/USD, ave 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Exchange rate USD/USD, eop 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Budget balance, USDbn -0.5 -0.4 -0.4 -0.2 -0.2 -0.2 -0.1
Budget balance, % of GDP -4.0 -3.6 -3.3 -2.8 -2.7 -2.5 -2.5
Goods and services exports, USDbn 6.4 6.5 6.7 6.5 6.8 7.3 7.7
Goods and services imports, USDbn 11.1 11.0 11.0 10.7 11.1 11.6 12.5
Current account balance, USDbn -1.6 -1.2 -0.9 -0.8 -0.7 -0.7 -1.0
Current account balance, % of GDP -6.5 -4.8 -3.6 -2.8 -2.7 -2.5 -3.2
e/f = BMI estimate/forecast. Source: National sources, BMI

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 Central America | July 2017

LATIN AMERICA – INDUSTRY OUTLOOK

Odebrecht Fallout Brings Threats, Opportunities
BMI View: Fallout from the Odebrecht scandal will threaten investment-led economic growth across Latin America over the coming
years as major infrastructure projects are halted and investor sentiment suffers from political uncertainty. Ongoing investigations
are set to intensify in the coming quarters, bringing opportunities for anti-corruption reforms and more efficient infrastructure
procurement processes.

• The bribery scandal surrounding Brazilian builder Odebrecht will negatively impact Corruption Will Weigh On Investor Sentiment
Latin America – Perceived Corruption Index
infrastructure development and economic growth in Latin America, as numerous,
prolonged delays affect major works across the region.
• Investor sentiment has been damaged by a higher degree of perceived corruption in
the region, stymieing our expectations for investment-led growth.
• We expect investigations to intensify in the coming quarters as prosecutors from 10
Latin American countries have agreed to collaborate and major cases move forward.
• Legislative bodies across the region will heed public demands for anti-corruption
reforms, especially where elections have brought to power administrations not
implicated themselves.
• The infrastructure sector could stand to benefit from increased transparency and *Higher score indicates lower perceived corruption, Source: BMI,
Transparency International
efficiency in the procurement process. This will likely attract new entrants to the
market and lower overall costs.

Regional Investment Outlook Darkens, Sentiment Shaken

The fallout from the Odebrecht corruption scandal, which has revealed hundreds of millions
of dollars in illicit payments in 10 countries across Latin America, will weigh heavily on
investment-led growth in the region. Much needed infrastructure projects will face severe
delays as concessions are cancelled and retendered, contracts already awarded are revisited,
and institutions and procuring agencies are restructured and restaffed. The scandal has
halted major projects in Peru, Panama, Ecuador, Colombia and the Dominican Republic,
in addition to Brazil. These infrastructure delays will weigh on fixed capital formation over
2017 and possibly over the next two or three years as investigations intensify.

Additionally, the scandal has contributed to rising political uncertainty and increased
awareness of corruption-related risks that will weigh on investor sentiment. This has led
us to downward revisions for real GDP growth in many Latin American economies tin 2017.
While our 2018 forecasts remain largely unchanged and see growth acceleration, further
fallout from the Odebrecht scandal brings significant downside risks.

Investigations To Intensify Across Region

We expect investigations across Latin America will intensify in the coming quarters,
driven by strong popular demand and the fact that former officials no longer benefit from
political support in many countries following regime changes. Odebrecht agreed to the
world's largest anti-corruption settlement of USD3.5bn in December 2016, which included
the revelation that the Brazilian firm had paid USD788mn in bribes to secure over 100
projects in 12 countries (10 in Latin America). On the back of the revelation, on February 17,
prosecutors from 10 Latin American countries agreed to collaborate on ongoing Odebrecht
investigations.

In Peru, for example, investigations have reached the highest levels, with a judge ordering the
arrest of former President Alejandro Toledo on corruption charges (Toledo is currently in the

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 Central America | July 2017

US) while jailed former Odebrecht CEO Marcelo Odebrecht has claimed to have paid USD3mn in bribes to former President Ollanta Humala.
Current president, Pedro Pablo Kuczynski, who served as Minister of Economy and Finance under Toledo, has been called to testify as well.

Major Projects Stalled, Delays Prolonged

Peru: Peru's economy, which President Kuczynski is attempting to boost with infrastructure investment, will be the most negatively
impacted in 2017 outside Brazil. The corruption scandal has halted Peru's largest infrastructure project – the USD7.0bn Southern eruvian
Gas Pipeline – in addition to the Chavimochic water diversion project. The Peruvian government has since banned Odebrecht from
bidding on all future projects in the country and is currently moving to force the company to sell its stakes in all ongoing projects in the
country, including the USD1.0bn Chaglla hydropower project.

Colombia: While infrastructure growth in Colombia will remain robust due to the success of the USD25.0bn 4G programme, in which
Odebrecht was not involved, a number of major works have been delayed and we note further risks. On May 10, Colombia's attorney
general brought bribery charges against former Corficolombiana CEO Jose Melo in relation to the USD1.7bn Ruta del Sol II project, which is
currently halted due to the bribery scandal. The scandal also derailed financing for the Magdalena River Project. Besides these projects, we
note additional downside risks should Colombia's infrastructure procurement agency, ANI, which was formed after corruption allegations
shuttered its predecessor, be implicated in any wrongdoing. We currently believe this to be unlikely: ANI is reportedly working towards
banning Odebrecht from all future contracts in the country.

Panama: The exit of the Brazilian builder will leave a large capacity gap in Panama, as Odebrecht has been a major player in the
country, weighing on the pace of infrastructure development. Additionally, we see downside risks to sector should further revelations
bring contracts for works currently under construction into question. In February, the government announced the cancellation of the
USD1.0bn Chan 2 hydroelectric project, due to concerns over the bribery scandal. The Panamanian government forbid Odebrecht from
bidding on any new projects in December with the revelation of illicit payments in the country, leading Odebrecht to withdraw from a
major bridge contract it would have previously been likely to win.

Odebrecht Exit Opens Door For Reforms, New Entrants

Odebrecht has played a key role in the Latin America infrastructure market in the last years and its exit will leave a large capacity gap, which
could yield additional opportunities for other firms and greater transparency in future. We maintain our long-held view that Odebrecht's
exit from regional infrastructure markets will create opportunities for new entrants, especially European and North American majors
who have the technical capacity to take on large projects. In addition, infrastructure markets across the region will benefit from anti-
corruption and institutional building endeavours that will bring more transparency and competition to the bidding process and thus
reduce costs and increase the total amount of new infrastructure.

We expect anti-corruption reforms to move forward in legislative bodies across the region as outrage surrounding the Odebrecht, and the
wider Lavo Jato scandal have brought widespread popular demand for change. Heads of state across the region have spoken out for the need
for reform, with Peru's Kuczynski being one of the loudest proponents for anti-corruption reforms. Kuczynski has called for the extradition
of his former boss, President Toledo from the United States on corruption allegations. In Colombia, President Santos announced eight new
measures to combat corruption, including additional resources for anti-corruption officials, special judges for public administration cases,
and anti-’lobbying’ measures. We are also seeing increasing momentum for some degree of reform measures in Panama, Chile, and Mexico.

Corrupt Payments Made In Each Latin American Country

Country Corrupt Payments (USDmn) Timeframe
Argentina 35 2007-2014
Colombia 11 2009-2014
Dominican Republic 92 2001-2014
Ecuador 33.5 2007-2016
Guatemala 18 2013-2015
Mexico 10.5 2010-2014
Panama 59 2010-2014
Peru 29 2005-2014
Venezuela 98 2006-2015
*excludes Brazil, Source: US Department Of Justice, BMI

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 Central America | July 2017

Regional Corruption Perceptions Lifting Anti-Establishment Candidates

Nonetheless, we also highlight heightened political risks stemming from potential victories for anti-establishment candidates in upcoming
elections, which could pose near term upside to public spending on capital projects but potentially damage countries' long-term fiscal
position and business environment. The widespread corruption scandal, which implicated high-ranking officials and politicians across
the region, has contributed to a general distrust for major parties and incumbent administrations across the region. As such, populist
candidates, including, Brazil's João Doria and Mexico's Andrés Manuel López Obrador have been rising in the polls and could bring major
changes in Latin America's two largest economies should they win upcoming 2018 elections.

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