New Brooms: It’s the economy, Señores Presidentes
Four new presidents (all men in this case) are in the process of settling in as the new chief executives in Colombia, Costa Rica, El Salvador and Panama. Here, we identify the prospects and main challenges for each country.
PANAMA: Juan Carlos Varela, a surprise victor in the 4 May general elections, is due to take office on 1 July for a five-year term.
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Panama overview |
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Population |
3.6m |
Most problematic factors for business |
% of responses |
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GDP |
US$36.3b |
1. Inadequately educated workforce |
16.8% |
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GDP per capita |
US$9,919 |
2. Inefficient govt bureaucracy |
16.1% |
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Annual GDP growth, 2013 |
8.0% |
3. Corruption |
15.8% |
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Avg. GDP growth 2008-13 |
8.1% |
4. Restrictive labour regulations |
9.2% |
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Global Competitiveness Rank |
40 |
5. Crime and Theft |
6.2% |
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Source: World Economic Forum, Global Competitiveness Report 2013-14; National statistics |
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SWOT Analysis: The good news for President-elect Varela is that Panama has some very important strengths. Although only a small country, it is strategically located on the Central American isthmus between the Atlantic and the Pacific, and has a massively important asset for world trade, the Panama Canal. Economic growth has been in the high single percentage digits and foreign investment flows are strong. The country has a young population, rich mineral deposits, and a well-developed banking and services sector.
Weaknesses include a history of corruption and money laundering, along with poor quality education. Further back in the past there has been serious political instability. While some might argue the contrary, Panama is also constrained by the lack of its own currency or a central bank (all business is effectively transacted in US dollars).
Among the country’s great opportunities are the current widening of the Canal, the potential for reforms to bring in greater transparency and investor confidence, and the chance to develop greater trade and investment links with China.
Threats include inflation, the large current account deficit, the ability of powerful drug and criminal cartels to buy influence, and some doubts about the independence of the judiciary.
Political baggage: Varela can be described as a conservative member of the country’s political establishment, coming from a populist tradition. He is a member of the Partido Panameñista (PPA), part of the El Pueblo Primero (EPP) alliance forged for the 2014 elections. A difficulty facing the new president is that the EPP will have only 13 of the 71 seats in the single-chamber legislature. He is in talks, therefore, with the Partido Revolucionario Democrático (PRD) – which will have 24 seats - to try to secure a working majority. We expect some tough haggling. During the campaign, Varela promised to strengthen pensions provision, expand the Panama City Metro, develop other infrastructure programmes, and apply “emergency price controls” to 22 basic products. Strikes by teachers and construction workers have now ended, but industrial relations are still fragile. Varela has made a number of key ministerial appointments, including naming Dulcidio de la Guardia to the economy and finance portfolio. De la Guardia was deputy finance minister for a time under outgoing President Ricardo Martinelli.
Issues: While the country is an outperformer in the growth stakes, there is clearly a case for institutional reform in Panama. In its 2013-2014 Global Competitiveness Report, the World Economic Forum (WEF) said that the country needed to strengthen those institutions engaged in “fighting corruption and crime” and boost “the independence of the judiciary”. Varela has promised to convene a constitutional assembly to look at reform, but he may be hamstrung by the strength of the other parties. There is also a danger that he may be drawn into a political struggle with Martinelli, whose appointees are well-represented in the judiciary (Martinelli and Varela, former allies, fell out in 2011 after a political-electoral deal fell apart). Some quick and effective moves against corruption are needed: the danger with a constituent assembly process is that it could be lengthy and ultimately held back by political deadlock. The new president also will need to ensure that his more populist promises can be funded without creating further fiscal imbalance. A priority for Varela will be to ensure that the delayed expansion of the Panama Canal is concluded by the revised date of 2016, as promised, again to ensure that the right signals are sent to the international financial and investment community.
A suggestion: Varela should look at small and successful countries such as the United Arab Emirates (UAE) and Singapore to see how their education policies have worked.
EL SALVADOR: Salvador Sánchez Cerén, a former guerrilla and member of the left-wing ruling Frente Farabundo Martí para la Liberación Nacional (FMLN), took office on1 June for a 5-year term, following two rounds of closely-contested presidential elections in April and March.
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El Salvador overview |
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Population |
6.2m |
Most problematic factors for business |
% of responses |
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GDP |
US$23.8b |
1. Access to financing |
22.8% |
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GDP per capita |
US$3,823 |
2. Restrictive labour regulations |
12.3% |
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Annual growth 2013 |
1.7% |
3. Corruption |
11.9% |
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Avg. GDP growth 2008-13 |
0.8% |
4. Policy instability |
11.9% |
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Global Competitiveness Rank |
97 |
5. Crime & theft |
6.8% |
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Source: World Economic Forum, Global Competitiveness Report 2013-14; National statistics |
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SWOT Analysis: As a small, high population-density Central American country, El Salvador’s strengths include a young labour force, competitive labour costs, and a dynamic and entrepreneurial business community. Agriculture and coffee exports help form the backbone of the economy, although there is an important assembly and manufacturing sector.
The problem for the president-elect is that the country also faces daunting weaknesses. It is one of the poorest economies in Central America, with one of the most unequal distributions of income, and the lowest real annual GDP growth rate in the region last year. According to the United Nations (UN), El Salvador is the fourth most dangerous country in the world, as measured by the very high homicide rate (about 40 per 100,000 inhabitants last year). Although the bitter civil war of the 1980s is a thing of the past, the country is now gripped by warfare between rival gangs, or maras. Like Panama, El Salvador has dollarised its economy and as such is not able to follow an independent monetary policy.
Opportunities include the productivity and output surge that would follow the achievement of greater security, and the potential to attract foreign direct investment, currently at very low levels.
Threats include the possibility of further Left-Right political deadlock and the advance of the coffee rust disease, which has seriously impacted the coffee harvest.
Political baggage: In his inaugural speech, Sánchez Cerén made a bid to be what business gurus would call a consensual or participative leader. Like Varela in Panama, he lacks control of the legislature and will need to reach some kind of deal with the main opposition party, the right-wing Alianza Republicana Nacionalista (Arena). Legislative elections will be held in March 2015, but the underlying balance of forces may not change much. As Sánchez Cerén put it, “the reality we live in demands that we seek consensus, agreements and solutions”.
While clearly a man who has had a lifetime on the Left, the president implied that his policy approach would be closer to the pragmatism of the current Uruguayan president, José Mujíca (another former guerrilla) than to the radical left-wing and politically confrontational style of Venezuela’s late Hugo Chávez (1999-2013). To make the point absolutely clear, Sánchez Cerén has mixed elements of continuity in his ministerial team (keeping on the finance minister, Carlos Cáceres) with boldness (appointing businessman Tharsis Salomón López as the new economy minister). The new president has also gone out of his way to reassure the country that there will be no unnecessarily divisive initiatives. Unlike Panama, there will be no talk of a constituent assembly (feared in El Salvador as a mechanism used by incumbents to prolong their hold on power). Nor will there be a move to de-dollarise and relaunch the Colón, the former national currency, which has been promoted by some as a way of achieving a more pro-growth monetary policy.
Issues: Sánchez Cerén arguably faces one of the most daunting challenges of this batch of incoming presidents. His country is the poorest, with the most unequal distribution of income, and crucially with a level of gang violence so high that the economic growth rate is effectively repressed. The question then becomes where to begin to make the change. The president will seek to use his negotiating skills to try to achieve domestic gang pacification (a previous truce between the two main maras, agreed in March 2012, has fallen apart).
A suggestion: There is a potential peace dividend to be had. But to stabilise the situation and achieve his aim of eradicating poverty and inequality, Sánchez Cerén will also need to invest in improving health and education levels. The previous administration sought to raise extra funds by proposing tax reform, but ran into determined opposition from the business community, backed by Arena. Sánchez Cerén will need to broker a deal whereby fiscal reforms are accepted; and timed in such a way that they do not derail any putative recovery in the weakened Salvadorean economy.
COSTA RICA: Luis Guillermo Solís of the centre-left Partido Acción Ciudadana (PAC) was sworn in on 8 May as Costa Rica’s new president for a four-year term, having won a second round run-off on 6 April (the first round election was on 2 February).
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Costa Rica overview |
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Population |
4.7m |
Most problematic factors for business |
% of responses |
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GDP |
US$45.1b |
1. Inefficient government bureaucracy |
24.3% |
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GDP per capita |
US$9,673 |
2. Inadequate supply of infrastructure |
20.4% |
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Annual growth 2013 |
3.5% |
3. Access to financing |
10.0% |
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Avg. GDP growth 2008-13 |
3.4% |
4. Tax regulations |
7.5% |
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Global Competitiveness Rank |
54 |
5. Corruption |
7.4% |
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Source: World Economic Forum, Global Competitiveness Report 2013-14; National statistics |
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SWOT Analysis: Costa Rica stands out among its Central American neighbours for its long-term political and institutional stability, and its higher levels of economic development and income. These are among the country’s strengths, along with a diversified economy built around tourism, agriculture, light manufacturing and electronics.
Weaknesses include the fact that with a relative small population and economy, the country is very exposed to any downturn in the global economy. In some ways, Costa Rica is a victim of its own success: comparatively more generous salaries, social welfare and pension provisions have eroded competitiveness and persuaded some investors to look elsewhere in pursuit of lower labour costs.
Opportunities facing the country include the development of trade with China. Costa Rica is the only country in the region with full diplomatic relations with China (rather than Taiwan). The newly-appointed foreign minister, Manuel González Sanz, says there is “enormous potential” for boosting collaboration with China. One proposal under study is the creation of a Chinese exclusive economic zone in the country.
Just before he took office, Solís was given an unpleasant reminder of the types of threat his country faces. The US semi-conductor manufacturer Intel announced a decision to close its chip assembly operations in Costa Rica, with the loss of 1,500 jobs. BA Continuum, a subsidiary of Bank of America, had earlier also announced a similar number of job closures. Other threats include the proximity to drug smuggling routes through Central America, with the associated risk of a ‘spill over’ effect from violent drug gangs.
Political baggage: President Solís and his PAC represent the launch of a ‘new brand’ in Costa Rican politics. His victory breaks a long duopoly in power between the Partido de Liberación Nacional (PLN) and the Partido de Unidad Social Cristiana (PUSC). Solís has identified the fiscal deficit, corruption, and the unequal distribution of income as the three big problems inherited from the previous PLN government led by Laura Chinchilla (2010-2014). But he is not entirely free of political baggage or limitations as he sets out to grapple with these challenges. The PAC is a centre-left organisation and, at least during the election campaign, it was accused of being inclined towards protectionism. According to the critics, a PAC government would be unwilling to advance Costa Rica’s bid for membership of the Pacific Alliance trade grouping. Most importantly, rather like President-elect Varela in Panama, Solís will be able to count on only a minority of seats in congress. In fact, the PAC has 13 seats, against 18 for the PLN, nine for the left-wing Frente Amplio (FA), and eight for the PUSC. Not surprisingly perhaps, the new president’s ministerial team has one PLN member and two from the PUSC. He has also signed informal collaboration deals with the FA and the PUSC.
Issues: Having said a lot of things during the election campaign, Solís now faces the task of all new leaders: explaining and demonstrating how his proposals are all going to fit together and be achievable. A case in point is the fiscal deficit which, at an expected 6% of GDP in 2014, will be the second highest in Central America (after Honduras). Solís is committed to reducing it to zero by 2016, but he says he won’t be relying on comprehensive fiscal reforms until the second half of his administration (2016 onwards). This is maybe because he doesn’t want to repeat his predecessor’s experience: Laura Chinchilla’s opening attempt at a comprehensive fiscal reform was ultimately struck down on procedural issues by the supreme court and failed. As a result, Solís will rely primarily on a newly tabled bill to reduce tax evasion, alongside traditional budget austerity measures. Given that he also faces wage pressures from restless public sector unions, this will be a difficult circle to square.
It is clear that the Intel decision to close manufacturing in Costa Rica has been a serious blow. Intel accounts for roughly 20% of Costa Rica’s total exports. To his credit Solís responded pro-actively, travelling to the US for a visit to Silicon Valley in June, where he sought to attract other high-tech companies to invest in the country. Intel itself softened the blow somewhat by announcing that it would open a new product-testing lab in Costa Rica, expected to employ some 350 people. But as the new president makes his pitch to international tech companies, he will be forced to do something about the factors that may scare them away.
Despite Costa Rica’s good levels of institutional stability and security, energy costs have emerged as a big problem, for example. In a survey of 200 companies in May, 80% cited high-energy tariffs (electricity charges have risen by 33% in the past six years) as the main obstacle to economic growth.
President Solís would do well to welcome the lessons to be learnt from the Intel experience, and find ways to claw back Costa Rica’s position as an attractive foreign investment destination.
COLOMBIA: The incumbent, President Juan Manuel Santos of the Partido de La U, won the second-round run-off election on 15 June (having come second in the first round on 25 May). His second consecutive four-year term in office will begin in August.
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Colombia overview |
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Population |
46.9m |
Most problematic factors for business |
% of responses |
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GDP |
US$366.0b |
1. Corruption |
20.2% |
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GDP per capita |
US$7,855 |
2. Inadequate supply of infrastructure |
14.6% |
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Annual growth 2013 |
4.3% |
3. Inefficient government bureaucracy |
12.2% |
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Avg. GDP growth 2008-13 |
4.1% |
4. Access to financing |
8.1% |
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Global Competitiveness Rank |
69 |
5. Crime and theft |
8.1% |
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Source: World Economic Forum, Global Competitiveness Report 2013-14; National statistics |
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SWOT Analysis: Because of its geographical location (with Pacific and Atlantic coasts), size, mineral resources and population, Colombia is a more significant player on the regional scene than any of the other three counties discussed here.
Its strengths include what are seen as sound and stable market-friendly policies, particularly in areas such as the treatment of foreign investment. Also important are the country’s rich mineral resources, including iron ore, coal, nickel oil and gas, and precious metals such as gold, silver and platinum. Colombia has a diversified economy ranging from agriculture, the export of flowers to nearby destinations such as the US, significant manufacturing, and services including tourism and call centres.
Yet Colombia’s weaknesses are also substantial. Perhaps the single most important is over half a century of left-wing guerrilla insurgencies that have turned significant parts of the country into no-go areas for normal business activity, and added major security costs to what gets done elsewhere. To this are added the major negatives of drug production and export, corruption, and the activities of well-organised criminal gangs. Underlying these phenomena are high levels of poverty, unequal income distribution, and poor levels of education.
The major opportunities facing the country include pacification. The debate on how to achieve it, through negotiation with, or military containment of, the guerrilla movements has been raging for over a decade, and was at the core of this latest election contest. However achieved, it is widely held that the result would be a major peace dividend, allowing a significant acceleration of the annual rate of GDP growth.
Threats include the ever-recurring possibility of an intensification of the cycle of violence. On a more narrowly economic level, Colombia is exposed to the negative effects of a downturn in commodity prices and an over-expansion of credit, with inflationary consequences.
Political baggage: On the surface, this election was about one issue over all others – the current peace talks with Colombia’s main guerrilla movement, Fuerzas Armadas Revolucionarias de Colombia (Farc); talks with the second, Ejército de Liberación Nacional [ELN] are in the pipeline also – and not about economic policy at all. Santos, who favours the continuation and conclusion of the peace talks with the Farc being hosted in Havana by the Cuban government, defeated his more conservative rival, Oscar Iván Zuluaga, who was much less enthusiastic about a settlement. Both men had served as ministers under the former two-term president Alvaro Uribe (2002-2010, Santos in defence, Zuluaga in finance) and both seemed to be offering a continuation of the market-friendly policies that Uribe had pursued. Under Uribe, who launched a sustained and largely successful heavy military assault on the Farc and drug trafficking in the country, with the support of the US, real annual growth averaged 4.5% per annum, a rate that rose to 4.8% during his successor’s first term. Santos, who once in office broke with the hard-line Uribe, was able to launch social programmes that have begun to ease inequality: he also boosted trade and moved to tackle the country’s infrastructure investment deficit. So the conventional wisdom says that economic policy will remain unchanged, but overshadowed by politics, as the peace talks occupy centre-stage.
But we caution that Colombia’s economic policy challenges will not fade into the background. One key reason for this is that left-wing parties helped swing the vote in Santos’ favour in the second ballot, and retain an influential presence in congress. Although centrist parties aligned with Santos’s coalition, Nueva Mayoría, control roughly 55% of the seats in congress, a group of smaller and left-wing parties, with about 10% of the votes, may be essential to get legislation approved (bearing in mind that a two-thirds majority is needed for constitutional reforms). This group of parties will not automatically sign up to an orthodox economic policy view; they will be seeking more action on redistribution.
Issues: The temptation for Santos will be to disregard the need for structural economic reforms and concentrate instead on achieving peace, in the hope that it will eventually produce an economic dividend. While the need to settle over half a century of near-civil war is obviously a priority, we would caution that the need for economic reforms is likely to become more, rather than less acute. The outline peace agreement reached so far – on agricultural development, political representation for demobilising guerrillas, and the Farc’s pledge to get out of the illegal drugs business, all require a combination of faster economic growth and greater redistribution of income. Meanwhile, with the peak of the commodity export boom having passed, Colombia’s growth rate is set to ease down, rather than up. One of Santos’ top priorities should be to revert this trend.
