Caribbean & Central America - July 2008 (ISSN 1741-4458)

EL SALVADOR

As a dollarised economy, the country could have been badly affected by the rise in fuel and food prices which are denominated in dollars. In fact, inflation is comparatively low, with the 12 month rate to the end of June, reaching 9.02%. Although this was the highest rate for the past 10 years, according to central bank figures, it is also the lowest rate in Central America. Only the other completely dollarised economy, Panama, at 9.6%, is comparable. According to the Dirección General de Estadí­sticas y Censos (DIGESTYC), higher food and oil prices are the main reasons for rising inflation. In June alone consumer prices rose by 1.24%. This was almost twice the rate of inflation for June 2007. The accumulated rate for the first six months of the year was 5.94%. In the first half of 2007 the rate had been 1.89%.

HONDURAS

Consumer price inflation eased slightly in June to 1.2%. In May consumer prices had risen by 1.8%. The June figure brought the accumulated inflation rate for the first six months of 2008 to 6.8%. While the past 12 months rate (June to June) is 12.2%, the central bank (BCH) prefers to use an average, which puts the 12 month rate at 8.9%. According to the BCH, the stability of the Lempira against the dollar is one factor keeping a lid on inflation (although even so, it estimates that imported inflation in May was running at 3.1%, up 0.8 of a percentage point on the previous month). The government's policy of maintaining fuel subsidies is also keeping inflation down although the cost of doing so is clearly high and one reason why President Manuel Zelaya is interested in gaining more support from President Hugo Chávez of Venezuela.

Honduras has already signed up to Venezuelan oil initiative, Petrocaribe and, in mid-July, according to Chávez , Honduras was on the point of announcing that it would join the Alternativa Bolivariana para las Américas (Alba) although Zelaya has neither confirmed nor denied this. The Honduras business sector is deeply opposed to this idea. arguing that full membership of Alba would mean losing the benefits of Cafta, the free trade agreement with the US. This is unlikely: Nicaragua is a member of both Cafta and Alba.

GUATEMALA

Guatemala's central bank (Banguat) is forecasting that economic growth this year will come in at 4.8%, down from 5.7% in 2007 and 5.3% in 2006. This will be in line with Central America's overall growth rate which is set to be 4.8% in 2008 down from 6.3% in 2007. Banguat estimates that for every one percentage point fall in US GDP, Guatemala's GDP will be 0.35 of a percentage point lower. By far the biggest effect of the fall in US GDP will be on remittances: the effect of a one percentage fall in US output will be the equivalent of 0.24 of a GDP percentage point drop in Guatemalan GDP, the central bank calculates. The next most vulnerable sector is exports (0.10 of a GDP percentage point) and the least affected is tourism (0.01 of a GDP percentage point). 

Inflation: The rate in June was 1.63%. This brought the accumulated rate for the first six months to 7.54% and the rate for the year to June to 13.56%.

PANAMA

Panama has become Costa Rica's most important trading partner in the first half of this year. Traditionally Guatemala and Nicaragua are Costa Rica's main markets. In the first half of 2008, Costa Rica exported US$210m of goods to Panama, up 34% on the same period of 2007. Panama buys a wide range of Costa Rican products; 482 Costa Rica companies sell over 1,500 different products to Panama.

Costa Rican exporters say that they are benefiting from the economic boom in Panama. The main beneficiaries are construction companies and companies producing consumer goods. Exports of construction goods from Costa Rica to Panama were up by 79% compared with the same period of 2007, at US$43m. Consumer good sales were up by 16% at US$85m. Overall, exports of raw materials from Costa Rica to Panama were up by 50% at US$96m.

Inflation: In the 12 months to June, consumer price inflation was 9.6%. Businesses are taking a hit to their margins because wholesale price inflation was 17.1% in the same period.

NICARAGUA

Humberto Arbulú, the IMF's representative in Managua forecasts that growth in 2008 will be between 3% and 4%. This is slightly below the 4% to 4.5% rate the government is forecasting. The government is more optimistic about exports and construction which it claims will get a boost from government spending at the end of the year. In the first half of 2008 export receipts were up by 30.5% compared with the same period of 2007. Exports came to US$835.3m, up from US$640m in the same period of 2007. Arbulú argued that 4% growth was nothing to be ashamed of, and conceded that the rate could even be a bit higher because the crucial agricultural sector seemed to be having a good year. The stronger prices of coffee, beans, peanuts and dairy products had already had an effect. The government also claims that agricultural productivity is rising and notes that the tax contribution from agricultural exports has increased in the first half of the year. In 2007 the economy grew by 3.8%, but inflation came in at 16.88%

CUBA

On 14 July the economy and planning minister, José Luis Rodrí­guez, officially warned Cubans that there would have to be “inevitable adjustments and restrictions" in the government's budget for 2009. He said that these were result of high food and fuel prices. Food prices have risen nastily even though fuel prices are still cheap by international standards. A litre of petrol sells for 0.95 convertible pesos. The cost of most non-subsidised foods sold in state shops jumped by 18% in May. Nevertheless, Rodrí­guez claimed that the economy would grow by 8% this year. In 2007 Rodrí­guez said that the economy grew by 7.5%. The 8% forecast looks heroic, given that one of the country's most important exports, nickel, has seen its price fall by 38% so far this year. Nickel probably accounts for about half the country's total exports. Oil production, however, is up by 6% at 2.1m tonnes for the first half of 2008. The target for oil production in 2008 is 4m t (around 69,000 barrels per day). A lot of the extra production seems to be gas. The country is meeting just over 43% of its energy consumption (of about 158,000bpd), from its own resources. By contrast, Cuba has to import 85% of its food and has become reliant on cheap supplies from the US. The rise in international food prices means that the government has had to find an extra US$2.6bn to buy in the same volume of food. This year Cuba is on course for a trade deficit of US$6bn.

DOMINICAN REPUBLIC

President Leonel Fernández announced a package of emergency economic measures on 17 July. The economy is reeling from the effects of the rises in food and energy prices. The heart of the plan is a 20% reduction in public spending in the second half of this year, representing a cut of around RD$20bn (US$590m).

As well as increasing borrowing from Venezuela, the government also announced plans to shake up the electricity and agricultural sectors. Fernández said that the government will try to hold the fiscal deficit to 2% of GDP. Since Fernández took office in 2003, following a devastating banking scandal, the country's GDP has almost doubled from US$1.9bn to US$3.8bn. In the same period unemployment has fallen from 19.3% of the workforce to 15.9%.

The government also revealed plans to cut back on investment spending by around US$100m as well as cancelling 25% of its publicity budget and freezing spending on office equipment and vehicles. Senior civil servants will also see a cut in their pay, with those earning between RD$151,000 (US$4,422) and RD$200,000 (US$5,885) a month facing a 5% reduction while those earning over RD$200,000 will receive a 10% pay cut. The lower paid civil servants (ie those getting less than RD$30,000) however will get a 15% pay rise. Over 97.6% of the public sector is in this category. Inflation:?Inflation in the first half of the year was 7.6%, according to the central bank.