Presentación del Vicepresidente Liberman en la Reunión Anual de Directores Ejecutivos Latinoamericanos, en la Ciudad de Panamá

Prospects for Central America

Luis LibermanVice President of Costa Rica

March 23rd, 2011

The World Economy and the Central American Region

Economic Outlook

• Central America: a group of small and open economies• Impact of the world economic and financial crisis over Central America:

Merchandise and services trade Remittance flows: negative effect on internal demand Financial flows: negative effect on FDI, foreign banks credit and other capital flows In contrast with many Latin American countries, Central American countries

external accounts and fiscal conditions did not improve with rising commodity prices

• Macroeconomic adjustments: Lower economic growth and an increase in unemployment Depreciation of local currencies Domestic economic policy reaction:

Fiscal policy: counter cyclical Monetary policy: lower interest rates (not in all countries)

CA in the face of the recession and the international financial crisis…

1. Moderate economic growth… after the rebound Advanced economies growth slower than developing and

emerging economies Central America trade and financial linkages are stronger to this

less dynamic group of economies (USA an Europe particularly)

2. Trade growth… but at a slower pace

3. Warning signs… increase in commodities and raw materials prices

4. Financial flows… returns to “normality”… but not to “boom years”

levels.

World Economy: Recent trends

Global recovery advances but remains uneven: Two-speed recoveryAdvanced economies grow slower rate emerging and developing economies. Central America trade linkages are stronger to the United States and Europe.

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

World Advanced economies

United States

European Union

Emerging and

developing economies

Developing Asia

Latin America and the

Caribbean

Central America

2009 2010 2011

Global GDP Growth (Percent change)

Source: IMF.

Commodity prices increased during the second half of 2010 and they willcontinue raising this year… negative impacts on domestic prices, external balance and terms of trade.

*Information as of March 8, 2011.

All-items Commodity Index(2005 = 100)

Producer Price Index, United States(Annual percent change)

2.9%3.9%

6.4%

-2.5%

4.3%5.1%

-4%

-2%

0%

2%

4%

6%

8%

2006 2007 2008 2009 2010 2011

Annual average Year end

0

50

100

150

200

250

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

Commodity Prices Will Continue to Rise…

Source: The Economist. Source: Bureau of Labor Statistics.

After the sudden stop in 2008… financial flows return to “normality”…

Net Private and Official Financial Flows(Billions of US$)

Net Foreign Direct Investment(Billions of US$)

-100

0

100

200

300

400

500

600

700

2006 2007 2008 2009 2010 2011

Latin America and the CaribbeanEmerging and developing economies

0

100

200

300

400

500

2006 2007 2008 2009 2010 2011Latin America and the CaribbeanEmerging and developing economies

Net Financial Flows and Net Direct Investment

6 month LIBOR: 0,6% (2010) | 0,7% (2011)Source: IMF.

• First, oil prices fell more than US$100 (fall in world’s production and trade). At the same moment, commodity prices reduced in 47% Lower levels of inflation worldwide. • In 2011, the expected average crude oil price was US$90 per barrel, nevertheless the crisis in the Middle East region have risen on worries.

Daily Oil Prices (WTI)U.S. dollars per barrel

0

20

40

60

80

100

120

140

160

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

U.S

. dol

lars

per

bar

rel

Rising Oil Prices…

Central America:Main economic features

• Total regional population in 2010: 42.6 millions

Central America: Population Distribution

Nicaragua5.8 m

Panama3.5 m

Costa Rica 4.6 m

Guatemala14.5 m

Honduras8.1 m

El Salvador6.2 m

34.0% 18.9%

13.7%14.5%

10.7%

8.2%

The northern economies of Central America concentrate the 68% of the population of the region…

NicaraguaUS$6.5B

PanamaUS$26.8B

Costa Rica US$35.8B

GuatemalaUS$41.1B

HondurasUS$15.5 B

El SalvadorUS$21.6B

27.9% 10.5%

4.4%14.7%

24.3%

18.2%

… Costa Rica and Panama –with only 19% of the population – represent 46% of the production.

Population(millions)

Country / CANominal GDP

(Billions of US$)Country / CA

Brazil 193.3 4.5 Brazil 2,023.5 13.7Mexico 108.6 2.6 Mexico 1,004.0 6.8Colombia 45.5 1.1 Argentina 351.0 2.4Central America 42.6 1.0 Venezuela 285.2 1.9Argentina 40.5 1.0 Colombia 283.1 1.9Peru 29.6 0.7 Chile 199.2 1.4Venezuela 29.2 0.7 Peru 153.5 1.0Chile 17.2 0.4 Central America 147.4 1.0Dominican Rep. 9.9 0.2 Dominican Rep. 50.9 0.3Uruguay 3.4 0.1 Uruguay 40.7 0.3

Comparing Central America with Latin America in 2010

Source: World Economic Outlook, IMF.

Nominal GDP per capita (U.S. dollars)

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000

NicaraguaBolivia

HondurasParaguay

GuatemalaCentral America

El SalvadorJamaica

Dominican RepublicPeru

ColombiaPanama

Costa RicaArgentina

MexicoVenezuela

BrazilChile

Uruguay

Source: IMF and CEFSA.

115

89

77

80

55

59

112

91

82

78

56

53

Nicaragua

Honduras

El Salvador

Guatemala

Costa Rica

Panama

2010

2009

WEF - The Global Competitiveness Report 2010-11

Source: World Economic Forum.

The Doing Business project provides objective measures for business regulations and their application in 183 economies and selected cities at the sub-national level.

1

35 39

7286

101

119125

131

0

20

40

60

80

100

120

140

160

Position in 2010 Rankings: Ease of Doing Business

Source: World Bank Group.

CENTRAL AMERICA: MACROECONOMIC DEVELOPMENTS

Road to recovery…

• Central American economies recovered in 2010 Return to the path of economic growth Boosted by external and domestic demand.

• Recession: an important test for the economic and financial reforms implemented since the 90s Negative effects of the world financial and economic crisis on

the region… yet with no domestic crisis! Economic reforms… a more resilient macroeconomic

environment

2010… Recovery after the “Great Recession”

• Economic reforms included: Trade liberalization and openness

Lower imports duties, free trade agreements, export incentive schemes Free movement of capital

Financial system reforms: Market oriented reforms Supervision and regulatory framework

Efficiency and incentives: public sector distortions

Investment in human capital and infrastructure

Public sector finances: lower budget deficits and public debt

Economic reforms during 90s and 00s

After falling a half percentage point during the recession, the regional real GDP growth was 3,7% in 2010…

6,5%7,2%

4,2%

-0,4%

3,7% 3,7%

-4%

-2%

0%

2%

4%

6%

8%

2006 2007 2008 2009 2010 2011 (p)

Real GDP Real GDP per capita

Central America: Average Real GDP GROWTH

Source: Central Banks and CEFSA.

2006 2007 2008 2009 2010 2011

Costa Rica 8.8% 7.9% 2.7% -1.3% 4.2% 3.8%

Guatemala 5.4% 6.3% 3.3% 0.5% 2.6% 3.0%

Honduras 6.6% 6.3% 4.0% -1.9% 3.0% 3.5%

El Salvador 4.2% 4.3% 2.4% -3.5% 0.8% 2.3%

Nicaragua 4.2% 3.6% 2.8% -1.5% 4.5% 3.5%

Panama 8.5% 12.1% 10.1% 3.2% 7.5% 6.1%

Central America Average 6.5% 7.2% 4.2% -0.4% 3.7% 3.7%

Source: Central Bank of each country.

Central America Real GDP (Percent change)

As a result, after falling in 2009, the per capita income recovered the growth path in 2010.

2,643

2,935

3,263 3,162

3,460

3,741

2,000

2,250

2,500

2,750

3,000

3,250

3,500

3,750

4,000

2006 2007 2008 2009 2010 2011 (p)

Central America and Panama: Nominal GDP per capita (US$)

Source: Central Banks and CEFSA.

1,124

1,923

2,839

3,501

7,641

7,852

0 2,000 4,000 6,000 8,000 10,000

NI

HN

GU

SV

PA

CR

2011

2010

2009

2008

Central America Nominal GDP per capita U.S. dollars

Source: Central Banks and CEFSA.

GDP based on purchasing-power-parity (PPP) - per capita GDP

10,732

7,442

4,871 4,405

2,970

12,398

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama

2008 2009 2010Source: World Economic Outlook, IMF.

However, the recovery in the labor market has been slower… the unemployment rate in the region remains above the rates registered prior registered previous to the recession.

4.9% 4.6% 4.6%

5.6% 5.5% 5.2%

0%

2%

4%

6%

8%

10%

2006 2007 2008 2009 2010 2011

Central America: Unemployment rate (% of labor force)

Source: Central Banks and CEFSA.

An important share of the economic growth recovery was due to the recovery in external demand… After a fall of 7%, exports grew almost 12% in 2010.

33.737.6

40.937.9

42.246.5

0

10

20

30

40

50

-10%

-5%

0%

5%

10%

15%

2006 2007 2008 2009 2010 2011 (p)

Billions of US$

Perc

ent c

hang

e

Percent change Billions of US$

Central America: Total Exports (FOB)

Source: Central Banks and CEFSA.

Share of exports of each country in 2010 (Percent of total exports)

Costa Rica22.1%

Guatemala20.0%

Honduras13.4%

El Salvador10.6%

Nicaragua7.3%

Panama*26.5%

*Includes Colón Free Trade Zone’s re-exports.

Source: Central Banks and CEFSA.

During the recession, the fall in domestic demand and in commodity prices led to a strong contraction of imports… along with the domestic expenditure recovery in the 2010, the external purchases recovered part of what they lost back in 2009.

52.8

61.6

70.7

55.4

66.2

75.0

0

10

20

30

40

50

60

70

80

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009 2010 2011 (p)

Billions of U.S. dollars

Perc

ent c

hang

e

Percent change Billions of US$

Central America: Total Imports (CIF) (Billions of US$, Percent change)

Source: Central Banks and CEFSA.

During 2010, the recovery of domestic demand and the rise in commodity prices ,increased the external gap.Revenues from services (tourism, enterprises services) and remittances financed an important share of trade deficit.

4.7%

6.9%

9.3%

2.0%

5.1%6.6%

18.3%20.2%

22.3%

13.2%

16.3%17.6%

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009 2010 2011 (p)

Current account Trade balance

Central America : Trade and Current Account Deficit (Percent of GDP)

Source: Central Banks and CEFSA.

In 2009, the international financial crisis led to a marked contraction of the capital flows toward the region (especially financial). In 2010, these were gradually recovered, however its composition changed (to official and multilateral financing).

6.3%

8.5%

9.6%

2.7%

6.5%7.3%

6.6

10.1

12.9

3.5

9.5

11.8

-

2

4

6

8

10

12

14

0%

2%

4%

6%

8%

10%

12%

2006 2007 2008 2009 2010 2011 (p)

Billions of U.S. dollars

Perc

ent o

f GD

P

Percent of GDP Billions of US$

Central America: Financial and Capital Account (Percent of GDP, Millions of US$)

Source: Central Banks and CEFSA.

Foreign Direct Investment (net) (Percent of GDP)

0%

2%

4%

6%

8%

10%

12%

14%

16%

2005 2006 2007 2008 2009 2010 2011

América Central Costa Rica Guatemala El Salvador

Honduras Nicaragua PanamáSource: Central Banks and CEFSA.

The reduction of tax revenues due to the recession and the increased government spending (to compensate for the fall in private demand) leads to…

12.9%13.4% 13.2%

12.4% 12.6% 12.7%

16.5% 16.6% 16.8%

17.9%18.6% 18.6%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

2006 2007 2008 2009 2010 2011 (p)

Tax revenue Total revenue Total expenditure

Central America : Central Government Revenue and Expenditure (Percent of GDP)

Source: Central Banks and CEFSA.

… a large increase in budget deficits during the recession.The adjustment period has began in most of the countries, but the fiscal deficits remain high.

1.2%

0.7%1.0%

3.3%3.6% 3.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2006 2007 2008 2009 2010 2011 (p)

Central America: Central Government Fiscal Deficit (Percent of GDP)

Source: Central Banks and CEFSA.

After a continuous fall during the first years of last decade, the public debt – as percent of GDP – increased again in 2009 and 2010…

27.2%

22.6%20.8%

23.5% 22.7%21.1%

0%

5%

10%

15%

20%

25%

30%

2006 2007 2008 2009 2010 2011

Central America: External Public Debt (Percentage of GDP)

Source: Central Banks and CEFSA.

• The international financial crisis found the Central American banking system in an expansion period : Fast bank credit expansion Consolidation of regional financial groups and entry of large

international banks• Crucial reforms in the banking system to face the crisis: Prudential

regulation and banking supervision

• Financial crisis effects: Less external credit available Credit contraction and deterioration of the loan portfolio quality But it did not cause banking crisis nor confidence crisis.

Regional financial sector

After a rapid growth until 2008, the private sector credit –a percent of GDP – contracted in 2009 and 2010 and is modestly recovering this year

35.9%

39.5% 40.2%39.4%

37.7% 37.9%

0%

1%

2%

3%

4%

25%

30%

35%

40%

45%

2006 2007 2008 2009 2010 2011 (p)

To Public sectorTo

Pri

vate

sec

tor

To private sector Tu public sector

Central America: Credit to the Private and Public Sector (Percent of GDP)

Source: Central Banks and CEFSA.

Due to the reduction of currency flows and the uncertainty during the crisis, the countries with local currencies experimented nominal depreciation…

1.5%

-0.8%

4.0%3.2%

-3.7%

1.6%

-6%

-4%

-2%

0%

2%

4%

6%

2006 2007 2008 2009 2010 2011 (p)

Central America: Average Exchange Rate Depreciation (Annual percent change)

Source: Central Banks and CEFSA.

In the last five years, only the Cordoba and the Quetzal showed nominal depreciation with respect to the U.S. dollar…

90

95

100

105

110

115

120

125

130

2006 2007 2008 2009 2010 2011 (p)

Inde

x (2

006=

100)

CR GU HN SV NI PA

Central America: Nominal Exchange Rate Indexes (Base 2006=100)

Source: Central Banks and CEFSA.

…And a real depreciation as well. However, the process reverts in 2010, and the Central American currencies appreciate against the U.S. dollar in real terms.The exchange rate flexibility played an important role in mitigating the crisis´ impact

-3.5%-2.5%

-7.0%

5.8%

-4.0%

0.7%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2006 2007 2008 2009 2010 2011 (p)

Central America: Average Real Exchange Rate Depreciation

Source: Central Banks and CEFSA.

In real terms the Honduran lempira and the Costa Rican colon are the two currencies that have appreciated the most against the U.S. dollar...

80

85

90

95

100

105

2006 2007 2008 2009 2010 2011 (p)

Inde

x (2

006=

100)

CR GU HN SV NI PA

Central America: Bilateral Exchange Rate Index (Base 2006=100)

Source: Central Banks and CEFSA.

The absence of external inflationary pressures and the fall in domestic demand meant a slow prices growth in 2009…The economic recovery, the rise in commodity prices and unfavorable weather conditions lead to higher inflation rates in 2010…

6.0%

8.5%

9.7%

1.5%

5.2%5.6%

0%

2%

4%

6%

8%

10%

12%

2006 2007 2008 2009 2010 2011 (p)

Central America: Average Inflation Rate (end of period consumer prices)

Source: Central Banks and CEFSA.

After stabilizing in 2010, the remittances to Latin America and the Caribbean are expected to rise in 2011…

23.430.9

36.943.8

52.6

6268.6 69.2

58.8 58.9

0

10

20

30

40

50

60

70

80

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Bilii

ons

of U

.S. d

olla

rsRemittances to Latin America and the Caribbean

Source: Fondo Multilateral de Inversiones, IADB.

Latin America and the Caribbean: Remittances in 2010

Source: Fondo Multilateral de Inversiones, IADB.

• LAC: US$ 58,9 billions (100%)

• CA: US$ 12 billions (20%)

In 2010, the remittances to Latin America and the Caribbean registered an annual rate of 0.2%, after a strong fall in 2009. Nevertheless, the inflation in the countries that received the remittances and the strengthening of the local currencies with respect to the dollar reduced the power of purchase of the remittances received.

Millions of U.S. dollars

Remittances in US$

In local currency

In local currency

adjusted by inflation

Costa Rica 509 -4.9% -11.6% -16.4%El Salvador 3,540 2.2% 2.1% 1.0%Guatemala 4,127 5.5% 4.1% 0.2%Honduras 2,529 1.9% 1.9% -2.7%Nicaragua 966 5.6% 9.5% 3.8%Panamá 297 2.1% 2.1% -1.4%

Remittances: Millions of U.S. dollars, Annual percent change

Remittances, exchange rate and inflation

Source: Fondo Multilateral de Inversiones, IADB.

Central America: Policy challenges

In the near future…

• Economic growth and development– Security: organized crime and drug traffic: squeezed between

Colombia and Mexico Public and private investment in infrastructure: energy, ports, roads…

Panama leads the region. Investment in human capital: education and health (more productive

labor force): Costa Rica is making important strides in labor training Improve competitiveness Different approaches to development

Panama playing its strengths: finance, logistics, corporate centers Costa Rica betting on manufacturing and corporate service

centers, agriculture Honduras: integrated textile industry

POLICY CHALLENGES

• Slow recovery: trading partners….Free Trade Agreements• Remittances• Commodity prices will continue increasing in the forseeable

future Central America is a net importer of raw materials and oil Deterioration of the terms of trade: decrease in real income

of consumers Increase in the trade gap Increase in the price of tradables and this will increase

domestic prices Energy production

POLICY CHALLENGES

Share of Electric Generation by Country, 2009

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama

Others

Cogener

Vapor

Geo

Diesel

Hydro

Source: ECLAC.

• Policy instruments Public investment Fiscal expansion and sustainability of public debt Monetary Policy Exchange Rate

• Public Debt default risk in advanced economies and its effects on capital flows to the region

POLICY CHALLENGES

Elections Calendar

Next Presidential Elections

2011Guatemala SeptemberNicaragua November

2013Honduras November

2014Costa Rica FebruaryEl Salvador MarchPanama May

Source: The Economist Intelligence Unit.

Prospects for Central America

Luis LibermanVice President of Costa Rica

March 23rd, 2011