GROWTH LACKLUSTER, REMITTANCES SOAR…

During the last fortnight, IMF talking heads in Washington perceptibly declared that “it will be a complicated year for growth in Latin America”, following the revised (down) growth outlook for Latin America and the Caribbean (‘LAC’) at 2% for 2014 and 2.6% in 2015. Such comments come as no surprise within the region given the impact of drought conditions on the agricultural sector and heightened inflation as a result of higher energy and food costs. Against the backdrop of increased debt costs driven by ratings downgrades – with these underpinned by higher budget deficits and many Central American nations coming under scrutiny for tax collection –  downward revisions to growth forecasts have an even greater impact for more heavily indebted Central American countries.

However, across the region despite the laclustre outlook for growth across the region, remittance numbers have been consistently strong within Central America, in line with the gradual recovery of the US economy. According to data from the Economic Commission for Latin America and the Caribbean (Comisión Económica para América Latina y el Caribe ‘Cepal’), over 80% is spent on food and clothing, 4-8% on health and education and 5-6% on savings and investment. The impact of remittances on exchange rates is discussed for both Guatemala and Honduras – whilst both countries count human capital as one of their most significant exports, the effect of these inflows on cross currency rates differs substantially given the two different exchange rate mechanisms.

That flying quetzal…

According to Bloomberg, remittances have been the driver of the strong performance of the Guatemalan Quetzal (GTQ), +3.6% over the past 12 months – the strongest in the region.

Whilst remittance growth is solid in Guatemala on the back of the US recovery – this does not directly translate to a stronger Quetzal by virtue of the free float currency regime.

Lining up data from the Central Bank of Guatemala on both remittances and the USD/GTQ cross rate from January 2008 to August 2014, the correlation coefficient is fairly low at 0.37, and even lower at 0.25 from January 2012 to August 2014. Remittance growth has been phenomenal +9.2% year-on-year for the year-to-date to August, however this is not directly translating into a stronger quetzal. Interestingly, in the absence of a clear and reliable domestic retail sales index, VAT receipts as a proxy for consumption/ sales displays a low correlation to remittance growth – granted tax collection is a well documented weakness within the Guatemalan bureaucracy and data. Whilst human capital is Guatemala’s number one export, and remittance inflows have a profound impact on liquidity within the country, the ability to clearly link the impact of remittances on any single sector of the economy is difficult.

And that lempira – between a rock and a hard place…

Touted as ‘supporting the growth of the economy of Honduras’, remittances account for 8-9% of all household income according to the National Institute of Statistics (Instituto Nacional de Estadísticas ‘INE’), with 13.5% of all households being dependent on monthly remittance-sourced income. Over the 20 year period between 1993-2013, remittances posted an annual growth of 21.8% – with the years during the financial crisis posting declines, and growth in 2014 posting a 9% increase year-on-year.

In the January 2014 report on remittances, conducted by the Central Bank of Honduras, some 79% of remittances are sent from the US, with approximately 62% of all remittances sent monthly. As a proportion of the country’s overall GDP remittance income will likely grow, not only as a result of a sustained recovery in the US, but also given the ongoing depreciation of the lempira.

Honduras maintains a crawling peg exchange mechanism, allowing for small valuation adjustments to be made to its currency. However, these adjustments are arguably slow to take place, and given the country’s persistent and growing budget deficit, the currency is presently overvalued. According to the Central Bank of Honduras, the devaluation reached 3.1% from January to September this year, higher than the 2.9% for the same period in 2013 .  The IMF continues to pressure Honduras into liberalising its currency policy erring towards further devaluation – particularly right now as the IMF and Honduran officials have just completed a round of negotiations to provide for USD300m in funding, to be receive a final approval on 10 November.

Whilst at time of writing the IMF news is very new and greater detail has not yet been made available – possible funding sources touted include increases to public service tariffs, despite President Hernandez indicating that there are other things that can be done [to raise funds], and despite the nation’s electricity agency being the key problem (“lo último que vamos a tocar es el tema de las tarifas porque hay otras cosas que podemos hacer. La Enee es el principal problema que tenemos y debemos entrarle. Son momentos difíciles pero son los pasos que tenemos que dar para seguir con buen paso”). Interestingly, whilst the topic of the country’s electricity agency, Empresa Nacional de Energia Electrica (‘ENEE’) was reportedly excluded from direct inclusion in the IMF discussions, this is clearly the elephant in the room given that it accounts for 30% of the current budget deficit, and an area that clearly warrants a pro-active approach to reform.

Despite shortfalls in the outlook for growth in Central America for the next 12 months – provided the US continues on its sustained recovery, remittance growth is expected to strengthen further and play the dominant part in local income. How this translates into the economy through looking at data is difficult to determine, given the largely cash nature of the region’s economies combined with poor tax collection procedures. No doubt anecdotal headlines and numerous surveys will continue to portray the impact of this crucial component in the economy…

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