Brian Bollen takes a look at the current state of the Central American market and explains how State Street and Apex’s presence looks set to move the dial
Central America includes Panama, Costa Rica, Nicaragua, Honduras, El Salvador, Guatemala and Belize. From the mid-19th Century, Central America’s economy was based on the production of coffee and bananas for export. During the 1960s and 1970s, vigorous economic growth was followed by national debt and low or negative economic growth rates.
Near the end of the 1990s the region’s economies rebounded, and the privatisation of companies and utilities, along with the spread of free trade, aided growth.
By the end of the 20th Century, Central America’s governments had attempted to revitalise the economy by fostering the diversification and expansion of non-traditional exports and free-trade zones. Assembly plants (known as maquiladoras) were established to encourage the expansion and decentralisation of manufacturing.
By the mid-2000s, El Salvador, Honduras, Guatemala, Nicaragua, and Costa Rica had entered into the Central America–Dominican Republic Free Trade Agreement (CAFTA-DR) with the US. However, growing diversification in the region has not provided an equitable distribution of wealth. Manufacturing is sharply hampered by Central America’s limited mineral and energy resources, and by the restricted size of its market.
The main trading partners outside the region are the US, Canada, and western Europe. Against this backdrop, opportunities exist for providers of financial services.
State Street, for instance, announced on 10 May that it had been appointed to provide custody services for Bladex, the Panama-based multinational bank. Bladex was established by the central banks of 23 Latin American and Caribbean countries to promote foreign trade and economic integration in the region.
Commenting on the news, Marcia Rothschild, State Street’s head of Latin America, said: “We are pleased to announce this mandate with Bladex as we continue to expand our custody capabilities across the region, furthering our goal of supporting leading institutional clients in Latin America. We look forward to partnering together to help Bladex generate and sustain growth to meet their investment objectives.”
In 2022, State Street announced the opening of a new office in Chile to help the firm serve and support institutional clients in the region, and also launched an integrated fund trading solution along with a custody offering for clients in Mexico.
Additionally, in 2021, the firm announced that its Brazilian bank, Banco Comercial (formerly known as Natixis Brasil S.A. - Banco Múltiplom), began offering full foreign exchange trading capabilities and sales operations.
Also looking to the future is Georges Archibald, chief innovation officer and regional managing director of the Americas at Apex Group. He says: “Following [Apex’s] recent expansion in South America via the acquisitions of BRL Trust DTVM and Modal Group’s alternative fund administration business in Brazil, we are now turning our attention to consider further opportunities for growth in the Central American region. We will continue to evaluate strategic growth opportunities in Central America, both via acquisition and organic growth avenues, as we seek to support our clients with our single-source solution, available globally and via teams of local experts.”
Oil we need
Stretching the geography slightly, we cannot resist casting an eye over Guyana, which saw its financial future transformed by the discovery of high-quality crude oil in the Stabroek block in May 2015, by a consortium led by ExxonMobil. According to Norway-headquartered independent research company Rystad, the Guyanese government could reap the rewards of this find with cumulative revenues totalling US $157 billion by 2040.
An International Monetary Fund working paper published in November 2022 notes that oil production presents a momentous opportunity to boost inclusive growth and diversify the economy by providing resources to address human development needs and infrastructure gaps.
At the same time, it presents important policy challenges relating to effective and prudent management of the nation’s oil wealth, including decisions to appropriate monetary policy and exchange rate frameworks, as Guyana transitions to a major oil exporter.
The main downside risks to the outlook are volatility in global oil prices, a slowing global economy, or rapid increases in investment, which could lead to macroeconomic imbalances.
It hardly requires the powers of Sherlock Holmes to deduce that few countries would turn down the opportunity to be faced with such a downside, given the long-term benefits that the discovery will likely accrue.
Costa Rica
Costa Rica is a success story in terms of development, according to The World Bank. It is considered an upper middle-income country, and has seen steady economic growth over the past 25 years.
This growth resulted from an outward-oriented strategy, based on an openness to foreign investment and gradual trade liberalisation. Costa Rica was hit hard by the COVID-19 pandemic. Fiscal consolidation efforts launched in 2018 were interrupted as revenues collapsed amid increasing expenditures needed to mitigate its impact.
Gross domestic product recovered 7.8 per cent in 2021 after the largest drop in four decades in 2020. A strong rebound in manufacturing, particularly of medical equipment, and a gradual recovery in services and agriculture lifted gross domestic product (GDP) above pre-crisis levels.
Growth is expected to moderate to 3.3 per cent in 2022 and 2.7 per cent in 2023, reflecting the challenging external environment, but should rebound to around 3.1 per cent in 2024, supported by Costa Rica’s dynamic exporting sectors.
Panama
From 2014 to 2019, Panama’s GDP grew at an average rate of 4.7 per cent. In 2020 it contracted by 18 per cent, the most significant drop in the region due to the COVID-19 pandemic.
The economy is projected to grow at 5.7 per cent in 2023 and 5.8 per cent in 2024. The fiscal deficit is projected at 3 per cent and 2 per cent of GDP in 2023 and 2024, respectively. Growth is driven by the services sector, led by wholesale and retail trade, transportation, storage and communications. However, construction, manufacturing and mining have also played an important role in Panama’s economic growth.
Business Panama Group, meanwhile, likens the centre of modern Panama City to a miniature Manhattan, saying it has “the most modern and successful international banking centre in Latin America”.
It notes that the International Banking Center offers investors over 67 banks from more than 32 countries around the world, especially from Asia, Europe and the Americas.
Nicaragua
Between 2000 and 2017 Nicaragua’s economic growth averaged 3.9 per cent, led by domestic demand fuelled by remittances and Foreign Direct Investment, according to the World Bank.
A small, open economy that depends on agriculture and light manufacturing, Nicaragua has not been able to further boost growth and per capita incomes as low human capital, large infrastructure gaps and a weak institutional and business environment undermine its long-term growth.
The socio-political crisis of 2018-2019, followed by the COVID-19 pandemic and two major hurricanes in 2020, resulted in a cumulative GDP loss of 8.7 per cent, while poverty ratcheted up to 16 per cent by end-2020.
Despite high inflation, global headwinds, and the damage caused by Hurricane Julia, GDP is expected to have grown by 4 per cent in 2022, driven by robust private consumption fuelled by remittances and net exports.
Remittances expanded sharply during 2022, reaching about 22 per cent of GDP due to a spike in emigration.
In 2022, the average annual inflation rate in Nicaragua surged to 10.5 per cent — the highest among Central American countries and more than double the average inflation rate over the past decade. Growth is projected to moderate to 3 per cent in 2023 amid fiscal consolidation, slowing external demand and elevated inflation.
Honduras
Honduras has a small, open, predominantly agricultural and informal economy, according to the World Bank. Given its strategic location, solid industrial base, ample productive resources and young and growing population, the country has the potential to accelerate its economy in an inclusive and resilient manner.
From 2010 to 2019, the average annual growth of the GDP in real terms was 3.1 per cent, driven mainly by remittances-fuelled private consumption. In 2018 and 2019, the country’s economic growth was 3.8 and 2.7 per cent, respectively. This growth was above the average for Central America (1.9 per cent) and Latin America and the Caribbean (0.9 per cent).
The Honduran economy rebounded strongly by 12.5 per cent in 2021, reaching the pre-crisis level of GDP. Annual real GDP expanded by 4 per cent in 2022, according to preliminary data from Honduras’s Central Bank. The growth forecast for 2023 is 3.5 per cent.
Guatemala
Guatemala is an upper middle-income country and the largest economy in Central America by population and economic activity, says the World Bank. The country has experienced a stable pace of growth (3.5 per cent on average over the 2010-19 period), underpinned by prudent fiscal and monetary management and macroeconomic stance.
Following a large rebound in 2021 (8 per cent), Guatemala’s economy grew by an estimated 4 per cent in 2022, driven by private consumption, investment and public consumption. GDP growth is expected to slow down to 3.2 per cent in 2023.
El Salvador
The smallest country in Central America, El Salvador has experienced modest economic growth in recent decades, the World Bank says. Annual GDP growth exceeded 3 per cent only three times between 2000 and 2022.
El Salvador’s economy grew by 10.3 per cent in 2021, after a fall of 8.2 per cent in 2020 due to the COVID-19 pandemic, while growth moderated to 2.8 per cent in 2022 and is expected to average 2.3 per cent in 2023. In the medium-term, GDP is forecast to converge to 2.1 per cent, above historical averages, on the back of private consumption, public investment and tourism.
Belize
As a small open economy, Belize relies considerably on international trade and has a limited supply of labour and capital. Belize has great economic opportunities, but as is the case in many Caribbean countries limited availability to social and economic data prevents the government and prospective investors from making more informed decisions. Greater financial inclusion could help raise savings and investments which would have a positive impact on growth. Sustainable progress will also require prioritising fiscal sustainability.
