THE RELATIVELY favorable external environment will not be enough for Central American countries to improve their credit ratings, which could remain stable despite fiscal problems.

External tailwinds are unlikely to lead to a significant uplift in Central America's creditworthiness, says Fitch Ratings in a new special report.

While external finances and inflation across the region have benefited from the U.S. recovery and lower oil prices, the outlook for growth, public finances and structural issues is more mixed. Nonetheless, the new external backdrop could be a stabilizing factor in credit trends in the region, especially given the negative bias of ratings in recent years.
After a decade-long commodity boom that benefited Latin America's commodity exporters, low oil prices and stronger U.S. growth are now creating a more positive environment for oil importers in Central America and the Dominican Republic. As a result, Fitch expects regional growth of 4.3% in 2015-2017 to significantly outperform the Latin American average of 0.7% during that period.

These tailwinds should support the dynamic economies of Panama and the Dominican Republic, although some growth moderation is expected on cooling domestic investment, while Costa Rica's economy is slowing on the closure of Intel's microchip plant. El Salvador and Guatemala could sustain higher growth rates than seen in the past decade, although structural bottlenecks from crime and human capital continue to restrain growth potential.

'Economic recovery in the U.S. could generate positive spillovers for the region due to strong linkages in terms of remittances, exports, tourism and foreign direct investment,' said Shelly Shetty, Head of Fitch's Latin America sovereign team. 'How countries use the tailwinds to re-build buffers and policy space and improve competitiveness through reforms will be key for credit trends in the region,' added Shetty.
Lower oil prices are expected to narrow regional current account deficits to 3.2% in 2015-2017, from 5.2% in 2012-2014, and to reduce inflation to 2.1% from 3.8%. Cheaper energy could also support consumption and investment by boosting the disposable income of households and reducing production costs for firms, but the impact will depend on different degrees of pass-through to consumer prices and diversification of energy matrices.
A favorable external context for the region could improve conditions for advancing reforms, reversing the deterioration in credit metrics. Fiscal reforms in Costa Rica and pension reform in El Salvador could face legislative hurdles, as could institutional reforms to electoral and public contracting laws in Guatemala and Panama.