Central America: the virus is sinking the economy and the arrival of investment

Telefonica completes its withdrawal from the region by selling its phone in Costa Rica
Stock photo. Guatemalan health worker participates in a drill to treat suspected cases of coronavirus, in a hotel in Guatemala City, Guatemala, February 26, 2020

REUTERS/Luis Echeverria  -   Stock photo. Guatemalan health worker participates in a drill to treat suspected cases of coronavirus, in a hotel in Guatemala City, Guatemala, February 26, 2020

The Spanish investment in Central America, which in the last two years has already experienced a certain halt in its growth, with the exception of Panama, will this year be hit by the coronavirus this year. Although historically, Spanish FDI has never been high in the region, before 2018, an increase had been registered which decreased in the last two years, but which was expected to resume in 2020, a trend which the epidemic could finally change into a strong decrease.

According to ECLAC's latest forecasts, the Central American economy will fall by 6.5% this year as a result of the impact of the COVID-19.

In the XIII Panorama Report on Spanish Investment in Latin America at the end of February, it was already stated that Spanish companies were planning to increase investment in Panama, Costa Rica, Guatemala and Honduras and maintain it in El Salvador and in Nicaragua, which was hit by the political-economic crisis prior to the virus and was in recession in 2018 and 2019. This trend was predicted even if investors continued to identify handicaps in the area such as citizen insecurity, political instability, poor infrastructure and lack of effective integration to increase the size of the six markets. A greater union than Spain, which is an observer at SICA, has long encouraged this.

And if by the end of 2019 ECLAC had predicted growth of 2.1% in the sub-region, after 1.3% in 2019, the coronavirus and its cyclone-like passage through the economies of the area has brutally degraded the expectations of the agency, which already forecasts a 6.5% decline in GDP and places the six countries in a recession that will be harder in El Salvador and Nicaragua and milder in Guatemala. A forecast that has been joined by the BCIE, for which the area faces a "severe contraction" never seen since the Great Depression and due to the pandemic, which has caused 141,285 infected and at least 4,772 deaths.

Panama, the sub-regional 'tiger' and the market with the most Spanish presence (400 companies are installed and Spain is the third largest investor), will see its GDP fall by 6.5%, when it was expected to expand by 3.8%, after 3% in 2019 (the smallest advance in ten years) and 3.7% in 2018, far from the rates above 10% in 2011-12. Panama led growth in Latin America over the past 25 years, averaging 5.9%, ahead of the Dominican Republic, Peru, Chile and Costa Rica, according to the IMF. In the country, where Spanish companies have participated and are participating in emblematic projects such as the reform of the Canal and the capital's metro, Sacyr, FCC, ACS, Naturgy, Indra, Mapfre, Acciona,Meliá, Barceló, NH, Grupo Puentes and Iberia, among others, operate. Panama, which captures the bulk of FDI in the sub-region (44%-48% of the total), is the most affected country (51,408 infections) and the most economically damaged: the IDB has already approved 700 million in aid.

Costa Rica, which attracts 27% of subregional FDI, will see its GDP fall by 5.5%, compared with the 1.9% increase forecast months ago. The country, which is home to a hundred Spanish firms, grew by 1.8% in 2019 and 2.6% in 2018. Spain is the second largest investor in Europe and sixth in the world, with companies such as FCC, Sacyr, Copisa, Puentes, Globalvia, Ríu, Barceló, Occidental, Iberia, Naturgy, Acciona, Iberdrola, Gamesa, Calvo, Tendam, Inditex, Mapfre and Indra.

Support from the IDB

Guatemala will have the smallest recession in 2020, a decline of 4.1% when it expected an advance of 3.2%, similar to those of 2019 (3.5%) and 2018 (3.1%). The country, in which Spain is the seventh largest investor, includes 90 companies, including Santander, FCC, Naturgy, Mapfre, Abantia, Atento, Barceló, Rianxeira, Pescanova, Elecnor, Adolfo Domínguez, Mango, Inditex and Iberia. In Honduras, the GDP will plummet 6.1%, when the same advance was expected in 2019 (2.9%), after 3.7% in 2018. Iberdrola, Gamesa, Cobra, Mapfre, Elecnor, Inditex, Pescanova, Typsa, Inypsa, Gestamp and Barceló, among others, operate there.

El Salvador will be the most damaged: GDP will fall by 8.6%. At the end of 2019, it was expected to rise by 2.3%, after 2.2% in 2019 and 2.5% in 2018. The promotion of tourism as an economic pillar has attracted firms like Barceló to a country where, despite Spain being the third largest investor (10% of FDI and 900 million in stock), only 40 are present, such as Calvo, Acciona, Abantia, ACS, FCC, Indra, Atento, Santander, Mapfre, Mango and Iberia. The PPP Act has been key to improving the attractiveness of a country in which Spain is the second largest investor.

Nicaragua will add another year of recession, albeit deeper than expected: GDP will fall by 8.3% in 2020 instead of 1.4%, after adding setbacks of 5.3% in 2019 and 3.8% in 2018. Nicaragua is home to 60 Spanish companies, including Iberia, FCC, Acciona, Repsol, Mapfre, Barceló, Inditex, ACS, Adolfo Domínguez, Isolux, Naturgy, Global Exchange, Inditex, Mango, Gamesa and Nueva Pescanova. Spain is the fifth largest investor, with 1.1 billion in stock.

Telefónica has been the protagonist of the main Spanish disinvestment in the area. The company completed last week, with the sale of its subsidiary in Costa Rica, its withdrawal, announced a year and a half ago, from Central America, the region where it landed in the late 1990s. Previously, it had sold its subsidiaries in El Salvador and Guatemala and, later, those in Nicaragua and Panama.

The virus crisis will damage the arrival of FDI this year. Already in 2019, and according to ECLAC, FDI fell from US$5.297 billion to US$4.835 billion in Panama. And in Guatemala, El Salvador, and Honduras, it has declined. In Costa Rica it grew by 13% to 2.5 billion and in Nicaragua it made slight progress. In April, the CABEI approved the Emergency Support and Preparedness Plan, worth $2 billion, to contain the coronavirus and strengthen the regional economy. And the IDB will allocate 27% of its resources (3.34 billion) to Central America to help overcome the pandemic.