Central America´s Business Blog

A slowdown in the United States is never good news for Central America, but the regional economy looks strong and diversified enough not to be severely hit (unless oil prices go through the roof, in which case all bets are off).

In the event of a major decline in American output and consumption, Central Americans working in the United States may send less cash to family members, especially in the region’s northern countries.

Remittances account for nearly 15% of national spending power in both Guatemala and El Salvador.

The figure for Honduras isn’t much lower.

But while many migrants from these countries work in the construction sector, which has already slowed significantly in recent months, many others are employed in the agriculture and basic services sectors, which tend to be stable.

An important growth sector in the three northern countries in recent years has involved making garments for Americans, who will probably buy fewer clothes, if their spending power falls.

But Central American garment production could stay strong even in such a scenario, partly because local costs have for the most part been consistent.

Meanwhile, prices have gone up in the case of many Asian products, including some made in China, whose currency went up close to 7% against the dollar in 2007.

In addition, the region should get a boost from the recently-approved Central America free trade agreement (Cafta), which lets producers sell duty-free clothes in the United States, even when they include high levels of foreign-made fabric and other components.

By comparison, pre-Cafta clothing exports to the United States had to be made almost exclusively with American inputs, which generally were more expensive.

The economic mix is different in Costa Rica and Panama, whose commercial relations with the United States are more focused on real estate investment and tourism.

In an economic downturn, Americans will probably take fewer leisure trips.

On the other hand, Central America will likely suffer less from an overall decline in American tourism, since it is a cheap destination compared to Asia or Europe.

The Costa Rican and Panamanian markets for vacation and second homes – red hot in recent years – could cool off, as the United States housing sector slumps.

But demographics favor a continuing high level of demand for these kinds of properties, especially as millions of up-market American boomers each year hit retirement age.

Even with prices dropping in recent months by around 10% for vacation homes in various parts of the southern United States, comparable Costa Rican and Panamanian properties still tend to be 30 to 40% cheaper.

That leaves agriculture, still a major export sector in all Central American countries.

But except in the case of a severe United States recession, demand for low-cost commodities such as fruits, vegetables and coffee should not be significantly affected.

A bigger problem for the Central American economy would be a spike in oil prices.

Most of the region’s countries depend heavily on oil-based fuel to generate electric power.

Likewise, most have transportation systems characterized by a combination of bad roads and old vehicles, which translate into high levels of gasoline and diesel consumption.

To the extent the dollar falls and oil producers raise prices to compensate for lower dollar-denominated revenues, Central America could face bigger fuel bills.

Despite an ugly fourth quarter in the United States economy, with declines in interest rates, stock prices and output, coupled with major losses in the banking sector, the dollar stayed steady versus the euro from October 2007 until this week (mid-February 2008).

On the other hand, the dollar is now reaching new depths against the euro, as the United States Federal Reserve, desperate to avoid a recession, seems committed to driving interest rates even further down.

No one can be sure that a United States downturn won’t end up causing real problems in Central America.

But, at least for now, the region looks as though it should be able substantially to maintain output and employment.