The economy is stabilizing, with fiscal adjustment in line with IMF program targets. Rapid vaccination rollout and subsequent reopening have contributed to ongoing recovery, and EMBIG spreads have dropped sharply. Tough political negotiations are key to move forward with the ambitious reform agenda.

Partial fiscal consolidation is underway following extraordinarily large deficits in 2020. Revenue has increased above pre-pandemic levels amid the ongoing growth recovery, but withdrawal of fiscal stimulus has been uneven. Fiscal pressure remains high given the debt buildup and deep social needs.

Frontier LatAm countries have bounced back following a sharp decline in 2020, but disparities in the recovery remain. Guatemala has already surpassed pre-COVID-19 GDP levels, while Panama continues to face challenges. Fiscal accounts have been severely affected, worsening public financing woes.

Ecuador’s IMF program entails steady fiscal adjustment. The government has kept austerity, redirecting spending to cope with COVID-19. However, implementation risk is on the rise ahead of the 2021 presidential election. Policy slippage could result in a challenging funding situation.

We project a real GDP contraction of 7.5% in 2020 and a modest rebound in 2021. Tourism remains depressed, but remittances have surpassed pre-COVID-19 levels. SLV, JAM, and PAN are set to endure the steepest recessions, while GTM should contract the least due to its stable macroeconomic framework.

The new IMF program improves the funding outlook. An external financing gap next year cannot be ruled out. High borrowing needs would require tapping additional sources. Limited REER adjustment could exacerbate external vulnerability. The February 2021 election adds program implementation risk.

COVID-19 has increased external funding challenges despite moderate borrowing needs. Notwithstanding oil price relief, collapsing remittances and tourism will weigh on current account receipts. While some countries have tapped global debt markets, uncertainty over financing sources remains.

Fiscal consolidation has been tempered by political reality. Revenue shortfalls and rigid spending could raise funding needs. Financing relies heavily on timely disbursement by official creditors.