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.

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.

Exchange rate flexibility has eased the adjustment to COVID-19 in most large countries. However, "fear of floating" is still high across Central America and the Caribbean. While local market financing is increasing, countries have largely had to borrow in hard currency to help withstand the shock.

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.

COVID-19 has affected Latin America through multiple channels. Pre-existing challenges and increased exposure put the region in a difficult position. We project a deep recession this year amid a sudden stop in capital flows and limited policy space.

Current account deficits in Frontier LatAm are wide by EM standards, largely due to energy trade imbalances, but lower oil prices since 2014 have helped ease financing gaps. Despite global headwinds and regional tensions, we project CA deficits to stay contained in 2019-20, broadly financed by FDI.

Current account deficits in Frontier LatAm remain wide and are largely dependent on remittances and oil prices. While high FDI helps cover external financing needs, debt buildups have been significant in some countries, increasing external vulnerability amid limited buffers.

We project solid growth and contained inflation this year and next. Main risks to the outlook are linked to external conditions as domestic policies have generally improved. While progress has been made to address longstanding challenges, major structural weaknesses remain.