New governments across Central America face many similar troubles, and opportunities. A change of presidents in three of the countries this year — Costa Rica, El Salvador and Panama — opens the way for new approaches to tackling these countries’ problems.

They are making progress, but have a long way to go. Already, El Salvador’s congress has approved the sale of new bonds to improve its debt profile and to ease pressure on the treasury. But the country’s double-B rating is by no means assured: Fitch Ratings has the sovereign’s rating on watch negative, although it praised the country’s recent tax reform legislation.

In Costa Rica, the announcement this year that US computer firm Intel would close its manufacturing facilities led the central bank to reappraise its growth forecasts for the second half of 2014 and the first half of 2015. As such, maintaining flows of foreign direct investment remains a core part of the new Costa Rican government’s goals.

Costa Rica claims it has greater underlying attractions to foreign direct investment than its regional peers, such as its justice system and infrastructure. Yet many in and outside the government worry about the extent that proposed changes to the tax framework, which includes stepping up audits on large companies, could negatively impact the business climate.

Reforming Costa Rica’s tax framework is, however, an imperative for the new administration — particularly given a high and rising government deficit and investor impatience over the country’s actions to remedy it.

Costa Rica also faces a ratings downgrade risk: Moody’s has said delays to tax reform could endanger the country’s rating, which the agency put on negative watch last September. But the Solís government can learn from the mistakes of previous governments, which failed to pass tax reforms, Helio Fallas, the new finance minister, tells LatinFinance.

By comparison, Panama’s challenges seem mild. Its economy is still growing at roughly twice the rate of Costa Rica, and its budget deficit, as a proportion of GDP, is less than half that of Costa Rica. However, the new Panamanian government must also pay attention to a debt load made bigger by the previous administration’s ambitious transport infrastructure projects.

Panama’s new leadership is also aware of the importance of developing its transport infrastructure. The country’s competitive advantage in this area is obvious — particularly given the delayed expansion of the canal.

Nevertheless, Panama needs to pay more attention to other types of infrastructure: most immediately electricity, as blackouts this summer provided an idea of what could come if the government does not act.

At the same time, as Panama’s economic growth slows, it too needs to pay attention to government spending, and the fiscal balance. LF


Costa Rica
Reforming the tax code
is a vital part of curbing
a rising deficit, and pacifying
investors, but it could
encounter trouble

The country faces the task
of realizing logistics ambitions,
generating more electricity,
and keeping debt levels