In conjunction with our blog series on central banking policy throughout the world, today we turn our attention to Central America and the unique fiscal and monetary landscape that is often an afterthought when examining the world economy. For the purposes of this blog, when referencing Central America, we are incorporating Mexico and all other continental countries of North America that are south of the United States of America. While Europe, Japan, and the US are locked into low interest rate environments, Central America offers a unique landscape for central banking.
Leading off with Mexico, it is very apparent that Donald Trump’s election victory will have a very significant effect on the economy and relationship with the US. When news of Trump’s election first hit the press, the peso quickly depreciated in value. In the past, when Mexico has faced severe currency devaluations, it has responded by hiking interest rates, cutting spending, and intervening in the foreign exchange markets. The first two are logical reactions to currency devaluation that may be tools used in the developed world. The intervention in FX markets, however, is something that is relatively rare in the developed world, and something the US has criticized countries like China about in the past. Unlike Chinese currency manipulation, however, the intervention from the Central Bank of Mexico is a tool to stop the free fall of the value of the Mexican Peso. Due to the recent election result, it can be inferred that further intervention from the Central Bank of Mexico may be needed, whether that be fiscally, monetarily, or otherwise.
Another country with a unique central bank organization is Panama. The unique aspect is that Panama has no central bank. In Panama, they use the US dollar as their currency and effectively have no need for or ability to enact monetary policy. Once again this is in stark contrast to the economies of the developed west where over the past decade or so since the great recession, we have seen monetary intervention on mass scales to influence the economy. From a fiscal standpoint, Panama also has little room to move, as the treasury cannot simply print more money to fund a deficit, and if the government raises the the money supply by obtaining debt, the banks simply take the excess cash and move it off shore.
While the entire world is extremely interconnected with economic decisions that occur in the US, Central America has a particularly strong link between their central banking decisions and those of the US. Overall Central America is quite nuanced compared to the typical central banking policies we see in the US, however, it is strongly influenced by every bit of political and economic decision making that comes out of Washington.