SELA published the report “Early Warning Indicators: a tool for facing times of crisis in Central America”

The Latin American and Caribbean Economic System (SELA) presented the report “Early Warning Indicators: a tool for facing times of crisis in Central America,” a study to detect speculative pressures in the markets and the presence of volatility in fiscal indicators and those related to the external sector of the economies of Belize, Costa Rica, El Salvador, Guatemala, Nicaragua and Panama.

The focus of this study was the Central American region, considering the degree of exposure of these economies to external shocks. The countries in this region have a high dependence on income from remittances and high levels of external indebtedness as a share of GDP, which makes them particularly vulnerable to fluctuations in the external conditions of their main trading partners, as well as to variations in international financing conditions.
The study aims to construct indicators to detect speculative pressures in the markets and to show early warning of a crisis based on a selection of indicators. This provides institutional actors with a monitoring tool to assess policy conditions in order to formulate more efficient and effective strategies.

The development of early warning indicators involves several procedures that allow for the collection of relevant information for analysis and the determination of possible actions to mitigate the effects of possible crises. In this case, the early warnings for these six Central American countries were constructed with the application of three indicators: the Speculative Pressure Index (SPI), the Noise Signal Ratio (NSR) and the External Vulnerability Index (EVI). The SPI helps identify periods of crisis in the foreign exchange market; the NSR helps select indicators that give good signals of crisis; and the EVI helps detect early warning signals based on certain indicators.

One of the relevant findings of the study is that the countries assessed may be dependent on remittances as an external financing instrument, which is an important element for analysing the structural vulnerability of the economies under review. It is essential that the countries adopt the necessary measures to strengthen their internal financing mechanisms, in addition to their capacity to generate income, as this indicator shows significant signs as a common element in several of the countries reviewed.

Early warning indicators are a fundamental tool for identifying economic variables that have an impact in periods preceding an established moment of volatility. The findings are important in order to ensure that the measures implemented by governments are effective enough to address their structural weaknesses.