Guatemala

Fiscal and institutional challenges for the new government

Country Rating B1

Strengths

  • Prudent macroeconomic policy framework
  • Moderate debt ratios and adequate external balance
  • Access to international financial support likely if needed
  • Trade agreement with the U.S. (DR-CAFTA)
  • Adequate business environment

Weaknesses

  • High dependency on primary commodities and the U.S. (trade and remittances) although exports are diversified
  • Weak institutional framework, legacy of political instability
  • Severe levels of crime  and drug trafficking
  • Low medium-term real GDP per capita growth and highly skewed income distribution

 

 

Economic Overview

Robust performance ahead

Economic growth in Guatemala is likely to accelerate, from +3.0% in 2017 to +3.4% in 2018 and +3.8% in 2019. Strong performance of the US economy should support activity in Guatemala in two ways. First, export growth should accelerate. Second, and more importantly, robust consumer spending could be buoyed by remittances flows from the US, on the back of continued employment gains in the American labor market. Consumer spending accounts for about 85% of GDP in Guatemala. Inflation should remain stable (4.3% in 2017, 4.2% in 2018, 4.0% in 2019) as oil prices stay at moderate levels.

 

Guatemala’s business climate is above regional average and ranks 88th globally according to the World Bank Doing Business survey. While getting credit, electricity and paying taxes is facilitated in the country, the regulatory quality and control of corruption scores lag behind. These weaknesses, along with low infrastructure quality, dampen the medium-term growth outlook. Yet, the policy framework in Guatemala is sound. (i) The central bank is likely to continue pursuing an accommodative monetary policy to support activity. (ii) The Central American Free Trade Agreement (CAFTA-DR) should grant better access to the US market and attract investment. (iii) Fiscal policy is prudent. The fiscal deficit is expected to remain stable below -2%.

 

External vulnerabilities on pause for now

The high dependence on the US economy is an inherent risk to Guatemala, from both the exports and the consumer spending point of view. In addition, natural disasters and extreme weather conditions pose a threat to infrastructure and harvests. As commodity exports account for half of total Guatemalan exports, commodity prices also greatly drive export revenues. The dollarization of the economy poses risks to monetary sovereignty. It is the flip side of the increase in remittances flows which have allowed net foreign currency flows to turn positive again. Foreign reserves cover more than 6 months of imports and both public and external debt-to-GDP ratios are moderate and projected to stay under control. The current account balance turned back to a deficit in 2017 after posting a surplus in 2016 (1% of GDP). It is projected to stay manageable thanks to remittance flows and foreign direct investment. The economy stayed dynamic in 2015 amid a political crisis. Yet recent corruption allegations against president Morales could deteriorate further the social climate and institutional stability at the expense of economic outcomes.