Growth to remain steady in 2015 and 2016
After a peak of +4.2% in 2014, real GDP growth is expected to go back to its long-term average, expanding by +3.7% in 2015 and +3.5% in 2016. Private consumption (84% of GDP) will remain the
main engine of growth, supported by low inflation and accommodative monetary policy. Consumer prices, which have steadily slowed down overs past months, are expected to remain within the inflation range of 4% +/-1pp in 2015 and 2016, while creditshould continue to expand above +10% per year. Regarding the external sector, the U.S. recovery will drive up Guatemalan exports, remittances, tourism and FDI inflows, while Guatemala will continue to benefit from low oil prices.
Fiscal and institutional fragilities remain
Public finances are fragile despite low levels of fiscal deficit and public debt. Narrow fiscal revenues (less than 12% of GDP) raise doubts about the sustainability of public finances, as public spending is fairly inflexible. Current expenses account for more than 75% of total spending, of which 45% are for functional expenses, 10% for payment of debt service and 20% for subsidies and other transfers. Implementing a tax reform will be one of the major challenges for the newly elected President Jimmy Morales, who is taking office in January 2016, as he does not hold an absolute majority in Congress.
The external position is broadly sound although vulnerable to external shocks given strong dependency on agro exports (notably sugar and coffee) and linkages to the U.S. (through exports, remittances and investment). The current account deficit is moderate (-2% of GDP in 2015) as the wide trade deficit (-12% of GDP expected for 2015) is mostly offset by remittances inflows (10% of GDP). The external deficit is largely financed by public borrowing and FDI inflows. These are expected to remain strong in coming years due to ongoing investment projects in agriculture, mining and banking sectors. FX reserves are comfortable (above USD7bn or 4 months of imports), allowing the monetary authorities to defend the managed float of the exchange rate against the USD (within a range of 7.8GTQ/USD +/- 0.3). The external debt is moderate (below 30% of GDP).
The business environment is adequate. Guatemala is ranked 81st out of 189 countries in the World Banks’s 2016 Doing Business survey. However, important shortcomings remain when protecting investors, enforcing contracts and resolving insolvencies, reflecting weak regulatory quality and the complexity of the rule of law. Also, a lack of physical investment, low human capital and worrisome security issues hamper investor confidence.