Guatemala's track record of macroeconomic stability, low public and external debt burdens, as well as the government's solid commercial debt repayment history continue to support the sovereign's ratings. These strengths have provided a buffer to deal with adverse external and domestic shocks in recent years.
The country's key credit weaknesses include its low tax take, high level of poverty and income inequality, as well as its weak social and governance indicators, factors which will take time to address and will constrain Guatemala's ratings to sub-investment grade over Fitch's rating horizon. Institutional weaknesses were highlighted last May with criminal allegations against the executive branch. While the current political crisis appears to be winding down for now, Fitch is concerned that these recent events could limit the government's effectiveness with respect to implementing its legislative agenda going forward. Furthermore, Fitch believes the current policy framework could be vulnerable to erosion of public support over the medium-term if notable progress in reducing poverty and inequality as well as addressing crime and corruption is not forthcoming.
'Although the government has made progress over the past year with respect to enhancing transparency and improving the quality of public expenditures under its Plan for Fiscal Modernization, approval of a revenue-enhancing tax reform remains elusive,' said Theresa Paiz Fredel, Senior Director for Latin American Sovereign ratings. The current political and economic environment, as well as Guatemala's fragmented, multi-party political system complicates prospects for the near-term implementation of substantive structural reforms as legislative approval requires a broad process of consensus building and the focus has shifted to managing the fallout of the global financial and economic crisis.
Most of Guatemala's public and external debt indicators continued to strengthen in 2008. However, the adverse consequences of Guatemala's exposure to the U.S. recession and global financial crisis through vital trade and financial linkages began to emerge last year as GDP growth slowed to 4% from 6.4% in 2007. In 2008, remittance inflows decelerated sharply, leading to lower levels of consumption growth. The outlook for 2009 is more pessimistic as export receipts, remittances and private capital inflows are expected to contract, while the implementation of fiscal measures to jump start the economy have lagged initial expectations. As a result, Fitch expects Guatemala to experience a mild recession this year, its first in over 20 years. In spite of this cyclical deterioration, most of the sovereign's economic and financial credit metrics will remain robust relative to 'BB' peers.
Reserve accumulation continued at a steady pace thanks to a solid balance of payments performance, with official reserves including gold reaching about US$4.7 billion by year-end 2008, a record high for Guatemala. Gradual reserve accumulation and comparatively low debt service has maintained Guatemala's liquidity ratio well above the 10-year 'BB' median of 115%. However, rising indebtedness, fuelled by the need to finance moderate current account deficits, could put some downward pressure on this ratio going forward.
'Despite a more challenging external environment, Fitch believes that the country's sound macroeconomic fundamentals and the authorities' commitment to managing downside risks, which is supported by a US$950 million precautionary Stand-by Agreement with the IMF, should help Guatemala's resilience,' said Paiz Fredel.
Guatemala's gross and net public debt/GDP ratios compare favorably relative to the 10-year 'BB' medians and will continue to do so despite increased borrowing to fund the planned fiscal stimulus or revenue shortfalls. However, GDP measures of public debt understate Guatemala's debt burden due to the narrowness of the country's tax base. As the public sector accounts for around half of Guatemala's external debt, gross and net external debt ratios are also low relative to the 10-year medians for similarly rated peers. Limited public debt and a manageable fiscal deficit also drive the sovereign's comparatively low public financing requirement, which could reach 3.7% of GDP this year if the budget is fully executed.
Easing of Guatemala's rating constraints, including a low tax take, high poverty and poor social indicators, through the implementation of reforms, which strengthen public finances and sustain higher rates of economic growth, would be viewed positively. Conversely, political gridlock, which hinders the implementation of structural reforms, or a marked deterioration in fiscal and external solvency as well as liquidity indicators could negatively affect Guatemala's ratings.
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