Effects of the Political Crisis on the Economy

Standard & Poor's has reduced Guatemala's debt rating from BB to BB-, arguing that political instability and weakness in government institutions are affecting economic growth prospects.

Thursday, October 19, 2017

A series of events that began earlier this year, when President Jimmy Morales declared the Commissioner of the International Commission against Impunity in Guatemala, Iván Velasquez a persona non grata, and which continued with the "Corruption Pact" made by 107 deputies to approve a reform of the Penal Code to favor politicians implicated in illicit financing and to extend commutative penalties is the main reason behind the reduction in the debt rating.

The agency Standard & Poor's says that the political situation is already affecting the country's economic prospects, and it does not see any improvement in the already delicate situation of public finances in the short term.

S & P also points out that failure to resolve the corruption cases that came to light is affecting the business sector's ability and intent to invest in the country.

See related articles: " Corruption, Impunity and Politics", "Guatemala: Setback for President Morales" and "Will the President of Guatemala Be Spared?"

From a statement issued by Standard & Poor's: 

Recurrent political instability and weak government institutions are affecting Guatemala's economic growth prospects.  
Consistently low general government revenues and uncovered corruption cases constrain the government and the private sector's ability and willingness to invest.
As a result, we are lowering our long-term foreign currency sovereign credit rating on Guatemala to 'BB-' from 'BB' and our long-term local currency sovereign credit rating to 'BB' from 'BB+'.

The outlook is stable, balancing the economic and political challenges with forecasted low fiscal and external deficits and the country's sound monetary policy.
On Oct. 18, 2017, S&P Global Ratings lowered its long-term foreign currency sovereign credit rating on the Republic of Guatemala to 'BB-' from 'BB' and its long-term local currency sovereign credit rating to 'BB' from 'BB+'. The outlook is stable. We also affirmed our 'B' short-term foreign and local currency sovereign credit ratings on Guatemala. At the same time, we lowered the transfer and convertibility assessment to 'BB+' from 'BBB-'.

The stable outlook balances the economic and political challenges of the country with our expectation of low fiscal and low external deficits, stable debt level, and the country's sound monetary policy.

We could lower the ratings over the next 12-24 months if political conflict escalates to a degree that it further affects not only economic growth prospects but also sustainable public finances. Our debt assessment could worsen and affect the ratings if interest payments surpass 15% of general government revenues.

Over the same period, we could raise the ratings if the government is able to propose and implement a reform agenda that strengthens Guatemala's governability and public institutions, increases its revenue, and bolsters its GDP growth prospects.

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