Guatemala: Economic Recovery and Forecasts

According to the IMF, the local economy is well positioned to support the recovery and overcome the deterioration of social indicators, which worsened due to the pandemic caused by the Covid-19 outbreak.

Wednesday, May 5, 2021

Strong remittances, pandemic-resilient productive specialization, and unprecedented economic policy support limited economic contraction in 2020, while the outlook for 2021 benefits from additional U.S. fiscal stimulus, the International Monetary Fund (IMF) reported.

Check out the "System for monitoring markets and economic situation in the countries of Central America", prepared by CentralAmericaData.

From the IMF report:

Recent Developments, Outlook, and Risks

1. 2020 growth proved resilient to the pandemic. The swift declaration of the State of Calamity and associated curfew, border closures, and suspension of non-essential activities contained the outbreak at its early stages. A prompt reopening facilitated the recovery while strict biosecurity protocols and effective mask use, jointly with the country’s high rurality, limited infections. Guatemala’s resilience further owes to its specialization in agriculture and other pandemic essential supplies (e.g. cleaning products), robust remittances, and an unprecedented policy support. Overall, GDP contracted mildly by 1½ percent in 2020.

2. The prompt fiscal policy response was key in limiting the impact of the pandemic. The authorities swiftly mobilized financing to enhance healthcare capacity and secure lifelines to businesses and vulnerable households. The scope and effectiveness of the government’s interventions are commendable given very low levels of health coverage and social protection pre-COVID. Through the Family Bonus, cash transfers increased twenty-fold to reach almost 80 percent of Guatemalan households within a few months.

3. The easing of monetary and financial policies supported credit. Banguat lowered the policy rate cumulatively by 100 basis points (to a historic low of 1¾ percent) and provided additional liquidity to support the payments systems and meet precautionary demand for cash. The Monetary Board temporarily eased credit risk regulations to facilitate loans’ renegotiation.

4. Despite these unprecedented measures, already weak social indicators have deteriorated. The pandemic, alongside the major hurricanes Eta and Iota that hit Guatemala last November, are estimated to have increased poverty and acute malnutrition. While the hurricanes’ growth impact is expected to be limited, they battered the poorest and indigenous-populated regions of the country, affecting livelihoods of over 300,000 people and fueling migration. In parallel, the pandemic has lowered the provision basic health services.

5. Positive spillovers from further fiscal support in the U.S. lift the growth outlook. Staff projects growth of 4½ percent in 2021, with the key sectors of agriculture, wholesale commerce and manufacturing leading the recovery, and construction and hospitality gradually gaining momentum. The recovery benefits from the American Rescue Plan owing to strong trade linkages with, and remittance inflows from, the U.S. The ongoing recovery in employment and sustained monetary accommodation are also expected to lift domestic demand. However, risks around virus mutations, and vaccine acquisition and distribution, expose Guatemala to new waves of infections and additional containment measures that could draw out the recovery. Protracted worsening of poverty and malnutrition and/or further natural disasters could also weigh on the outlook.

Policy Priorities

Fiscal Policy

6. The envisaged deficit of about 3½ percent of GDP is appropriate and the authorities should prioritize programs against poverty and malnutrition. The authorities are rightly envisaging a gradual withdrawal of the fiscal stimulus from a deficit of 4.9 percent of GDP in 2020 to 3.4 percent of GDP this year, gradually converging to the historical deficit mark of 2 percent of GDP over the medium term. The 2021 draft Budget had envisaged a well-calibrated shift from providing lifelines to improving allocations to social programs and public investment. Ongoing government’s efforts to reshuffle spending, given the lack of Congress approval of the 2021 Budget, should aim for (i) a targeted increase in cash transfers for health, nutrition, and education, commensurate with the deterioration in social indicators during 2020; and (ii) stepped up public investment. Further efforts to target the provision of cash transfers digitally, and to secure the provision of education through virtual or in person-learning, are critical to prevent human capital losses post-COVID.

7. As the recovery takes hold, the authorities should durably expand the social safety nets and infrastructure spending . Funding this additional spending while keeping public debt broadly stable will require enhanced revenue mobilization and spending efficiency. Greater management continuity at the tax agency and improvements in voluntary compliance—through, e.g., a dispute resolution mechanism—are most welcome. Further strengthening of tax administrative enforcement faculties, medium and large taxpayers’ compliance and customs’ controls, as well as rationalizing tax exemptions, and automatizing revenue administration processes remain priority areas. In addition, the authorities should pursue integral procurement and civil service reforms, linking public wages to expanded coverage of public services. Welcome efforts to improve fiscal transparency (for example, information portals for the use of resources for COVID-related programs, external loans, NGOs, trusts) should be complemented with the financial strengthening of the Comptroller General’s Office.

Monetary and Financial Policies

8. Monetary policy should remain accommodative to guard against downside risks from the pandemic . Temporary inflationary pressures throughout the pandemic are expected to abate during the second half of 2021 as local supply constraints and precautionary hoarding of basic foods wane. At 1.75 percent, the monetary policy rate implies an unprecedented monetary easing, which should continue provided that inflation expectations remain well anchored. The FX measures taken by Banguat to improve reserve adequacy were appropriate given uncertainty during 2020. Going forward, further FX flexibility is important to support de-dollarization efforts while stronger emphasis on structural reforms will be important to boost competitiveness amid appreciation pressure from strong remittance inflows.

9. Financial policy should remain supportive while closely monitoring financial stability risks. With capitalization above the regulatory level and improved liquidity coverage, the banking sector seems to have weathered the crisis well so far. As the authorities have gradually unwound regulatory forbearance, banks’ capital position and profitability have remained solid. Although financial stability risks seem moderate, the SIB should continue to engage with banks to ensure early responses and safeguard financial stability. The authorities should persevere in their efforts so that the Congress of the Republic of Guatemala approves the modifications to the banking law and the new AML/CFT framework, which would help strengthen the financial sector’s stability and integrity.

Unlocking Potential Growth and Building Resilience

10. Building on a successful entente with Congress during the pandemic, the government should boost business climate reforms . Energizing investment is essential to raise potential growth, create employment opportunities, and tackle poverty and irregular migration. Staff welcomes the authorities’ emphasis on digitalization to reduce red tape and exposure to corruption and recommends the passing of the Administrative Simplification Bill. Improved interagency coordination against contraband is bearing fruit and should be underpinned by a robust anti-smuggling regulatory framework. There is scope to further strengthening the Public Prosecutor’s Office and judicial capabilities. The President’s ongoing efforts to engage with foreign investors and define a large-scale investment program hold promise. They should be complemented with reforms to modernize road infrastructure, connectivity and logistics, provide legal certainty to investors, and facilitate part-time employment and firms’ insolvency procedures.

11. The authorities should continue to reduce vulnerability to natural disasters, with a focus on fiscal and infrastructure resilience . Highly exposed to climate events, natural disasters in Guatemala are macro-critical and disproportionately affect the most vulnerable. The authorities’ efforts on climate change mitigation and adaptation should be complemented by an effective implementation of its emissions reduction programs, and enhanced fiscal and infrastructure resilience to natural disasters.
The IMF mission would like to thank the authorities for their outstanding cooperation and the open dialogue sustained from April 19 to May 4, 2021.

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