Guatemala: Economy Is Coping With Political Uncertainty

In the view of Fitch Ratings, despite the high level political noise of the past three years, economic growth has proved relatively resilient, supported partly by favorable external U.S. demand and strong worker remittances flows.

Wednesday, April 18, 2018

From a report by Fitch Ratings:

Fitch Ratings-New York-17 April 2018: Fitch Ratings has affirmed Guatemala's long-term, foreign-currency (LT FC) Issuer Default Rating (IDR) at 'BB' with a Stable Outlook.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

Guatemala's ratings are supported by its track record of macroeconomic stability and conservative policies, low public debt to GDP and sound external liquidity. These strengths are counterbalanced by a narrow tax base that constrains policy flexibility and limits debt tolerance, as well as weak governance and human development indicators.

A series of corruption scandals has shaken the political environment in Guatemala since 2015. Corruption allegations against President Morales and his attempt to dismiss the head of the UN-appointed anti-corruption body (CICIG) led to protests at the end of 2017. The erosion of the President's political capital diminishes the prospects for reforms this side of the June 2019 elections, including reforms to raise Guatemala's low taxes, the lowest in the 'BB' category. A fragmented Congress makes consensus on legislation difficult to achieve. A key sign of the gridlock was the failure of the Congress to pass the 2018 budget or approve a series of multi-lateral loans (a small share of Guatemala's financing) despite the concessional terms.

Despite the high level of political noise over the last three years, economic growth has proven relatively resilient, supported partly by favorable external U.S. demand and strong worker remittances flows. Growth slowed to 2.8% in 2017, a level below potential due to fiscal retrenchment and the closure of the Escobal silver mine.

Uncertainty lingering from the continued political crisis continues to weigh on investment spending, especially for the public sector. Investment to GDP has fallen steadily since 2007 and was only 12.2% in 2017. However, real GDP is forecast to accelerate to 3.2% in 2018 and 3.5% in 2019 on the assumption of higher budget execution of public investment and strong remittances inflows supporting private consumption. The near- and medium-term risks to domestic investment and growth are on the downside, in Fitch's view, due to budget execution risks to public investment and political uncertainty. Longer-term constraints on growth include a low domestic savings rate, a narrow fiscal revenue base limiting budget space for public infrastructure spending, shallow credit penetration and governance problems.

Guatemala's external indicators are supportive of its credit profile. The current account balance moved into surplus in 2016, reflecting the lower energy import bill and strong remittance inflows (11% of GDP). The current account surplus remained at 1.5% of GDP in 2017 on the back of continued strong remittances, up 13.4% yoy, despite a higher trade deficit. Fitch expects these drivers to sustain a declining current account balance in 2018-2019. The country's external financing needs are low and adequately covered by broad-based foreign direct investment. Modest external debt and ample international reserves mitigate external liquidity risks; Guatemala's external liquidity ratio is more than double the BB median. The central bank's foreign-exchange market intervention during 2017 raised its international reserves by 28.5% in 2017 to USD11.7 billion or 6.3 months of current account payments.

Guatemala's central government fiscal deficit is low relative to peers. In 2017, it reached 1.3% of GDP, up marginally from the decade-low of 1.1% of GDP in 2016. The Guatemalan Congress failed to pass the 2018 budget, resulting in the 2017 budget being rolled over. Fitch expects the deficit to fall marginally to 1.1% of GDP in 2018, reflecting the government's under-execution of infrastructure spending.

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More on this topic

Guatemala As Seen by Standard & Poor's in November 2015

November 2015

Despite the fact the government has acknowledged that it does not have sufficient resources to pay interest on foreign debt, the agency announced that the country´s risk rating remains unchanged, with a stable outlook.

From a press release issued by Standard & Poor's:

In our view, political instability related to corruption cases will not significantly hurt Guatemala's stable macroeconomic performance this year and in 2016.

Fitch downgrades sovereign rating to B+

July 2015

The agency said the growing fiscal deficit, low economic growth, political polarization and weak business confidence, were the triggers for the downgrading of long-term debt.

Fitch Ratings-New York-09 July 2015: Fitch Ratings has downgraded El Salvador's long-term foreign and local currency IDRs to 'B+' from 'BB-'.

Guatemala: Fitch Maintains Debt Rating

June 2015

Noting uncertainty and political instability in the country as the main risk factor for the economy, the rating remains at BB with a stable outlook.

From the press release by Fitch Ratings:

Fitch Ratings-New York-19 June 2015: Fitch Ratings has affirmed Guatemala's long-term foreign- and local-currency Issuer Default Ratings (IDRs) at 'BB' with a Stable Outlook.

Fitch has affirmed Guatemala's IDRs at BB+

July 2009

Fitch Ratings has affirmed Guatemala's local and foreign currency Issuer Default Ratings (IDRs) at 'BB+'. The Rating Outlooks on both ratings are Stable.

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.

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