Guatemala: Moody's Upgrades Debt Rating Outlook

Arguing that the country's credit profile has overcome the political crisis in 2015, the agency has raised from negative to stable the outlook for sovereign debt notes, which still stand at Ba1.

Friday, July 1, 2016

From the press release by the IMF:

New York, June 30, 2016 -- Moody's Investors Service has today changed the outlook on Guatemala's ratings to stable from negative and affirmed the Ba1 government bond and issuer ratings.

Today's rating action reflects the following key drivers:

1. Guatemala's credit profile proved resilient to the political crisis of 2015, posting robust growth, a lower fiscal deficit and stable debt metrics.

2. The government's fight against corruption and its effort to improve transparency and accountability will continue to strengthen the country's weak institutions, particularly in tax administration and rule of law.

Guatemala's long-term foreign currency bond ceiling remains unchanged at Baa3. The foreign-currency deposit ceiling remains at Ba2, while the local-currency bond and deposit ceilings remain at Baa1. The short-term foreign-currency bond ceiling remains at P-3, while the short-term foreign currency deposit ceiling remains unchanged at NP.




In 2015, the escalation of political risks triggered by corruption scandals led to widespread street demonstrations and eventually to the ousting of President Otto Perez Molina. The uncertainty surrounding the outcome of the political crisis posed a risk to macroeconomic stability and government financial strength. However, government channels were used to pursue corruption allegations and street protests did not lead to violent incidents. President Jimmy Morales, who took office in January 2016, has been responsive to the Guatemalan people's demand to fight corruption. As a result, social and political pressures towards instability have eased, as well as questions surrounding the government's commitment to maintain Guatemala's track record of conservative macroeconomic and fiscal policies.

To date, there has been no evidence of economic or fiscal deterioration as a result of the political crisis. GDP grew 4.1% in 2015 and the central bank expects GDP growth to be in the 3.1% - 3.9% range this year. The economy has benefited from lower oil prices, which has translated into a smaller current account deficit and higher disposable incomes, while stronger remittances have also boosted domestic consumption. Additionally, the exchange rate and foreign exchange reserves have experienced only modest fluctuations. We expect these external forces will continue to positively impact economic growth in 2016-17.

A fiscal deficit of 1.4% of GDP was reported in 2015, down from 1.9% of GDP in 2014, while the central government debt amounted to 24.2% of GDP at the end of 2015. The deficit reduction was the result of an expenditure containment plan that began in October 2014, as a response to the expectation that revenues would be lower than budgeted. At the end, expenditure cuts of 1.1% of GDP in 2015 more than offset a fall in government revenues of 0.7% of GDP, which were due to both corruption in the customs tax administration and lower taxes collected from oil derivatives imports, given the drop in oil prices. For 2016 and 2017, we expect the fiscal deficit to increase slightly, reaching levels closer to its historical average of 2% of GDP.


The CICIG (International Commission against Impunity in Guatemala, a UN-run entity) in tandem with the Public Ministry, have led a fight against corruption, uncovering entrenched criminal networks working within the State. As of June 2016, around 300 people had been arrested, with 53 apprehended on a single day last month. The arrests include not only top and middle-management government officials but also members of Congress, the military and two prominent bankers.

The discovery of these corruption networks has shed light on the magnitude of the rule of law challenges in Guatemala. However, there is optimism about the effect the intervention of the CICIG would have on Guatemalan institutions, identifying the permanent criminal structures (not only the temporary ones) and increasing the judicial system's independence and ability to enforce the law. It has already begun to do so by helping Guatemalan authorities follow due process in the most recent cases. The CICIG's mandate has been renewed by President Morales for two more years, scheduled to end September 2019.

Corruption, particularly in the customs agency, affected revenue collection in 2015. Government revenues amounted to only 10.8% of GDP last year, down from 11.5% of GDP in 2014, making Guatemala the sovereign with the third lowest revenue-to-GDP ratio in our rated universe of 131 countries. The President Morales administration has begun to take measures such as renewing the top leadership of the tax administration department (the SAT), which has a new director as of March 9. As of June, two-thirds of the employees in the SAT were new, as well as 70% of the managers. Despite running with a limited staff, the department has been able to stabilize revenue collections. The SAT expects to increase total government revenues by 0.5% of GDP in 2016 compared to 2015.

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