Guatemala: S&P Confirms Risk Rating

Arguing that continuity in economic policies is expected after the change of administration in January 2020, Standard & Poor's maintained the country's credit risk rating at BB-.

Thursday, December 5, 2019

From S&P report:

S&P Global Ratings confirmed its long-term sovereign credit ratings of "BB-" in long-term foreign currency and "BB" in Guatemala. The outlook for our long-term ratings remains stable. We also affirmed our short-term 'B' foreign and local currency ratings in Guatemala, the international agency reported.

On Dec. 3, 2019, S&P Global Ratings affirmed its 'BB-' long-term foreign currency and 'BB' long-term local currency sovereign credit ratings on Guatemala. The outlook on our long-term ratings remains stable. We also affirmed our 'B' short-term foreign and local currency ratings on Guatemala.

The transfer and convertibility assessment remains 'BB+'.

Outlook

The stable outlook reflects our expectation of continuity in key economic policies following the change of administration in January 2020. We expect Guatemala to maintain low fiscal deficits and sound monetary policy amid still-weak economic growth and a challenging political environment that affects public policy effectiveness. Moreover, we expect that continued cautious fiscal policies should maintain a stable general government debt burden during 2019-2021.

We could lower the ratings on Guatemala over the next 12-24 months if unexpected deterioration in economic policies erodes prospects for economic growth and contributes to worsening public finances. We could also lower our ratings if fiscal slippage results in higher-than-expected annual increases in net general government debt.
Conversely, we could raise the ratings over the next two years if the new administration is able to propose and implement a reform agenda that strengthens Guatemala's governability and public institutions, increases its tax revenues, and bolsters its GDP growth prospects.

Rationale

Our ratings on Guatemala reflect our view of still-developing governing public institutions and a challenging political environment that constrains policymaking effectiveness. Despite a modest acceleration in economic growth, expected real GDP growth around 3.5% in 2019-2022 would continue to be insufficient to substantially reduce the country's poverty level. On a per capita basis, Guatemala's GDP growth has been lower than that of its rating peers. A persistently narrow tax base, as well as shortfalls in basic public services and physical infrastructure, also constrain the rating. Our ratings incorporate Guatemala's solid external position despite terms of trade volatility, overall stable and moderate general government debt to GDP, and sound monetary policy that has kept inflation under control.

Institutional and economic profile: A challenging political environment and still-developing governing public institutions are affecting the sovereign´s ability to promote economic growth
  • We expect continuity in key economic policies following the change of administration in January 2020.
  • A challenging political environment limits the government's ability to advance meaningful reforms.
  • We expect economy growth to slightly increase around 3.5% over 2019-2022.

President-elect Alejandro Giammattei of the center-right Vamos party, will take office Jan. 14, 2020. He won the second round of the presidential election on Aug. 11, 2019, with 58% of the vote, against Sandra Torres of the Unidad Nacional de la Esperanza (UNE) party. In the congressional election, Vamos won 17 of the 160 seats in the 2020-2024 legislature, in contrast to UNE that won 52 seats; nine other parties won between six and 12 seats each, while eight parties won between one and four seats. President-elect Giammattei will need to build alliances to pass laws in the divided Congress, but we expect that political fragmentation will limit his ability to advance meaningful reforms.

Our assessment of Guatemala's governance reflects weak checks and balances between institutions, perceptions of corruption, and a record of weak policy implementation. After months of constant tensions with the outgoing president, Jimmy Morales, the mandate of the Comisión Internacional contra la Impunidad en Guatemala (CICIG, the U.N.-backed International Commission against Impunity in Guatemala) came to end on September 2019. Corruption scandals damaged President Morales' legitimacy to promote a comprehensive fiscal reform.

President-elect Giammattei will face the challenge of either implementing, or seeking to change, Guatemala's recent "safe third country" agreement with the U.S. to restrict the flow of migrants to the U.S. The government has not announced any plans for curbing migration through Guatemala to the U.S.

We expect generally stable public finances without substantial changes in macroeconomic policy over the next two years. We expect the next administration to remain committed to moderate fiscal deficits while trying to strengthen social programs and implement an ambitious plan on infrastructure investment through public-private partnerships.

We forecast Guatemala's real per capita GDP growth to average 1.6% in 2019-2021, slightly above the 1.3% of the previous three years. Our economic assessment for Guatemala reflects its low per capita income (estimated to be US$5,440 in 2019) and its history of below-average economic growth compared with its rating peers. Persistent low growth reflects, among other things, limited provision of basic public services (such as education and health care) and limited physical infrastructure, as well as a high crime rate.

In 2018, economic growth increased to 3.1% from 2.8% in 2017, supported by private consumption and improved budgetary execution. Additionally, a 13.4% surge in remittances supported real domestic demand. While remittances growth of 13% as of September 2019 would continue supporting Guatemala's economic growth this year, we believe that double-digit increases in remittances could be temporary, which could affect real domestic demand and economic growth in the coming years. Over the long term, sustained economic growth will also depend on the sovereign's ability to improve productivity and strengthen the rule of law and the enforcement of contracts, which will help to attract higher private investment.

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