Guatemalan Economy According to the IMF

For the international organization, during 2020, Guatemala's economy showed resilience, since in the context of the crisis caused by the Covid-19 outbreak, the GDP contracted only 1.5%.

Friday, June 11, 2021

According to the International Monetary Fund, in a context of favorable specialization of production and exports, resilience of remittances, and unprecedented support from monetary and fiscal policies, the drop in Guatemalan production was minimal compared to that reported in other Central American countries.

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From the IMF report:

The Executive Board of the International Monetary Fund (IMF) concluded the 2021 Article IV consultation with Guatemala on June 9, 2021.

The pandemic hit Guatemala at a time of macroeconomic stability and firming growth, with robust remittances, soaring investor confidence, and accommodative macroeconomic policies. The economic impact of the COVID-19 shock has been relatively limited given an early reopening of the economy, unprecedented policy support, and resilient remittances and exports. Large-scale government support notwithstanding, already weak social indicators—including on poverty and malnutrition—have further deteriorated following COVID-19 and the two major hurricanes that hit Guatemala in November 2020.

Real GDP is estimated to have contracted by 1½ percent in 2020, showing Guatemala’s resilience in a regional comparison, amidst a favorable production and exports mix, resilient remittance inflows, and unprecedented monetary and fiscal policy support. Although temporary factors exercised upward pressures on headline inflation, inflation expectations have remained well-anchored throughout, reflecting soft demand conditions and core inflation. The current account balance increased significantly to 5½ percent of GDP in 2020 (from 2.4 percent in 2019), reflecting resilient remittances and a lower trade deficit due to stronger terms of trade, imports compression, and robust agriculture, food and chemical exports.

The authorities deployed an unprecedented set of macroeconomic policy measures to counter the impact of the pandemic. Fiscal policy promptly supported the economy and the most vulnerable, as the authorities drew on available fiscal space with an overall package of 2.3 percent of GDP to enhance healthcare capacity, secure lifelines, and sustain demand. The central bank lowered the policy rate 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 the renegotiation of loans, and allowed banks to record interest from restructured loans on an accrual basis.

Economic activity is projected to expand by 4½ percent in 2021, with leading indicators showing a recovery in the key sectors of commerce, manufacturing, and construction, and a slower recovery in hospitality. The outlook will be supported by the U.S. recovery, powered by the vaccine and the American Rescue Plan, and improving prospects in remaining trade partners. Over the medium term, growth is projected to stabilize at its pre-COVID potential rate of 3½ percent by 2023. Near-term inflation is set to converge to the mid-point of the target band (4 +/-1 percent) as supply shocks wane, outweighing inflationary pressures from diminishing economic slack. As the pandemic recedes, the current account balance is expected to deteriorate to -0.6 percent of GDP over the medium term due to lower exports growth, improving imports, and an increase in the FDI payout.

Risks to the outlook are tilted to the downside. Slower vaccine rollout and/or new virus strains could prolong the global and domestic recovery. Protracted worsening in poverty and malnutrition could trigger social discontent, and further natural disasters could weigh on the recovery and livelihoods. A premature withdrawal of the financial sector support measures might curtail banks’ profitability and credit flow to the recovery. On the upside, a quick resolution to the pandemic, alongside faster-than-expected progress with business reforms, could further lift investment and growth.

Executive Board Assessment 

Directors commended the Guatemalan authorities for maintaining sound macroeconomic policies and for implementing a swift and unprecedented policy response to the COVID-19 pandemic, which allowed for an early reopening of the economy. Directors agreed that the near-term outlook is favorable although the recovery hinges on progress in vaccination. They recommended that macroeconomic policies remain supportive in the near term until the recovery takes hold, while guarding against any downside risks from the pandemic. Noting that the pandemic and recent hurricanes have exacerbated Guatemala’s long-standing challenges, Directors emphasized the importance of securing more inclusive, sustainable growth, building resilience to natural disasters, and ensuring debt sustainability.

Directors recommended that, as the fiscal stimulus is gradually withdrawn, the authorities scale up much needed social programs and infrastructure expenditure, aimed at reducing poverty and boosting potential growth. To this end, enhancing revenue mobilization and spending efficiency is necessary to expand fiscal space. More specifically, Directors encouraged continued efforts to strengthen tax controls, tackle contraband, and reduce red tape and corruption. They also emphasized the importance of enhancing transparency, governance, the quality of public services, and procurement cost-effectiveness.

Directors agreed that accommodative monetary conditions should continue, provided inflation expectations remain well-anchored. They stressed the need to guard against any unintended consequences from last year’s monetization of part of the fiscal deficit. Directors also encouraged the authorities to monitor banks’ asset quality closely and remain vigilant to financial stability risks. They looked forward to the prompt passage of the banking law and the revised AML/CFT law, which would enhance financial stability and integrity.

Directors welcomed the authorities’ reform agenda to lift potential growth and build resilience, noting that its expeditious implementation would help improve the business climate, foster employment opportunities, and facilitate external rebalancing. Given Guatemala’s high risk to natural disasters, they recommended complementing past efforts on climate change mitigation and adaptation with an enhanced disaster risk management strategy and an effective implementation of the emission reduction programs.



More on this topic

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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.

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.

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In the critical context of this year, the resilience of remittances and exports, added to the decline in oil prices, would have somewhat shielded the Guatemalan economy, whose GDP would fall only 2% by the end of 2020.

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After production in Nicaragua fell 3.8% in 2018, the IMF estimates that during 2019 the GDP will contract by 5.7%, however, the agency predicts that by 2020 the variation could be only -1.2%.

Real GDP is estimated to have contracted by another 5.7% in 2019 due to the deterioration in aggregate demand, fiscal consolidation and sanctions, the IMF reported after its visit to the country.

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In the words of the International Monetary Fund (IMF), the Central American country's economy is projected to remain among the most dynamic on the continent, as the outlook remains positive.

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