Coface Group
Guatemala

Guatemala

Population 18.0 million
GDP per capita 4,317 US$
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Country risk assessment
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 3.9 -1.5 4.6 4.0
Inflation (yearly average, %) 3.4 4.8  4.5 3.6
Budget balance (% GDP) -2.2 -4.9 -3.4 -2.8
Current account balance (% GDP) 2.3 5.5 2.3 1.7
Public debt (% GDP) 26.5  31.5  32.4 33.4

(e): Estimate (f): Forecast

STRENGTHS

  • Financial support from the United States and multilateral lenders
  • Free trade agreements with the U.S. and the EU
  • Geographic proximity to the United States and Mexico
  • High potential for tourism, agriculture (bananas, coffee, sugar), mining, hydroelectricity and geothermal energy

WEAKNESSES

  • Low tax revenues
  • Poor health, education, water and power infrastructure
  • Rural poverty, inequality, under-employment, informal economy, ethnic divisions
  • Vulnerable to external shocks (natural disasters and impact of commodity prices on imports and exports)
  • Heavily reliant on low value-added industry and expatriate remittance flows
  • Security issues related to drug trafficking
  • Social and political instability

Risk assessment

Faster economic recovery than its peers

Guatemala will continue to outperform its neighbours with sustained growth driven by net exports and remittances from expatriates in the Unites States. These remittances will be powered by U.S. growth and falling unemployment among the U.S. Latino population, particularly in the construction sector, where many Guatemalans work. Representing around 30% of household income, these flows should continue to support household consumption, which accounts for 85% of GDP. Despite an increase in social spending in the 2022 budget, the high level of poverty, particularly in rural areas hit by two hurricanes at the end of 2020, will continue to favour consumption of essential products with low added value. The return of inflation to the middle of the central bank's target window (4 +/- 1%) should also support consumption. This will allow the central bank to maintain its expansionary policy by keeping its key rate at 1.75%, which should facilitate the growth of credit to the private sector, especially to businesses, as President Giammattei has resumed the implementation of his pro-business policy agenda. The expansion of the free trade zones in May 2021 could reverse the downward trend in activity in these zones over the past few years and attract new foreign investors. Improved investor confidence and stronger growth in the United States should benefit the country's leading sectors, notably agriculture, agri-food, and chemicals. The agricultural sector will benefit from a favourable base effect following a tough year in 2021 due to bad weather at the end of 2020. The construction sector will remain extremely busy, with public investment in infrastructure and increased investment. The tourism sector is set to continue its slow recovery as travel restrictions are lifted in European countries and the United States.

 

Good fiscal health and a current account surplus

The draft 2022 budget foresees a 3.3% decrease in total expenditure compared with the 2021 budget, which repeated the 2020 plan after the initial draft was rejected. In all, 71.5% of the financing needs are to be covered by budgetary revenues, which are forecast to increase following efforts to boost collection. These revenues hit their lowest level ever in 2019 (11.5% of GDP), and uncertainty remains over the success of reforms undertaken to increase them. The rest of the financing should come from bonds issued at relatively low rates on the international markets. External borrowing, notably from multilateral lenders and the United States for specific development projects, will round out the financing. Public debt will remain largely contained and is particularly low by regional standards.

 

The current account should show a smaller surplus. The goods deficit will increase on stronger demand for capital goods to support activity coupled with higher energy prices. Brisk chemical, agricultural (sugar, coffee, pineapple) and textile exports will not fully compensate for this increase. The balance of services should also remain in deficit, while the tourism sector has not yet returned to its pre-crisis levels. The income surplus will shrink owing to increased repatriation of dividends by foreign companies and slower growth in expatriate remittances (13.6% of GDP in 2019). However, the current account surplus should allow further consolidation of the foreign exchange reserves, which were already equivalent to eight months of imports at the end of 2021, while FDI (1.0% of GDP in 2019) remains below its target level. These comfortable reserves will make it possible to limit devaluation of the quetzal, which will remain overvalued in real terms, affecting export competitiveness.

 

The political landscape remains fragmented

Despite enjoying a high popularity rating when he took office in January 2020, Alejandro Giammattei has found his ability to act limited by the political fragmentation of the country’s assembly. His party, Vamos, has only 16 of the 160 seats in Congress, which is divided among ten parties. This means that coalitions must be formed on a case-by-case basis when adopting reforms. Building successful coalitions is likely to be made increasingly difficult by the approach of elections scheduled for 2023, while opposition parties may seek to further slow the pace of reform. This situation is compounded by popular discontent, which has been mounting since the start of the pandemic, with protests breaking out at the end of 2020 in connection with adoption of the 2021 budget. Considered insufficiently transparent and overly focused on infrastructure investment at the expense of social programmes, the budget was finally abandoned in the face of massive protests. In this environment, corruption remains a hot topic, particularly following the ousting of anti-corruption prosecutor Juan Francisco Sandoval in the summer of 2021, while he was investigating corruption cases in the president's entourage. The Biden administration has repeatedly made its development aid conditional on the implementation of a genuine anti-corruption strategy. Migration will also remain a central issue. Hopes that the Biden administration would adopt a less strict policy encouraged people to head to America in 2021. A recent U.S. Supreme Court ruling requiring these migrants to wait for a response to their asylum claims on the Mexican side of the border could however change this trend. 

 

Last updated: February 2022

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