Caribbean & Central America - July 2022

On 7 June the International Monetary Fund (IMF) published a statement on the “favourable” outlook for Guatemala’s economy, the latest in a string of positive assessments from influential bodies that belie the difficult economic situation for many in the country.

The IMF hailed the economy’s “remarkable resilience” during the coronavirus (Covid-19) pandemic while recognising that “social indicators likely deteriorated during the pandemic and longstanding infrastructure and social gaps remain.” Nonetheless, it projects GDP growth of 4% in 2022 before stabilising at its pre-pandemic potential rate of 3.5% in 2023.

“Risks to growth remain tilted to the downside,” according to the statement, which cites a highly uncertain external outlook. “Elevated and volatile commodity prices introduce additional uncertainty and could accelerate global inflationary pressures and slowdown external demand,” it says. “Social discontent could be triggered by rising food and energy prices affecting the most vulnerable.” The Guatemalan government should consider reimplementing social measures used in the early stages of the pandemic if economic conditions worsen, says the IMF, which also highlights that “accelerating efforts to address long-standing social gaps is crucial while maintaining fiscal sustainability”.

This assessment was followed by an update from international credit ratings agency Moody’s on 15 June, which boosted Guatemala’s outlook from negative to stable. The agency cited Guatemala’s “demonstrated ability to cope with the pandemic shock with a minimal impact to its overall credit profile,” due to a strong economic recovery and conservative fiscal policies which limited the increase in debt. Moody’s gave Guatemala a Ba1 long-term issuer rating which, it says, “reflects the balance between the country's track record of conservative fiscal management and resiliency to domestic and external shocks and credit pressures derived from low per-capita income and weak institutions, evidenced by low overall government effectiveness and rule of law scores”.

And on 26 April, another international credit ratings agency, Fitch Ratings, revised the country’s rating outlook from stable to positive, citing “structural improvements in tax collection”; current account surpluses that have increased international reserves; and a record of macroeconomic stability. On the other hand, Fitch pointed out that governance and human development indicators are a weakness, as is a low revenue-to-GDP ratio and political gridlock, which makes dealing with these issues more difficult.

The overall picture from these three assessments is fairly positive, which is slightly unexpected given recent developments in Guatemala. On 16 June President Alejandro Giammattei presented a ‘national emergency plan’, amounting to Q6.74bn (US$872m), as part of the government’s attempt to mitigate the economic impact of Russia’s invasion of Ukraine. The multi-pronged plan contains fiscal, social, monetary, and credit elements, as well as prioritising international cooperation projects in the short and medium term to maximise investment and job creation. While presenting the programme, President Giammattei said that a “crisis committee” had drawn up the plan, which would protect the country’s most vulnerable sectors of society.

The president of the central bank (Banguat), Sergio Recinos, who will be the coordinator of the crisis committee, said that while the country had shown resilience in dealing with international shocks such as the coronavirus pandemic, the war in Ukraine was causing high inflation (5.82% in May) due to an “exorbitant increase in fuel and food costs”.

Among other things, the plan will widen food donation programmes for around 300,000 families, remove quotas on tariff-free imports of basic grains, and subsidise propane gas, diesel, and petrol until at least August. There will also be Q2.88bn assigned to social protection policies; Q540m on sectoral policies; Q450m on food security; and Q90m on a ‘social tariff’ to keep electricity prices down until the end of the year.

However, the allocation of Q3.19bn for infrastructure projects, the largest single pot of funding, has caused controversy due to concerns over transparency. The infrastructure spending was approved by congress in March in the face of significant opposition, as previous large projects have been affected by corruption.

While this emergency package may go some way to helping shelter Guatemalans from the worst economic fallout from the Russian invasion of Ukraine, it will not fix long-term issues with the economy flagged by the IMF, Moody’s, and Fitch. In order to do so, the IMF recommends a series of measures including reforms that “focus on increasing budget flexibility, bolstering the cost-effectiveness of procurement, improving the coverage and quality of public services, and rationalizing tax incentives and exemptions”.

Other suggested measures include multi-annual budget planning, instead of annual budgets that are used at present, as well as formalising an explicit fiscal anchor, which is a fiscal or budget rule that guides all spending decisions. The IMF also recommends improving the judiciary and legislative environment to encourage foreign investment, which is an area in which Giammattei’s government has come in for considerable international criticism as prominent public prosecutors have been forced into exile.

In addition, it is worth pointing out that one major reason for Guatemala’s relative economic success is the contribution of remittances sent home by migrants, which were worth the equivalent of 18% of GDP last year, according to Moody’s. This contribution looks set to increase this year, with data from January-March 2022 showing an increase of 25% in the value of remittances compared to the same period in 2021.

The fact that so many people continue to leave the country in search of a better life is not indicative of an economy that is working for most Guatemalans, despite the largely positive macroeconomic assessments from financial institutions. President Giammattei may be able to use these latest ratings to point to sound macroeconomic management, but that will do little to assuage those whose living conditions have worsened in recent years and desperately need answers to their problems.