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Guatemala: Guatemala Economy Profile 2012

2012/03/13

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Guatemala Economy Profile 2012

The Guatemalan economy was negatively affected by the global crisis, but there are signs that the economy is beginning to recover. After growing 5.8 percent during 2006–07, on average, economic growth decelerated to 4.0 percent in 2008 and continued to slow down in 2009. The global crisis affected the Guatemalan economy through a decline in exports, remittances, tourism receipts, and net private capital inflows. Annual inflation fell to
-0.6 percent in October, from 9.4 percent at end-2008, reflecting weak demand and the decline in commodity prices. Despite the external shock, domestic and external stability have been preserved and the authorities are treating an 18-month Stand-By Arrangement as precautionary.2

The authorities’ economic policies in 2009 have aimed at safeguarding macroeconomic stability and mitigating the impact of the global crisis. The authorities’ strategy has consisted in adopting moderately countercyclical policies, maintaining exchange rate flexibility, advancing reforms to further strengthen the financial sector, and refocusing public expenditures toward social and infrastructure spending (as set out in the National Program of Emergency and Economic Recovery).

Fiscal policy has struck a reasonable balance between supporting demand and preserving public debt sustainability. The fiscal deficit of the central government reached 1.4 percent of gross domestic product (GDP) in January–September of 2009 due to a decline in revenues of about 7.5 percent and an increase in spending (mainly social and infrastructure expenditure). The government’s financing requirements were met through domestic bond issuance, use of government deposits at the central bank, and external loans from multilaterals. At end-2009, the central government deficit is expected to reach 3.4 percent of GDP, up from 1.6 percent of GDP in 2008.

Monetary conditions were eased gradually in 2009 to support the economic recovery and avoid disorderly adjustments in the exchange rate. As inflationary pressures eased, the central bank reduced its policy interest rate by 275 basis points to 4.50 percent (7.25 percent at end-2008). The nominal exchange rate has depreciated by 6½ percent since end-2008, contributing to cushion the impact of the global crisis. The central bank has intervened occasionally to smooth exchange rate volatility.

Despite the economic slowdown, the financial sector has remained sound. In the face of the global crisis, several measures were adopted to reduce the risks to the financial system, including continuous onsite supervision, temporary and enhanced liquidity provisioning mechanisms, and tighter provisioning requirements. While nonperforming loans have risen and profitability declined, liquidity and solvency ratios have remained adequate. As banks’ deposits are growing and credit is stagnant, overall liquidity is ample, inducing banks to repay foreign credit lines.

The recovery of the Guatemalan economy has continued to firm up. While the natural disasters that hit the country in late May had a negative impact on the economy, the monthly indicator of economic activity (IMAE) has continued to accelerate and inflation remains low (4.1 percent year-on-year growth, as of end-July). Growth in exports and imports is also accelerating, remittances have started to recover, and international reserves are above the end-2009 level. The fiscal deficit of the central government reached 0.9 percent of annual GDP during the first half of 2010, 0.6 percent of GDP below the program’s target. The solvency and asset quality of the financial system remain adequate, and credit to the private sector in quetzales is gradually picking up.

The near-term outlook remains positive. Economic growth in 2010 and 2011 is projected at around 2½ percent, and inflation is expected to remain within the target of 5 percent plus/minus 1 percentage point set by the Monetary Board. There is limited space to implement expansionary macroeconomic policies. The underlying fiscal deficit (i.e. without reconstruction spending) is projected at 3.1 percent of GDP in 2010 (compared to 3.1 percent of GDP in 2009), even though the overall deficit could increase up to 3.4 percent of GDP due to the damages inflicted by the recent natural disasters that may cause emergency and reconstruction expenditures to increase. It is important that the deficit starts declining in 2011 to safeguard public debt sustainability and enable the implementation of countercyclical policies in the future. Monetary policy is expected to remain vigilant, and the stance tightened if inflation forecasts deviate from the target set by the Monetary Board.

Performance under the precautionary Stand –By Arrangement with the IMF has continued to be very strong. The authorities met all quantitative performance criteria for end-June 2010 and annual inflation stayed within the inner consultation band set in the program.

The authorities’ policy response to the crisis, supported by the IMF’s Stand–By Arrangement, has proved effective. The government’s strategy to treat the external resources from the Stand-By Arrangement as precautionary in order to shield the economy from external shocks helped preserve confidence, maintain stability, and protect the most vulnerable groups. A moderately countercyclical fiscal policy contributed to the recovery and a cautious monetary policy kept liquidity in line with financial sector’s needs without affecting inflation expectations.

The authorities have indicated that they will continue to treat the Stand–By Arrangement as precautionary until its completion on October 21, 2010. The mission expects that the IMF Executive Board will consider the fourth and final review of the Stand–By Arrangement in late-September 2010.