Guatemala: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|C||The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.|
Growth proves resilient driven by US demand
In 2016, growth should reach a comparable level to that of 2015, driven mainly by increased US demand which is boosting foreign trade, as well as by household consumption. Manufacturing exports (59% of export sales), the textile and clothing sector in particular, and agricultural products, should feel the benefits of higher demand in the United States (the leading trading partner) and in its neighbors (in particular El Salvador and Honduras), which are also feeling the benefits of the economic upturn in the United States. Household consumption will remain strong thanks to increased remittances from migrants and a slowing in inflation. There is also likely to be an increase in private investment, in the manufacturing sector in particular. The lack of cohesion within the political class and a potential revival of social disorder could however undermine investor confidence. The extent of the political fragmentation is also hampering public investment projects, with the tender calls being postponed on a regular basis. Stability in oil and food prices should help limit inflation in 2016. Upward pressure on food prices cannot however be excluded because of the possibility of the country suffering as a result of the El Niño climatic phenomena during the year.
The weakness of budgetary resources and the slowness of decision making will continue despite new government
In power since January 2016. President Jimmy Morales and his government are expected to continue with the former president's economic policy aimed at stimulating growth whilst maintaining macroeconomic stability. The new government does, however, face a number of challenges. Firstly, the lack of a majority and political fragmentation within Congress is likely to slow the implementation of the economic and social reforms required for the country’s development. In addition, the resources for public action are limited because of the low level of revenues (11% of GDP). Although efforts have been made to boost these, such as the tax reforms approved in 2012 intended to bring in additional revenues worth 1.5% of GDP, widespread corruption and incompetent management of public agencies (in particular customs and taxes) continue to undermine State revenues. This revenue shortfall significantly reduces the government’s options in terms of investment and the fight against poverty, a situation in which over half of the population still finds themselves.
External accounts depend on US demand
The foreign trade deficit is at the origin of the current account deficit. This is expected to hold fairly steady in 2016: The growth in manufacturing exports (textiles and clothing in particular) to the United States (almost 60% of export sales) will partly offset growth in imports (fuel. consumer goods and capital goods). The services deficit is likely to shrink given the growth in tourist income and the reduction in the cost of transport for goods as a result of lower oil and gas prices. The continued local re-investment of the profits earned by foreign companies, specifically in export focused manufacturing industries (maquilas), has helped stabilize the revenue deficit. Remittances from workers, mostly living in the United States, should increase and help finance the trade deficit, together with the expected influx of direct foreign investments in 2016.
The President’s lack of political experience together with no majority in congress could hinder the adoption of reforms in the short term
The resignation and arrest in September 2015 of the former president. Otto Pérez Molina (2012-15) of the Partido Patriota (PP), accused of corruption, worked in favor of a political outsider and comedian, Jimmy Morales, a member of the Front de Convergencia Nacional (FCN). He won the second round of the Guatemalan presidential election on 25 October 2015 with an overwhelming victory (68.5% of votes) over his rival Sandra Torres of the Union Nationale de l’Espérance (UNE). Taking up office as of January 2016, the new President, who made fighting corruption his key campaign focus, will need to negotiate alliances in Congress, including with parties tainted by corruption scandals (PP and Lider in particular), which he has refused to do so far. The party of the President (FNC) has only 11 of the 158 seats in congress, compared to 46 for Lider, 33 for UNE and 18 for PP. This political fragmentation could prevent the future adoption of economic and anti-corruption reforms, especially as the lack of political experience on the part of the President constitutes an additional obstacle. The risk of popular unrest such as that which precipitated the departure of ex-president Molina remains high.