More resilient economic growth than its peers

Guatemala will continue to stand out from its neighbors with sustained growth thanks to public investment plans and remittances from expatriates in the US. The low level of unemployment will drive these remittances among the Latino population in the US. These flows should support their consumption, representing around 30% of household income on average, which accounts for 85% of GDP. Given the high poverty level, particularly in rural areas affected by two hurricanes at the end of 2020, the increase in social spending in the 2022 budget and aid to cope with rising food and energy prices will mainly support the consumption of necessities. Inflation will remain lower than in neighboring countries. It is expected to reach the upper limit of the central bank’s target window (4+/- 1%) in 2022 or even breach it slightly if global inflationary pressures do not decrease. This suggests a further rise in the policy rate after the increase from 1.75% to 2% at the end of May 2022. However, the increase is likely to be contained, and its effect on private sector credit growth is limited, as President Giammattei has resumed implementing his pro-business policy agenda. Expanding the free trade areas in May 2021 could reverse the downward trend in activity in these areas over the past few years and attract new foreign investors. Despite an expected slowdown in the US, US activity should continue to benefit the country’s leading sectors, notably agriculture, food processing, and chemicals. The agricultural sector will benefit from a favorable base effect following a more challenging year in 2021 because of the bad weather in late 2020. Public investment in infrastructure under the 2022-2024 government plan should benefit the construction sector. The tourism sector accounts for around 10% of GDP and is expected to continue its slow recovery as travel restrictions in European countries and the US is lifted.

A healthy budget and a small current account deficit

The 2022 budget includes fiscal stimulus, resulting in an increase in the deficit compared to the 2021 budget, a replica of the 2020 budget, following the rejection of the initial draft. The bulk of its financing should come from budgetary revenues, expected to increase following efforts to improve its collection. After reaching their lowest historical level in 2019 (11.5% of GDP), these revenues are growing. However, the sustainability of this increase is still being determined, depending on the success of the planned reforms. The rest of the financing is expected to come from bond issuance at relatively low rates on the international markets (3.7% in the last sovereign bond issue in September 2021). External borrowing will complete the picture, notably from multilateral lenders and the US for specific development projects. Public debt will remain primarily contained, particularly low by regional standards.

Traditionally in surplus, the current account should post a small deficit. The balance of goods deficit will widen due to a more robust demand for capital goods to support the activity and the rise in energy and food prices. The dynamism of chemicals, agricultural (sugar, coffee, pineapple), and textile exports will only partially compensate for this widening. The balance of services should also remain in deficit, as the tourism sector has yet to reach its pre-crisis level. The income balance will show a smaller surplus with an increase in the repatriation of dividends from foreign companies and slower growth in expatriate remittances (13.6% of GDP in 2019). However, this account deficit should not threaten the foreign exchange reserves, equivalent to 8 months of imports at the end of 2021. These comfortable reserves will support the quetzal, which will remain overvalued in real terms, affecting the competitiveness of exports.

A still fragmented political landscape

Despite a high popularity rating when he took office in January 2020, Alejandro Giammattei’s ability to act has been limited by the political fragmentation within the assembly. His party, Vamos, has only 16 of the 160 seats in Congress, which is divided among ten parties. This implies the formation of coalitions on a case-by-case basis to adopt any reform. The success of these coalitions is likely made increasingly difficult by the approach of elections scheduled for 2023, with opposition parties possibly seeking to slow the pace of reform further. This is compounded by growing popular discontent since the pandemic’s start, which was expressed at the end of 2020 around adopting the 2021 budget. Considered too non-transparent and too oriented towards infrastructure investments to the detriment of social programs, the budget was finally abandoned due to the scale of the protests. In this context, the issue of 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 implementing a genuine anti-corruption strategy. The migration issue will also remain at the center of the debate, as hopes of a less strict policy from the Biden administration have encouraged departures in 2021. The US Supreme Court’s ruling on the need for these migrants to wait for a response to their asylum claims on the Mexican side of the border could change this trend.