Guatemala: Risk Assessment
Country Risk Rating
Business Climate Rating
- 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
- Social and political instability
- Poor infrastructure
- Vulnerable to external shocks (natural disasters and commodity prices)
- Heavily reliant on low value-added industry and expatriate remittance flows
- Low tax revenues
- Rural poverty, inequalities, under-employment, informal economy, ethnic divisions
- Security issues related to drug trafficking
A more resilient economy than that of its neighbors
As the country least affected by the pandemic-fuelled recession in Central America, Guatemala will return to growth in 2021 with stronger fundamentals than its neighbors. Private consumption will remain the mainstay of domestic demand (88% of GDP in 2019) supported by expatriate remittances (14% of GDP) from the United States. The catch-up effect observed in these currency flows during the second half of 2020, after they came more or less to a standstill during the U.S. lockdown, is expected to fade in 2021. Unemployment is expected to decline more slowly among the U.S. Latino population than for the rest of the population. Accordingly, these flows are not expected to reach the record growth rates seen in 2019. Non-renewal of assistance programs set up in 2020 for the poorest households will contribute to weakening demand from these households. Inflation will remain low, at the bottom end of the central bank's target window (4 +/-1%), with oil prices still moderate. This should lead the central bank to continue its accommodative monetary policy, holding the policy rate at 1.75% to support the recovery. Investors are likely to remain cautious, held back by the business environment, which remains poor pending the reforms under the recovery plan, and worldwide uncertainty. External demand should see some recovery, despite being constrained by weaker U.S. demand, particularly for clothing. External demand for agricultural products should be more resilient. Public demand is expected to grow strongly as part of the stimulus package in the 2021 budget. The plan’s focus on infrastructure (60% of planned investments) should benefit the construction sector, with five multi-annual road and port projects set for implementation. The agricultural sector, which employs 30% of the labor force, should see strong levels of activity, supported by demand for coffee, sugar, and cardamom. However, it will remain highly exposed to climate risk. Activity in the manufacturing sector will grow to a lesser extent, with the clothing sector constrained by U.S. demand. The maquilas, with their focus on textile, pharmaceutical, and agri-food production, will be the most affected, as they produce mainly for the United States. The tourist sector (8% of GDP) will still be too uncompetitive and will remain in recovery mode, with flows from Europe and the United States kept in check by persistent health fears. An uncontrolled resurgence of the pandemic, either in the country or among its main trading partners, could affect this scenario.
The external and financial situation remains favorable
The 2021 budget plans for another substantial deficit to finance the recovery plan. With one of the lowest revenue collection rates in the region, the investment plan will be financed by debt. Funding will be provided through government bonds and multilateral loans. Multilateral loans have been obtained from the IMF, the Inter-American Bank for Economic Cooperation, the Inter-American Development Bank, and the World Bank. Thanks to these loans, Guatemala’s debt will remain largely under control.
Looking at the external accounts, the trade deficit is expected to increase, with the recovery in imports set to exceed that of exports. The revival of manufacturing production will increase demand for imported intermediate products, while higher oil prices will likely push up the import bill. On the export side, growth will be stymied by weakness in the clothing sector, despite the good performance expected from the agricultural sector. The balance of services should remain in the red as visitor numbers remain low. Expatriate remittance flows should largely cover the twin deficits, but the end of the catch-up effect in late 2020 will cause the current account surplus to narrow. The surplus, in combination with multilateral loans, will allow further consolidation of foreign exchange reserves, which covered the equivalent of ten months of imports in October 2020. These reserves will maintain the stability of the quetzal.
The political landscape remains fragmented as the president’s popularity wanes
Since taking office in January 2020, Alejandro Giammattei of the center-right Vamos party has faced a highly fragmented political landscape in Congress, making lengthy political negotiations necessary for any reform. His party has only 16 seats out of 160 in the Assembly and the president’s popularity has been severely affected by his handling of the COVID-19 crisis, which has been widely criticized, with only 30% of people expressing a favorable opinion in July 2020. The issue of corruption is still very much present, while the 2021 budget has been criticized for its lack of transparency.
On the international scene, the migration issue will remain at the forefront of discussions. Negotiations on this subject with the United States in the context of the “safe third country” agreement signed in 2019 will be heavily shaped by the outcome of the U.S. elections. On the same theme, discussions at the regional level will be key, with caravans of Honduran and Salvadoran migrants transiting through the country on their way to the United States.