Guatemala
Request for Stand-By Arrangement-Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Guatemala
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International Monetary Fund
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Publication Date:
12 May 2009
eISBN:
9781451816679
Language:
English
Keywords:
ISCR; CR; fund; Guatemala; inflation-targeting framework; policy; banking sector; current account; central bank; foreign currency; real interest rate; Global; short-term debt
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This paper discusses a request from the Guatemalan authorities for an 18-month Stand-By Arrangement (SBA) with total access of SDR 630.6 million (about US$951 million). Guatemala has a strong track record of macroeconomic stability. The economy is open and hence vulnerable to external shocks. The authorities have taken a number of upfront measures to mitigate the impact of the external shock and preserve macroeconomic stability. The program will support the authorities’ policies and provide insurance against significant downside risks.

Abstract

This paper discusses a request from the Guatemalan authorities for an 18-month Stand-By Arrangement (SBA) with total access of SDR 630.6 million (about US$951 million). Guatemala has a strong track record of macroeconomic stability. The economy is open and hence vulnerable to external shocks. The authorities have taken a number of upfront measures to mitigate the impact of the external shock and preserve macroeconomic stability. The program will support the authorities’ policies and provide insurance against significant downside risks.

I. Background

1. Guatemala has a strong track-record of macroeconomic stability. Structural reforms, prudent policies, and a favorable external environment led to an acceleration of growth above historical averages and higher private investment in the last few years. Fiscal policy has been strong, with deficits broadly at debt-stabilizing levels and significant progress on tax administration, while good public debt management led to longer maturities and declining debt dollarization. Inflation remained mostly in single digits, though it increased rapidly since mid-2007, to a large extent as a result of the global commodities shock. The recent reversal in commodity prices, however, has helped bring down inflation sharply.

2. The economy is open and hence vulnerable to external shocks. Linkages, predominantly to the U.S., operate through three main channels—trade, remittances, and capital flows. While public sector external financing requirements are low (2.4 percent of GDP), recent data releases show large private sector external financing requirements, implying a gross external financing need (current account deficit plus total debt amortization) of 16¼ percent of GDP for 2009, above the median for emerging markets. A large NIR stock (90 percent of short-term external debt on remaining maturity basis and 34 percent of M2 at end-2008) provides an important buffer.

3. The banking sector has consolidated after tensions in 2006 and 2007. At that time, two banks representing broadly 10 percent of the system failed and were resolved effectively, with little cost to the public sector. Since then, bank consolidation has increased the resilience of the system as a whole, with the capital to risk weighted assets ratio averaging 13.5 percent, while system-wide liquidity remains high at 40 percent of deposits at end-December 2008. Still, areas for further improvement remain in regulation, supervision, and bank resolution. Risks in credit portfolios are related to loan dollarization, credit concentration, and low levels of provisions. Pockets of illiquidity and linkages to offshore banks are also sources of risks, although offshore operations are gradually decreasing in relative size.

4. Rapid credit growth during 2006–2007 included a build-up of currency risk on private sector balance sheets. Aided by low dollar loan rates and a (historically) stable currency, credit in foreign currency gradually increased, including to borrowers operating in nontradable sectors.

Foreign Currency Credit by Economic Activity.

Share in total foreign currency lending portfolio (in%)

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Source. Superintendency of Banks of Guatemala and Fund staff estimates.

5. Reducing Guatemala’s high poverty and inequality remains a key medium-term challenge. The stable macroeconomic environment and moderate growth have not been sufficient to make substantial inroads into poverty reduction, with 51 percent of the population living below the poverty line in 2006, well above countries with similar per-capita GDP. Social spending, as well as public spending on infrastructure, has been constrained by the low tax ratio, and private investment is deterred significantly by high levels of crime.

II. Recent Developments

Signs of the deceleration of economic activity are becoming more evident and while financial conditions remain stable, they are becoming tighter. Inflationary pressures have receded as commodity prices declined and domestic demand weakened.

6. Growth: Real GDP growth is estimated to have slowed to 4 percent in 2008, from 6.3 percent in 2007. The decline has been driven by domestic demand, particularly investment, as external demand remained robust through most of 2008. Growth is projected to decelerate to 1 percent in 2009 as consumption slows significantly, with important downside risks (Figure 1).

Figure 1.
Figure 1.

Guatemala. Recent Developments

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A001

Sources: Bank of Guatemala; and Fund staff estimates.
uA01fig01

Real GDP Growth, Contributions

(in percent)

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A001

7. Inflation: Annual inflation continues to decline, from its peak of 14 percent in mid-2008, to 9.4 percent by year-end, and further to 5 percent in March 2009. The decline in inflation has become firmly entrenched: various measures of core inflation have declined consistently in the last quarter of 2008; inflation in services and nontradables has moderated substantially; and inflation expectations are declining rapidly.

8. Balance of payments: The current account narrowed to 4¾ percent of GDP in 2008, already signaling a slowdown in domestic absorption, and helped by the reversal of the negative terms-of-trade shock from commodity prices in the second half of last year (Table 3 and Figure 2). Since the last quarter of 2008, remittances have been decelerating rapidly, and declined by close to 10 percent in the first two months of 2009. By January, annual export growth, which had remained robust until the third quarter of 2008, slowed to 1 percent while imports declined markedly, by 20 percent. Private capital inflows have slowed, but nonetheless net international reserves increased to US$4.8 billion by end-March 2009 due to recent disbursements of public external financing.

Table 1.

Guatemala: Selected Economic and Social Indicators

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Sources: Bank of Guatemala; Ministry of Finance; and Fund staff estimates and projections.

Average annual change; a positive change indicates an appreciation.

Includes changes in inventories.

Table 2.

Guatemala: Monetary Sector Survey

(Stocks in millions of quetzales)

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Sources: Bank of Guatemala; and Fund staff estimates.

Program definition nets out foreign currency liabilities of the central bank to financial institutions.

Includes open market placements with the private sector (financial and nonfinancial).

Table 3.

Guatemala: Summary Balance of Payments

(In millions of U.S. dollars)

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Sources: Central Bank of Guatemala; Ministry of Finance; and Fund staff estimates and projections.
Figure 2.
Figure 2.

Guatemala External Sector

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A001

Sources: Bank of Guatemala; and Fund staff estimates.

9. Fiscal sector: The strength of the fiscal position was maintained during 2008, with the central government deficit declining to 1.7 percent of GDP, despite a real decline in tax revenue (Figure 3 and Table 4). The drop in revenue has become more severe in early 2009, and while there has been a sharp contraction in the tax base (40 percent of tax collections come from imports), there are also structural changes, including lower VAT productivity due to earlier excessive withholding and some increase in informality, and a collapse of oil royalties associated with declining production and prices.

Figure 3.
Figure 3.

Guatemala. Fiscal Sector, February 2009

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A001

Sources: Ministry of Finance; and Fund staff estimates.
Table 4.

Guatemala: Combined Public Sector Balance

(In percent of GDP)

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Sources: Ministry of Finance, Bank of Guatemala, and Fund staff estimates.

10. Financial sector: Amid greater concern about the quality of credit and slowing funding sources, including a small decline in external credit lines in the last quarter of 2008, banks are rebalancing their portfolios toward liquid assets and away from loans. As a result, credit to the private sector increased only 11 percent in 2008 (26 percent in 2007). Domestic interest rates have risen about 100 bps since the beginning of 2008 (Figure 4). There are no signs yet of significant deterioration of bank portfolios (Table 5).

Figure 4.
Figure 4.

Guatemala: Weekly Financial Sector Developments

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A001

Source: Banguat and Superintendency of Banks.
Table 5.

Guatemala: Indicators of Vulnerability

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Sources: Bank of Guatemala; and Fund staff estimates.

Guatemala. Banking Sector Balance Sheet, 2006-2008

(in millions of US$)

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Source: Superintendency of Banks and Fund staff calculations

III. The Authorities’ Program

A. Objectives

11. The authorities have been proactive in addressing the effects of the global crisis through a comprehensive policy response. Their strategy, whose implementation started already in 2008, is centered on (i) a moderate fiscal stimulus to support domestic demand, financed to a large degree with external resources from multilaterals to minimize crowding out of the domestic private sector; (ii) a monetary policy focused on consolidating the decline in inflation and a flexible exchange rate to facilitate economic adjustment; (iii) a strengthening of financial sector policies to increase the resilience of banks under adverse scenarios and enhance the banking sector safety net and resolution procedures; and (iv) a refocusing of public expenditures toward strengthening social spending and labor-intensive public works.

12. To complement these efforts, the authorities are now aiming to build a higher external liquidity cushion, to reduce risks from sudden changes in the current and capital account. There is concern about the reduced flows of remittances and exports and the risk of a significant slowdown of private capital inflows, factors that may require real and financial adjustments. Fund support is a key element of the strategy to face these risks, not only through the contingent financing provided under the proposed SBA, but also through the endorsement of the authorities’ program, which will help maintain investor confidence. Additional contingent financing to protect the banking sector from sudden cuts in external credit lines is being discussed with the IDB. At the same time, public sector financing policy aims at prefinancing government operations, to preserve the existing liquidity cushion (deposits at the central bank).

B. Macroeconomic Framework

13. The program envisages a gradual economic recovery and a declining inflation rate, with improvements in the external current account, but lower private capital inflows. Global conditions are expected to improve in the first half of 2010, in line with the latest WEO projections, although there are important downside risks both in terms of the size of the slowdown and its duration. Thus, 2009 will likely be marked by declining remittances and lower capital inflows, but also by the sharp decline in oil prices, helping to improve the current account. Remittances could decline further, due to difficult employment conditions in the U.S., and global risk aversion may trigger capital outflows, putting pressure on banks’ liquidity. Risks to the inflation projection are associated with the volatility of commodity prices and pass-through effects from currency movements.

C. Fiscal Policy

14. The central government deficit is projected to increase to 2.8 percent of GDP in 2009, driven by substantially weaker revenues and moderately higher spending. Expenditure is envisaged to increase by 0.4 percent of GDP to 14.1 percent of GDP—in line with the average for 2004–08—with social spending growing by about 0.6 percent of GDP. The tax revenue ratio is expected to fall substantially, by 0.8 percent of GDP, as a result of both cyclical factors and structural declines of VAT (0.5 percent) and oil royalties (0.3 percent).

Key Macroeconomic Indicators Under Baseline Scenario

(in percent of GDP, unless otherwise indicated)

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15. The authorities have shifted the financing of the budget deficit toward external sources, almost exclusively from multilaterals. A multi-year external loan package of about $1 billion was approved by Congress in January 2009.1 This measure assures the financing of a substantial part of the deficit and lessens potential crowding out of private sector credit. As revenue has weakened substantially in the last few months, the authorities plan to present to Congress an additional financing package, which would include new external financing from multilaterals (about $160 million) and greater domestic bond issuance.2

16. As the economy recovers, the increase of the fiscal deficit is expected to be largely reversed by 2011, ensuring sustainable debt levels. With expenditure remaining constant in terms of GDP, the projected recovery of revenue, including due to an increase in indirect taxes (see paragraph 17), would bring the deficit down to 2 percent of GDP over the medium term. Nonfinancial public sector debt is expected to remain low (slightly above 25 percent of GDP by 2014) and on a sustainable path (Table 8).

Table 6.

Implementation of the Main FSAP Update Recommendations

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Table 7.

Guatemala: External Debt Sustainability Framework, 2004–2014

(In percent of GDP, unless otherwise indicated)

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Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S. dollar terms, g = real GDP growt e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (b

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium-and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Table 8.

Guatemala: Public Sector Debt Sustainability Framework, 2003–2014

(In percent of GDP, unless otherwise indicated)

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Central Government.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as - g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

17. The authorities will pursue improvements in tax policy and administration to offset revenue losses. Congress has already made permanent a temporary tax on net assets (yielding about 1 percent of GDP), reducing downside risk to tax collections. A 0.2 percent of GDP in revenue is expected to result from a package of indirect revenue measures, currently under discussion in Congress and expected to be approved before end-2009 (MEFP paragraph 10). In parallel, the tax authority, SAT, is implementing a medium-term plan (elaborated with support of IMF technical assistance) to achieve a consistent decline of tax evasion rates (MEFP paragraph 11). While recognizing the need for a higher tax ratio to strengthen the provision of key public goods, the authorities regretted that the current economic circumstances would make even more difficult to garner enough political support for a significant tax reform (as originally envisaged by the government in early 2008).

18. If the tax ratio falls further, financing constraints would limit the room for maneuver and require expenditure adjustment. The authorities are working to identify nonessential spending programs to be ready in case cuts become inevitable. Before submission of the 2010 budget to congress, staff will discuss with the authorities the size of structural revenue losses, to agree on revenue and spending measures that may be needed in 2010 to maintain public debt on a stable path (MEFP, paragraph 9).

D. Monetary and Exchange Rate Policy

19. The central bank has started to ease monetary policy in a measured manner. Given the expected continued decline in inflation, the contraction in real monetary aggregates in 2008, and downside risks to growth, the monetary board has reduced the policy rate 100 bps since end-2008 to 6.25 percent. For 2009, inflation is targeted to decline to 5½ percent, with a tolerance margin of +/- 1 percent. To this end, the Monetary Board will set changes to the policy interest rate, as needed, based on the analysis of current developments and added emphasis on forward-looking variables (MEFP paragraphs 13 and 14).

20. The authorities will seek to strengthen their inflation-targeting framework and have set a medium-term target of 4 percent with a tolerance margin of +/- 1 percent. Steps have been taken to promote the development of secondary markets for public debt, supported by IMF technical assistance, to obtain market price signals that will better guide monetary policy (MEFP paragraph 15).

21. Changes to the foreign-exchange intervention rule have allowed greater flexibility of the exchange rate, increasing the effectiveness of monetary policy and facilitating economic adjustment. The central bank will continue intervening symmetrically in the foreign-exchange market (up to US$24 million daily) when the exchange rate deviates from its 5-day moving average by 0.75 percent (previously 0.5 percent).3 Since September 2008 the exchange rate has depreciated 8¼ percent, with limited intervention ($88 million, or 2% of NIR) over the last 5 months.

22. Continued deterioration of the external outlook, however, would challenge the conduct of monetary and exchange rate policies, possibly requiring a tighter monetary stance and/or more foreign-exchange intervention. In light of this risk, the authorities are proceeding with monetary easing only gradually and, while committing to the foreign-exchange intervention rule, they reserve the right to conduct additional discretionary intervention to avoid sudden movements of the exchange rate.

E. Financial Sector Policy

23. The domestic banking sector has limited exposure to the sources of the global financial crisis. The participation of foreign banks is small, with a market share of 8 percent of deposits, and banks have not invested in high-risk instruments related to the U.S. mortgage market. Moreover, the financial system underwent significant consolidation in recent years, with weaker institutions being absorbed by more solid ones. A large offshore sector, however, has been a source of concern, due to difficulties in effectively supervising institutions incorporated in foreign jurisdictions. While liquidity, solvency, and profitability have been maintained (Table 5), the tightening of financial conditions and the expected deceleration of economic activity are set to put some pressures on the banking sector, increasing nonperforming loans and reducing liquidity.

24. Starting in 2008, the authorities have addressed the most pressing financial risks (MEFP, paragraph 18), focusing on:

  • Enhancing banking supervision, with continuous on-site supervision since mid-2008 and regular dialogue with banks’ Boards of Directors to detect risks earlier and discuss contingency plans.

  • Ensuring adequate bank liquidity. The central bank introduced temporary measures to provide liquidity in domestic and foreign currency, by flexibilizing reserve requirements and introducing reverse repos in foreign currency (MEFP paragraph 18). The overall assistance via reverse repos has been below the established limits for the system as a whole (US$290 million), averaging less than US$100 million.4 These short-term measures would be rolled over, if needed, within the limits necessary to avoid disequilibrium in the money market.

  • Bolstering banks’ solvency. Provisioning requirements have been changed, requiring a gradual increase to ensure full-provisioning of NPLs by mid-2011. This measure addresses a long standing concern, as the current provisioning ratio still stands at 70 percent of NPLs, below the averages of Central and Latin America. In addition, CHN (the state-owned mortgage bank) received a cash capital injection of Q$200 million by the government, which allowed the bank to meet the minimum capital ratio.

25. The program now seeks to fortify the financial system through a further strengthening of regulation and supervision and enhancing the banking sector safety net and resolution procedures. The superintendency of banks is working on changes to liquidity and credit risk management regulations, which will induce banks to compute liquidity gaps at different maturities and make them internalize risks in the dollar-denominated loan portfolio arising from lending to borrowers without foreign-currency earnings (structural benchmarks, MEFP paragraph 19 and Table 3). Consolidated supervision of financial conglomerates with regional operations will be strengthened through enhanced coordination with foreign supervisors.

26. A key structural measure is the submission of amendments to the banking laws, by June 2009 (structural benchmark, MEFP paragraph 20 and Table 3). Key provisions include: (i) reducing risks from offshore operations by limiting retail operations, eliminating the obligation of the offshore’s domestic partner to cover capital deficiencies, and cooperating closely with home supervisors to ensure corrective action of solvency concerns; (ii) reducing connected lending, by setting a limit to the aggregate exposure with connected parties; (iii) enhancing enforcement powers of the superintendency, by allowing the supervisor to request corrective action (i.e., limits to dividend distribution) when bank solvency is threatened; and (iv) strengthening the instruments and size of the banking sector safety net, including giving the central bank larger room for lender-of-last-resort functions and increasing the deposit insurance premium. To improve resolution procedures, the authorities will propose additional options for the transfer of assets of failed banks, quick licensing of top-rated foreign institutions to participate in resolution, and possibly, allowing the bank recapitalization fund to supplement capitalization of banks by the private sector, should the need arise. With the approval of the amendments to the banking law, Guatemala would make important progress toward the adoption of FSAP recommendations (Table 6).

F. Social Protection and Growth Policy

27. The authorities’ social protection policy aims at enhancing current programs to offset the effect of the crisis on the neediest. Social spending will increase from 4.4 percent of GDP in 2008 to 5.0 percent of GDP in 2009. To address extreme poverty, emphasis will be placed on four flagship government programs. A key conditional cash transfer program initiated in 2008 (Mi familia progresa) will be expanded to reach 500,000 families and 0.3 percent of GDP in 2009 (MEFP paragraph 22).

28. The authorities are putting in place a number of policies to enhance productivity and raise investment over the medium term. High crime rates and energy costs, alongside low labor force productivity are key constraints to private sector activity. The authorities are addressing these areas with policies to develop infrastructure, improve access to credit, deepen economic integration—free trade agreements (FTAs) ratified with Colombia and Panama will take effect in 2009 and congress is considering the ratification of a FTA with Chile—and seek improvements in the corporate restructuring framework (MEFP, paragraph 24).

IV. Risks

29. Risks to the outlook are significant and stem from a possible sharper-than-expected deterioration of the external current or capital accounts.

  • Guatemala has large external financing requirements. The current account deficit plus total debt amortization is estimated at 16.2 percent of GDP in 2009. A large financing gap (around 2.5 percent of GDP) could arise under a scenario where remittances decline a further 5 percent relative to baseline, FDI inflows return to 2005 levels, and a decline in rollover rates on the stock of short-term external private sector debt.

  • In a more severe downturn, especially if coupled with some depreciation of the currency and capital outflows, the solvency and liquidity of the banking sector may be reduced, as NPLs would increase and liquidity outflows could affect smaller banks.

Guatemala: Gross External Financing Requirements

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Includes errors and omissions.

30. The program is designed to mitigate those risks. The resources made available to the central bank under the SBA would deter speculative portfolio shifts and a sharp depreciation of the currency. Structural measures are focused on strengthening the banking sector.

V. Program Access, Conditionality, and Capacity to Repay the Fund

A. Access

31. The proposed 18-month SBA would involve exceptional access and upfront phasing.5 The baseline projection for 2009–10 does not envisage an external financing gap and NIR ratios are projected to remain broadly stable. To face the risks to the outlook, total access is proposed at 300 percent of quota ($951 million or 2.5 percent of GDP), with a first purchase on program approval of 200 percent of quota, leading to access of 260 percent of quota during the first year of the program. The proposed access and frontloading of purchases are designed to strengthen the country’s ability to withstand external shocks and support the increased exchange rate flexibility. Guatemala’s quota (about US$320 million) is small relative to the average inflow of private capital witnessed in recent years and the proposed access is commensurate to potential balance of payments shocks.

32. Guatemala meets the four criteria of the exceptional access framework. There are potential risks in the current and capital accounts. Guatemala’s debt is low and debt dynamics are sustainable. While terms of access to private capital markets have worsened, access has not been curtailed, and staff expects that Guatemala will regain normal access during the program period. The authorities’ policy program is strong, as is their track record in maintaining macroeconomic stability (Box 1).

B. Program Monitoring and Conditionality

33. The conditionality of the program focuses on ensuring adequate macroeconomic policies and strengthening financial stability and bank resolution. Given the quantity and quality of the pre-emptive measures already taken by the authorities, the proposed program does not envisage prior actions. The arrangement would have quarterly reviews with test dates in March, June, September, and December, with a first test date in June 2009 and a first review in September 2009. Available statistics are adequate for program monitoring.

  • Quantitative performance criteria (MEFP Table 2) are being set initially for end-June and end-September 2009 (and indicative targets for end-December 2009), including: (i) a floor on the central government fiscal balance for 2009—equivalent to a deficit of 2.8 percent of GDP—with an adjuster for up to 0.2 percent of GDP if additional external financing is identified, (ii) a floor on NIR, securing an adequate liquidity buffer and assurance that the policy mix remains appropriate; and (iii) a continuous performance criterion on the nonaccumulation of external arrears.

  • An indicative floor is established on central government deposits at the central bank, which could serve as an early indication of difficulties in obtaining additional financing.

  • Consultation clause on inflation: a path for the expected annual inflation rate at the end of each quarter has been set. If annual inflation at these test dates deviates from the estimated inflation rate by more than 2 percentage points, up or down, a consultation with staff will be triggered. If inflation is more than 3 percentage points above the estimated rate at the test dates, a consultation with the Executive Board will be triggered prior to resuming purchases.

  • Structural Benchmarks (MEFP Table 3): Submission to Congress of amendments to the banking law and central bank charter by June 2009, and the elaboration of draft regulations on liquidity management and credit risk in foreign-currency loans, by end-December 2009.

C. Capacity to Repay the Fund

34. Guatemala’s capacity to repay the Fund is strong. Guatemala has no debt outstanding to the Fund and the proposed access will not affect significantly the level of total external debt (36 percent) nor its sustainability over the medium term. The recent GRA lending reform marginally increases Guatemala’s commitment fees but decreases its interest charges on potential drawings by up to US$3.2 million annually.

35. A safeguards assessment should be completed by the time of the first review (September 2009). The last safeguards assessment of the Bank of Guatemala was completed on August 9, 2002.

VI. Staff Appraisal

36. Guatemala’s economic performance has been solid in recent years but is now being affected by the global recession. Aggregate demand growth is slowing rapidly, due to falling remittances, lower export prices and demand, and lower capital inflows. Given close economic and financial ties with the region and the United States, downside risks are considerable.

37. The authorities’ economic program seeks to preserve macroeconomic and financial stability, mitigate the effects of the global crisis on economic activity, and strengthen social protection. Traditionally prudent fiscal and monetary policies now allow room for a moderate stimulus. The planned expansion of public spending is focused on labor-intensive public works and a strengthening of the social safety net. Building on recent progress and adopting lessons from their own experience, the authorities plan to strengthen financial sector policies, especially with regard to enhancing the banking sector safety net and resolution procedures.

38. Monetary policy should be focused on anchoring inflation at low levels. Staff supports the recent easing of monetary conditions, which is expected to continue in the coming months, in light of continued weakness of economic activity and falling inflation. Further easing should be gradual and the authorities should prevent that the short-term real interest rates turn negative. Efforts to promote deepening of secondary markets should help develop a yield curve and allow for price signals to better guide monetary policy.

39. The authorities’ commitment to exchange-rate flexibility is welcome. Greater exchange rate flexibility is increasing the effectiveness of monetary policy and will facilitate adjustment to external shocks. While the experience with rules-based intervention has been positive so far, staff supports occasional discretionary intervention to avoid sudden movements of the exchange rate, which could result in higher economic uncertainty given the levels of liability-dollarization and might lead to loss of confidence and portfolio shifts.

40. While the fiscal position is strong, the authorities need to focus on preventing erosion of the revenue base. The room for fiscal impulse is limited because of financing constraints, and deficits above program levels may erode confidence in the capacity of the authorities to reverse the widening of the deficit over the medium term. Thus, the authorities should be prepared to prioritize spending if downside risks to tax revenue materialize. The deterioration of the fiscal position in 2009–2010 will need to be reversed in subsequent years, once tax revenue rebounds, to maintain public debt at safe levels.

41. The focused expansion of social spending is expected to have a strong impact on the neediest segment of the population, especially as remittances decline sharply. The conditional cash-transfer program, developed with support from the World Bank and the IDB, is expected to reach 500,000 families during 2009, securing school access and health services for children in the poorest municipalities.

42. Over the medium term, the need for a revenue enhancing tax reform remains. While there is room to improve efficiency and targeting of public expenditure, the effectiveness of social spending is limited by the low spending levels. Furthermore, greater provision of public goods—infrastructure, security, health, and education—is needed to increase productivity and investment and raise growth. A broader tax base will also reduce the instability of the tax ratio, enhancing the capacity to undertake a countercyclical fiscal policy.

43. The banking sector has become more resilient, but downside risks to the outlook call for continued and close monitoring of developments. The preemptive measures adopted by the authorities—continuous on-site supervision, enhanced liquidity mechanisms, gradually tighter provisioning requirements, and recapitalization of a public bank—are welcome. Planned regulatory reforms, including amendments to the banking law and regulatory changes, should be implemented decisively. To better assess the impact of the external shock on the banking sector, the superintendency of banks is improving stress-test methodologies.

44. The financial sector safety net should continue to be strengthened. Legal reforms aim at boosting the central bank’s lender-of-last-resort function and the deposit insurance fund. A number of changes to the banking resolution procedures will facilitate faster transfer of asset and liabilities of problem banks. Preparation to manage contingencies is adequate.

45. The medium term growth strategy is rightly focused. The authorities should continue promoting investment in human capital and infrastructure, while seeking benefits from increasing international integration. Social spending, especially in areas such as education and health, should be encouraged, and policies to improve security actively promoted. Increasing the private sector’s involvement in infrastructure investment through public-private partnerships will also help overcome capacity constraints in the public sector.

46. The level of access under the proposed arrangement will provide an additional liquidity cushion, while keeping Fund exposure manageable. Guatemala would be in a strong position to repay the Fund if it were to make all purchases under the proposed SBA. While there are downside risks to the program, particularly more severe balance of payments shocks and recession, those risks can be contained with decisive policy implementation and additional contingent external financing that the authorities may secure.

47. In view of the sound strategy and policies proposed by the authorities, staff supports their request for a SBA for SDR 630.6 million.

Exceptional Access Criteria

The proposed Stand-By Arrangement exceeds the annual normal limit of access to Fund resources. Fund policy allows for access in excess of normal limits (i.e., exceptional access), provided that the following four criteria are met: (i) The member is experiencing or has the potential to experience exceptional balance of payments pressures on the current account or the capital account, resulting in a need for Fund financing that cannot be met within the normal limits; (ii) a rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term; (iii) the member has prospects of gaining or regaining access to private capital markets within the timeframe when Fund resources are outstanding; and (iv) the policy program of the member provides a reasonably strong prospect of success, including not only the member’s adjustment plans, but also its institutional and political capacity to deliver that adjustment. Staff assesses that Guatemala meets all four criteria for exceptional access:

  • Criterion 1—Actual or potential exceptional balance of payments pressures. Guatemala has followed a strategy to offset the expected decline in private capital inflows with a substantial increase in flows from multilaterals (about $1 billion over 2009-2010). However, risks remain. Guatemala has large rollover requirements in the near term (about 12 percent of GDP), and a further decline in remittances, lower capital inflows, and lower rollover rates could create exceptional balance of payments pressures.

  • Criterion 2—Sustainable public debt position. Guatemala’s public debt stock is low (21 percent of GDP), and its dynamics are sustainable under a range of plausible shocks, including a severe exchange rate shock, given efforts over the past couple of years to reduce dollar-denominated debt. Guatemala has a strong track record of conservative fiscal policy, and, currently, there are no indications of any potential contingent liabilities of the government that could arise from private external indebtedness.

  • Criterion 3—Access to private capital markets. Terms of access to private capital markets have worsened since September 2008 (at least 150 basis points increase in the cost of external credit lines, a widening of 250 bps in sovereign spreads), but access has not been curtailed. Staff expects that Guatemala’s terms of access will become more favorable once global conditions improve.

  • Criterion 4—Strength of the policy program and capacity to deliver. Guatemala has a track-record of macroeconomic stability and the authorities have been proactive in responding to the effects of the global crisis. They have delivered on measures to bolster bank solvency, strengthen supervision, increase the flexibility of the exchange rate regime, reduce inflation, and prevent an erosion of the tax base by making permanent a previously temporary tax on net assets.

Figure 5.
Figure 5.

Guatemala: Financial Sector, January 2009

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A001

Sources: Banguat; and Superintendency of Banks.
Figure 6.
Figure 6.

Guatemala: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A001

Sources: International Monetary Fund, Country desk data, and Fund staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ A 5 percent of GDP shock to contingent liabilities is assumed.
Figure 7.
Figure 7.

Guatemala: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A001

Sources: International Monetary Fund, Country desk data; and Fund staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 30 percent occurs in 2007.
Table 9.

Guatemala: Indicators of Fund Credit 2006-2014

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Sources: Bank of Guatemala; IMF Finance Department; and Fund staff estimates.

End of period

Excludes IMF purchases.

Assumes a constant 1.47 percent rate of charge.

Excluding commitment charges.

Table 10.

Guatemala: Proposed Access, 2009–2010

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Sources: Executive Board documents; MONA database; and Fund staff estimates.

High access cases include all available data at approval and on augmentation for the 36 requests to the Board since 1994 which involved the use of the exceptional circumstances clause or SRF resources. Exceptional access augmentations are counted as separate observations. For the purpose of measuring access as a ratio of different metrics, access includes augmentations and previously approved and drawn amounts.

The data used to calculate ratios is the actual value for the year prior to approval for public and short-term debt, and the projection at the time of program approval for the year in which the program was approved for all other variables.

Defined as debt of the central government and debt guaranteed by the central government.

Attachment I. Letter of Intent

Guatemala City, April 13, 2009

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C., 20431

Dear Mr. Strauss-Kahn:

1. Guatemala’s economy has performed well in recent years. Sound macroeconomic policies and structural reforms have delivered high economic growth, a declining public debt-to-GDP ratio, and a stable external position, with international reserves rising to comfortable levels. Apart from a period of sharp increases in commodity prices, inflation has been low and stable. The global financial turmoil and the ensuing global recession, however, have tightened external financing conditions considerably, and our open economy has started to feel their impact. Against this backdrop, the Government of Guatemala is determined to continue implementing sustainable macroeconomic policies to safeguard macroeconomic and financial stability, while pursuing an agenda of reforms to achieve sustained high growth and poverty reduction over the medium term.

2. The attached Memorandum of Economic and Financial Policies (MEFP) presents the plans and policies of the authorities of Guatemala for 2009 and 2010. In support of this economic program, Guatemala requests a Stand-By Arrangement (SBA) from the International Monetary Fund totaling SDR 630.6 million (300 percent of quota), covering the period through October 21, 2010. Our intention is to treat the arrangement as precautionary. We expect that the SBA would support our commitment to continued sound macroeconomic policies, anchor investor confidence, and provide a larger liquidity cushion to face the downside risks in the global environment, if they were to materialize. The program summarizes the government’s announced policies and thus benefits from strong ownership and political support.

3. We believe that the policies described in the attached MEFP are sufficient to meet the objectives of our program, and stand ready to take additional measures that may be needed for this purpose. In this respect, we will maintain a close and proactive policy dialogue with the Fund, in accordance with Fund policies on such consultations. We will continue our close dialogue with IMF staff on our economic policies after the expiration of the arrangement, for as long as there are any outstanding purchases in the upper credit tranches. During the program, we will continue to comply with all obligations of Article VIII of the IMF’s Articles of Agreement.

4. Program implementation will be monitored through quarterly reviews, with the first review to be completed on or after September 15, 2009 and the second review on or after December 15, 2009. The phasing of access, performance criteria, and structural benchmarks under the program are set out in Tables 1–3 of the MEFP.

5. We authorize the IMF to publish this Letter of Intent and its attachments, and the related staff report.

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Attachments

Attachment II. Memorandum of Economic and Financial Policies for 2009–2010

1. Over the past several years, Guatemala has made progress in consolidating macroeconomic stability and in implementing important structural reforms. Reflecting this progress and favorable external conditions, the economy has been expanding at rates above historical records, averaging 4¾ percent in 2005–08. This outcome was attained without a deterioration of the underlying external and fiscal positions.

2. Volatile external conditions, however, are having a strong impact on the Guatemalan economy. Up until mid-2008, higher commodity prices put upward pressure on inflation and the external current account deficit. We reacted timely, tightening monetary conditions, enhancing exchange rate flexibility, and strengthening the social safety net, while maintaining a prudent fiscal stance. The global economic and financial crisis, however, is now changing the scenario significantly, and our economy has started to feel its impact, through a deceleration of economic activity and tightening of domestic financial conditions.

3. The Guatemalan economy is well prepared to face the adverse external outlook. As the global slowdown is likely to be protracted and significant downside risks still remain, we are adjusting our policies to minimize the domestic effects of the external shock and to be better prepared in case downside risks materialize. At the same time, we remain committed to addressing the medium-term development challenges facing Guatemala, and we will implement necessary reforms to ensure sustainable medium-term growth, continued progress in reducing poverty, and protection of the neediest.

I. Program Objectives and Strategy

4. Our program aims at safeguarding macroeconomic and financial stability. The deterioration in the global economic and financial environment will affect the Guatemalan economy through three main channels: a lower external demand for our exports combined with a decline in export prices, a decline in remittances, and a significant slowdown of private capital inflows. Despite the rapid decline in oil prices, which should provide important relief to the external current account, these three factors are likely to require real and financial adjustments. Our policies aim at minimizing the cost of economic adjustment while preserving financial stability and confidence in the policy framework. By implementing these policies, we aim at maintaining growth in a range between 1 and 2 percent in 2009 and 1.7–2.7 percent in 2010.

5. Our strategy is based on the following key pillars: (i) a moderate countercyclical fiscal policy to support domestic demand, financed largely through external resources to minimize crowding out the private sector; (ii) a monetary policy focused on reducing inflation and a flexible exchange rate to facilitate economic adjustment; and (iii) financial sector policies aimed at (a) strengthening bank regulation and supervision to increase the resilience of the banking system; and (b) enhancing the banking sector safety net and the effectiveness of bank resolution procedures. These macro-financial policies will be complemented with a refocusing of public expenditures to expand the social safety net and undertake labor-intensive public works. Over the medium term, we remain committed to increasing economic integration at the regional and global levels as a way to ensure efficient resource allocation and encourage growth.

II. Macrofinancial Policies

A. Fiscal Policy

6. Guatemala’s strong fiscal position provides space for a countercyclical fiscal policy. Prudent fiscal policy has been a key feature of Guatemalan economic policy, with the central government deficit averaging 1.8 percent of GDP in 2004–08. As a result, Guatemala boasts the lowest public debt level in the region, 21 percent of GDP. We seek to maintain the sustainability of fiscal policy over the medium term, protecting the room for maneuver of fiscal policy in the face of shocks.

7. Accordingly, a moderate fiscal impulse in 2009–10 is envisaged to prevent an excessive decline of domestic demand. Public expenditure will increase by 0.4 percent of GDP with respect to 2008, to 14.1 percent of GDP, to help offset the expected retrenchment of private consumption and investment. To maximize the impact on aggregate demand, the increase in public expenditure is focused on labor-intensive public works and social spending targeted to poor households (section II) with a large propensity to consume. Tax collections are expected to decrease in the short term, by about 0.8 percent of GDP with respect to 2008, due to a decline in imports (VAT on imports and customs duties account for about 40 percent of tax collections) and a decline in oil royalties related to lower oil prices and a secular reduction in production. As a result, the fiscal deficit of the central government could increase to 2.8 percent of GDP in 2009 and then decline to 2.6 percent of GDP in 2010. The deficit of the consolidated public sector, in turn, could reach 2.4 percent of GDP in 2009 and 2.2 percent in 2010. The envisaged gradual recovery of tax collections over the medium term and the maintenance of the expenditure to GDP ratio would yield sustainable debt dynamics, anchoring public debt at a safe level.

8. The larger deficits in 2009–10 will be financed mainly by external sources, mostly multilateral institutions. We have secured new loans for almost US$1 billion from the World Bank and the IDB, which would allow us to meet this objective. Our domestic financing strategy envisages net domestic debt placements of 1 percent of GDP in 2009 and of 0.6 percent of GDP in 2010, and a drawdown of deposits accumulated at the Central Bank of 0.1 percent of GDP in 2009 and 0.4 percent of GDP in 2010. We aim to conduct our financing policy with the objective of prefinancing spending, building liquidity cushions in the meantime. We will not incur external arrears at any time during the program period.

9. In the event economic developments require an adjustment of fiscal policy, our priority will be to protect social spending. The room for maneuver of our fiscal policy is not unlimited, and if downside risks materialize, we may need to adjust fiscal policy to maintain confidence. If tax collections come in lower than projected, we expect to finance up to 0.2 percent of GDP with additional external financing to avoid compressing expenditures in 2009. In the context of program reviews, we will analyze the need for compensatory measures, granting priority to social protection and labor-intensive public works.

10. Tax policy measures are being discussed to strengthen the revenue base, allowing for a sustainable expansion of government spending. Despite an increase of about 3 percent of GDP over the last 10 years, the tax ratio remains among the lowest in the region. We have reduced downside risks to tax collections by establishing the Solidarity tax, which replaces the temporary IETAAP as a minimum tax on income of individuals and corporations. Congress is considering a reform to indirect taxation that includes a new tax on the registration of vehicles, a graduated increase in the tax rate on vehicles in circulation, and legislation to strengthen tax administration. This legislation has been presented to Congress and it is expected to yield 0.2 percent of GDP annually once approved.

11. In the short term, the tax authority, SAT, will continue implementing its medium-term plan to achieve a consistent decline of tax evasion rates. Starting in 2009, SAT will complement its Annual Operations Plan with stronger and wider actions against tax evasion and smuggling. These additional efforts will help reduce the projected fall in tax collection, with an expected impact of 0.2 percent of GDP in 2009 and 2010. The main actions envisaged by SAT include: (i) stricter control of VAT tax exemptions (ExenIVA) and of workers’ income tax withholdings (RetenISR); (ii) intensive crosscheck of VAT and income tax returns data; (iii) stricter control of VAT credit reimbursements to exporters; (iv) effective control of certain activities like sports clubs, cattle owners, transport, and exporters; (v) coordination and intensification of actions against smuggling through the Inter-institutional Commission for Smuggling and Customs Fraud Prevention and Fight (which includes the Army and police forces, and tax administration, health, and prosecution authorities); (vi) technological improvements for container transit control through the compulsory use of new state of the art GPS device (GPSAT); and (vii) control of vehicle circulation taxes.

12. A number of measures to continue increasing the transparency of public spending have been introduced, in the context of the 2009 budget and as part of the overall policy program under the coordination of the Transparency Commission, headed by the Guatemalan Vice-President.

  • We have created the Vice-ministry for Fiscal Transparency and Evaluation at the Ministry of Finance. The vice-ministry will promote transparency by setting new policies and developing a map of corruption risks in the public sector.

  • We are setting stricter conditions for the use of trust funds for expenditure management, and introducing reporting requirements by decentralized units and trust funds before budgetary transfers are approved.

  • We have reduced the number of activities and entities exempted from the use of GUATECOMPRAS (online public procurement system), and have augmented the information required to be submitted to this system to increase transparency.

  • We will improve the coordination between the Ministry of Finance, the Planning Secretary, and the Ministry of Communications, Infrastructure, and Housing in the preparation of the capital expenditure budget and its monitoring, aiming at expanding the coverage of the National Public Investment System to include all investment projects being executed with public resources.

  • To better assess and conduct fiscal policy we will elaborate above-the-line consolidated general government accounts with technical assistance from the IMF.

B. Monetary and Exchange Rate Policies

13. Monetary policy will focus on achieving a gradual reduction of inflation, toward a medium-term target of 4 percent, with a tolerance margin of +/- 1 percent. We remain committed to strengthening the inflation-targeting regime, which we judge appropriate for Guatemala. The transmission of policy decisions to overall monetary conditions, and thus to aggregate demand, has been strengthening in recent times, especially as commercial bank rates have been more responsive to changes in the short-term policy rate. We have made important progress developing models to forecast inflation and plan to introduce further refinements, such as the effects on inflation of external commodity prices, exchange rate movements, and fiscal impulses.

14. For 2009, the Monetary Board has targeted a decline of inflation to 5½ percent, with a tolerance margin of +/- 1 percent. In light of the downside risks to inflation and economic activity, the Monetary Board has started an easing cycle reducing the policy interest rate; in the future, the rate will be managed as needed to meet the inflation target. If inflation were to deviate from its expected path beyond the established band in the program (+/-2 percent), we would discuss with the IMF on the policy response.

15. Efforts will continue to develop secondary markets for central bank and government paper. More liquid and deeper secondary markets will improve price signals, help better guide policy decisions, and enhance the policy transmission mechanism. In this regard, we have started the dematerialization of debt instruments, the standardization of their maturities, a reduction in the number of weekly auctions, and an increase in the number of market participants allowed to bid in such auctions. Supported by technical assistance from the IMF and the U.S. Treasury, we are preparing further measures.

16. Consistent with our monetary policy framework, we have allowed greater exchange rate flexibility to facilitate economic adjustment to shocks. To this end, we have amended the foreign-exchange intervention rule to set symmetric and limited intervention. While fully committed to a rule-based approach, the central bank stands ready to prevent excessive and disruptive volatility in the foreign exchange market. To maintain an appropriate external liquidity cushion, the program sets a floor on net international reserves.

C. Financial Sector Policies

17. Our financial sector features very moderate exposure to the sources of the global financial crisis. The participation of foreign banks is limited and our banks have not invested in high-risk instruments related to the U.S. mortgage market. Moreover, our financial system underwent a significant consolidation process in the aftermath of two bank failures in late 2006 and early 2007, with weaker institutions being absorbed by more solid ones. Thus, the banking system is better capitalized, liquidity remains adequate, and profitability has been maintained at healthy levels.

18. However, we have introduced preemptively a number of measures to reduce risks arising from the global downturn:

  • Continuous and enhanced on-site supervision has been put in place since June 2008, to identify risks earlier, facilitate discussions of developments and contingency plans with banks’ Boards of Directors, and allow rapid enforcement of corrective actions.

  • Temporary and limited measures to ensure adequate banking sector liquidity have been introduced by the central bank. Banks have been allowed to make limited use of liquid assets (other than deposits at the central bank) to meet reserve requirements until March 2009, thus allowing a relaxation of reserve requirements from 14 percent to about 13 percent. In addition, the central bank introduced reverse repos to provide liquidity in dollars, to address concerns about cuts in external credit lines. The overall assistance, in place until May 30, 2009 is limited to $290 million (about 15 percent of the stock of external credit lines). These facilities could be rolled over or expanded within prudent limits, if needed.

  • Stronger capital cushions are being built. Provisioning requirements have been revamped, to ensure that by mid-2011 all nonperforming loans are fully provisioned. This gradual approach is justified by the need to avoid undue procyclicality in the requirements, while strengthening banks’ capital adequacy. In addition, we have injected new capital to Banco de Crédito Hipotecario Nacional to restore its capital adequacy.

19. Building on this progress, we will further strengthen the regulatory framework to ensure adequate risk-management and continue improving supervision. We will introduce regulatory changes to ensure that banks strengthen liquidity management through the use of liquidity gap measurement and that credit risk arising from borrowers’ foreign-currency exposures are properly internalized through higher provisions or capital requirements (the timing of these changes will be set at the time of the first program review). We will also aim to improve consolidated supervision of regional financial groups, including through closer coordination with foreign supervisors, and further develop our stress-testing methodologies.

20. A key element of our strategy is to introduce changes to our banking legislation in order to strengthen regulation and supervision and enhance the current bank resolution framework. To this end, we plan to submit amendments to the banking legislation in the first half of 2009. Based on the lessons from our past experience and key recommendations from IMF technical assistance, the amendments to the law will aim to reduce connected lending, reduce risks from offshore operations, and strengthen enforcement powers of the Superintendency of Banks. Also, we will seek to improve the bank resolution framework to increase the strength, effectiveness, and flexibility of resolution tools, on the basis of strict and transparent principles. Envisaged reforms include the expansion of the central bank’s lender-of-last-resort function and higher deposit insurance premia.

21. We will continue making progress with the recovery of failed-bank assets and in implementing our anti-money laundering strategy. Assets under recovery after the failure of Bancafe have been sufficient to cover all the liabilities assumed by private banks in its resolution, and the deposit insurance fund (FOPA) has started to recover part of its contribution to that resolution. While it is unlikely that remaining assets will be enough to cancel all debts with FOPA, we plan to accelerate asset disposal in the coming months. Anti-money laundering policy implementation has been strengthened with the enlargement of the Financial Intelligence Unit within the superintendency of banks, and more controls in a number of activities, including cash transactions, large remittances, and gaming. Soon, control procedures will be established for other activities, including real estate.

III. Protecting the Poor and Encouraging Medium-Term Growth

22. Our social protection policy aims at enhancing current programs to offset the effect of the crisis on the neediest. We have a strong commitment to safeguard the individuals’ access to economic opportunities ensuring the minimum requirements for human development. Thus, securing nutrition, health, and basic education are pillars of our strategy. Social expenditure is expected to reach 5 percent of GDP in 2009, up from 4.7 percent of GDP on average in 2005–2008. To attend to extreme poverty, the emphasis will be put on a new government program of conditional cash transfers, whose progress will be monitored closely to assess their impact. The program, Mi familia progresa, aims at securing that poor children attend school and visit health centers regularly. The program, initiated in 2008, covers 281,000 families. In 2009, the program will be expanded to reach 500,000 families and its budget is expected to reach about US$150 million. Other important social programs include Bolsa solidaria; Escuelas abiertas; and Comedores Solidarios, with a budget of around US$7 million in 2009.

23. Sustained growth and significant poverty reduction require enhancing productivity and raising investment. Long-term growth has been low and insufficient to reduce poverty, which declined only moderately in recent years and remains high at 51 percent.

24. In order to raise productivity and investment, a number of efforts are required. Assessments of the business environment conclude that, to facilitate the development of private sector activity, there is a need to improve health and education so as to increase the productivity of the labor force, combat crime, and reduce the cost of energy. We are addressing these issues while continuing with our strategy to increase openness and reduce the cost of doing business. The main policies that are being undertaken include:

  • Deepening Economic Integration, including progress in the implementation of a Central American Customs Unions, beginning with El Salvador, and advancing with the negotiation of an association agreement with the European Union. We expect that free trade agreements with Colombia and Panama will take effect in 2009. We also expect Congress to consider the ratification of Free Trade Agreements with Chile, already signed.

  • Developing infrastructure. We are working with Congress to enact a law on public-private partnerships (Alianzas para el Desarrollo) to overcome capacity constraints in the public sector while ensuring sound management of fiscal contingencies.

  • Improving access to finance. We have implemented the new law on movable collateral, with the opening of the public registry of loans with such guarantees.

  • Combating crime. The fight against fraud, money laundering, and contraband will require a coordinated effort by various ministries, SAT, and the Superintendency of Banks.

  • Improving the framework for creditors’ rights and insolvency proceedings. Current mechanisms are long and inefficient and these weaknesses are widely acknowledged. Since addressing them involves complex legal issues, including constitutional provisions, we will set up a high-level commission with participation of private sector and legal experts to explore solutions. We expect to have the support of multilateral institutions in this endeavor.

IV. Safeguards Assessment

25. We recognize the importance of completing an updated safeguards assessment of the central bank of Guatemala before the first review of the Stand-By Arrangement. To facilitate this, we have authorized the central bank’s external auditors to provide IMF staff with all necessary information and to hold discussions directly with IMF staff. We also commit to receiving a safeguards mission and to providing that mission with all necessary information without delay.

V. Program Monitoring

26. Progress in the implementation of policies under this program will be monitored quarterly through quantitative performance criteria and indicative targets, an inflation consultation clause, and structural benchmarks. The phasing of access under the arrangement and the review schedule are set out in Table 1. The quantitative performance criteria, indicative targets, and parameters of the inflation consultation clause are set out in Table 2. Structural benchmarks are presented in Table 3. Program conditionality is further specified in the accompanying TMU.

Table 1.

Guatemala: Purchase Schedule and Terms Under the Stand-By Arrangement

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Source: Fund staff estimates.

US$/SDR exchange rate of 0.662813 as of March 26, 2009.

Table 2.

Guatemala: Quantitative Performance Criteria, Indicative Targets, and Consultation Clause

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Cumulative from end of preceding year.

Continuous performance criterion.

Deviations outside the inner and outer bands’ limits for inflation will trigger consultations with the Fund, as set out in the TMU

Band of +/- 3 percent around central inflation point.

Band of +/- 2 percent around central inflation point.

Table 3.

Guatemala: Structural Benchmarks

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Attachment III. Technical Memorandum of Understanding

1. This technical memorandum of understanding (TMU) further describes the understandings reached between the authorities of Guatemala and IMF staff for the monitoring of performance during the requested 18-month Stand-By Arrangement. The TMU describes the quarterly quantitative performance criteria and corresponding adjusters, the indicative target, the consultation clause on inflation, and reporting requirements.

I. Quantitative Performance Criteria

A. Overall Balance of the Central Government

2. The overall balance of the central government is measured on an accrual basis from above the line. It is defined as the difference in total revenue and total expenditure as defined in Guatemala’s Budget Law. The information on revenue and expenditure will be obtained from the public sector accounting system (SICOIN).

3. At the time of the reviews, the authorities and IMF staff will undertake a process of reconciliation of above-the-line and below-the-line (as defined below) measurements of the central government deficit, aiming to progressively reduce differences between them.

4. The below-the-line deficit is defined as net external financing of the central government plus net domestic financing of the central government. The net external financing of the central government is defined as (i) disbursements of external loans plus; (ii) proceeds from the issues of government bonds abroad minus; (iii) amortization payments minus; and (iv) debt buy-backs or any other prepayments of debt. Net domestic financing is defined as (i) the net increase in the stock of domestic central government bonds minus (ii) net changes in the stock of deposits of the National Treasury at the central bank and commercial banks plus; (iii) net changes in other liabilities of the central government, minus; and (iv) net changes in other assets of the central government.

5. Adjuster. The floor on the overall balance of the CG for 2009 has been calculated assuming net external financing totaling US$637 million (Q5093 million at an exchange rate of Q8 per dollar). If net external financing exceeds that level, the floor will be adjusted downwards by up to US$100 million (Q 800 million).

B. Net International Reserves (NIR) of the Central Bank

6. For the purpose of the program, the stock of NIR of the Central Bank is defined as the difference between the U.S. dollar value of gross liquid foreign assets, and short-term foreign liabilities as defined below.

7. The definition of gross foreign assets and net foreign assets should be consistent with the Data Template on International Reserves and Foreign Currency Liquidity and the fifth edition of the Balance of Payments Manual (BPM5).

  • Gross reserve assets include monetary gold, holdings of SDRs, any reserve position in the Fund, and holdings of foreign exchange in convertible currencies. Excluded from gross reserve assets are capital participation in IFIs, any assets in nonconvertible currencies, holdings of precious metals other than monetary gold, encumbered reserve assets, reserve assets pledged as collateral for foreign loans, reserve assets pledged through forward contracts, and illiquid assets.

  • Short-term foreign liabilities of the central bank are defined as the sum of (i) all foreign currency-denominated liabilities of the central bank with an original maturity of one year or less; (ii) liabilities to the Fund; (iii) any foreign currency liabilities of the central bank to residents, including financial institutions; and (iv) any short-term liability converted into a medium-term liability during the program period.

  • As per these definitions, on March 23, 2009, gross foreign assets of the central bank stood at US$5046 million and NIR stood at US$4781 million.

C. Non accumulation of External Arrears

8. Guatemala will maintain its stated policy of not incurring external payment arrears. This performance criterion applies on a continuous basis. For the purposes of this performance criterion, an external debt payment arrear will be defined as a payment by the central government, which has not been made within seven days after falling due under the contractual agreement, unless specified otherwise.

II. Indicative Target

9. Central Government deposits at the Bank of Guatemala are defined as all the account balances of the central government held at the Bank of Guatemala, currently under the summary account 22106001.6

III. Consultation Clause

10. Reflecting the Bank of Guatemala’s inflation targeting approach to monetary policy, quarterly consultation bands of +/– 2 percentage points (inner band) and +/– 3 percentage points (outer band) are established around the projected 12-month rate of inflation in consumer prices (MEFP Table 2). Inflation will be measured by the 12-month rate of change of the headline consumer price index (IPC - Indice de precios al consumidor), as published by the National Statistics Institute (INE).

11. Should the 12-month rate of IPC inflation fall outside the inner band specified above, the authorities will discuss with Fund staff on the policy response. Should the 12-month rate of IPC inflation exceed the upper limit of the outer band specified above, the authorities will also consult with the IMF Executive Board prior to resuming their purchases.

IV. Reporting requirements

12. The authorities will provide the necessary information to the Fund staff to monitor the program in an adequate manner, in particular as it refers to the following specific daily, weekly, and monthly data with a delay not exceeding the indicated lag. The Bank of Guatemala and the Ministry of Finance will send the information by e-mail, or by fax if electronic delivery is impossible.

13. In addition, timely information will be provided to the Fund on economic and financial measures taken by the government, as well as changes in legislation including regulations approved by the Central Bank of Guatemala, the Ministry of Finance, the superintendency of banks, the SAT, and other key economic agencies.

14. A daily electronic mail will be sent with a lag of no more than 2 working days unless otherwise agreed, and will contain:

  • (i) The level of gross international reserves and net international reserves, including short-term foreign currency liabilities.

  • (ii) The stock of currency issued.

  • (iii) The deposits of the central government and the rest of the nonfinancial public sector in the Bank of Guatemala.

  • (iv) The exchange rate of the quetzal vis-à-vis the U.S. dollar.

  • (v) Amount of the central bank intervention in the FOREX market.

  • (vi) Principal accounts of the balance sheet of the central bank

15. The weekly information will be sent with a lag of no more than one week, and will contain:

  • (i) Daily buying and selling exchange rates in the interbank foreign exchange markets.

  • (ii) Placements and amortization of certificates of open market operations by maturity, interest rate and holder (nonfinancial private sector, financial sector, nonfinancial public sector).

  • (iii) Commercial banks’ average deposit and loan interest rates in domestic and foreign currencies.

  • (iv) Foreign currency cash flow of the central bank.

  • (v) Daily liquidity information (excess and required reserves) in foreign and local currency, by bank (2 week lag)

16. Monthly information will be sent with a lag of no more than 4 weeks and will contain, unless otherwise specified:

  • (i) Main monthly accounts of the commercial and development banks, including their offshore operations.

  • (ii) Monthly accounts of the central bank.

  • (iii) Monthly consumer price index (2 week lag)

  • (iv) Analysis of inflationary developments

  • (v) Updated inflation projections by the Bank of Guatemala

  • (vi) Main economic and financial laws, and related monetary board regulations

17. The Ministry of Finance will send every month by e-mail the following information:

  • (i) Total central government revenue measured on a cash basis, and divided between tax revenue and nontax revenue, transfers and grants as on the form the authorities have been supplying IMF staff with in the recent past. Tax revenue will be divided between direct taxes (income tax, oil royalties, ISO, other) and indirect taxes (domestic VAT, VAT on imports, excise taxes on oil, alcohol and beverages, stamp taxes, vehicle taxes, import taxes, other taxes) (finalized revenues will be sent with a lag of no more than 3 weeks).

  • (ii) Total government expenditure measured both on an accrual basis and a cash basis, and divided between current and capital expenditure. Current expenditure will be divided between expenditure in wages and salaries, goods and services, external and internal debt interest payments, and transfers. Capital expenditure will be divided between direct investment and capital transfers.

  • (iii) Total government social expenditure, defined as expenditure in education, science and culture; health care and social assistance; and housing, including information on key social programs such as Mi Familia Progresa.

  • (iv) External financing of the central government, including disbursements and amortizations of external loans and bonded debt placed with nonresidents, as well as any variation of external arrears.

  • (v) Domestic financing of the central government, including variation of the National Treasury deposits in the Bank of Guatemala and commercial banks, as well as bonded debt placed with residents and any variation of arrears with domestic debt holders.
1

This financing comprises budget-support and investment loans from World Bank and IDB.

2

Additional loans for $100 million from the World Bank and about $60 million from CABEI and bilateral sources.

3

Nominal thresholds for the exchange rate, which were embedded in the old rule to trigger more frequent intervention by the central bank, were eliminated by mid-2008.

4

The central bank has also made explicit that it stands ready to redeem central bank paper before maturity and purchase public bonds from banks, in an effort to reduce perceived liquidity risks and avoid further shortening of maturities in central bank paper placements.

5

The arrangement requires exceptional access because purchases would exceed 200 percent of quota during the first 12 months.

6

The authorities will inform IMF staff in case the account number of the central government at the Bank of Guatemala changed or other accounts had to be taken into consideration for the purpose of assessing compliance with the indicative targets established in the program.

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Cover IMF Staff Country Reports
Guatemala: Request for Stand-By Arrangement-Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Guatemala
Author:
International Monetary Fund
Volume/Issue:
Volume 2009: Issue 143
Publisher:
International Monetary Fund
ISBN:
9781451816679
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9781451816679.002
Figure 1.

Guatemala. Recent Developments

Real GDP Growth, Contributions

(in percent)
Figure 2.

Guatemala External Sector
Figure 3.

Guatemala. Fiscal Sector, February 2009
Figure 4.

Guatemala: Weekly Financial Sector Developments
Figure 5.

Guatemala: Financial Sector, January 2009
Figure 6.

Guatemala: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)
Figure 7.

Guatemala: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)