Guatemala—Assessment of the Risks to the Fund and the Fund’s Liquidity Position
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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; credit to Guatemala; rollover rates decline; GRA exposure; Guatemala's capacity; GRA resource; Credit; Debt service; Service exports; Global
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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.

1. This note assesses the risks to the Fund arising from the proposed Stand-By Arrangement (SBA) for Guatemala and its effects on the Fund’s liquidity, in accordance with the policy on exceptional access.1 The authorities are requesting an 18-month SBA with access of SDR 630.6 million (300 percent of quota). The arrangement would be front-loaded with a first purchase of SDR 420.4 million (200 percent of quota) upon approval, followed by five purchases each of SDR 42.04 million (20 percent of quota). Access during the first year would reach 260 percent of quota and the last purchase under the arrangement would be available in September 2010 (Table 1). The authorities intend to treat the arrangement as precautionary.

Table 1.

Guatemala: Proposed SBA—Access and Phasing

article image
Source: Finance Department.

Starting in September 2009, purchases will depend on the completion of a review.

I. Background

2. Guatemala has had several Fund arrangements, but has not drawn on Fund resources since the late 1980s. In total, six SBAs and two uses of the Compensatory Financing Facility were approved during the period November 1981 to June 2003, with the three most recent SBAs treated as precautionary (Table 2). Access under all arrangements was relatively low, ranging from 25 percent to 150 percent of quota. The most recent arrangement was requested in support of the authorities’ program for 2003 and was designed to ensure macroeconomic stability and progress with key structural reforms ahead of presidential elections in November 2003. While many of the objectives of the 2003 SBA were achieved, the arrangement went off track and expired without the completion of the mid-term review. There has been no Fund credit outstanding to Guatemala since late 1993 and all obligations to the Fund have been met in a timely manner.

Table 2.

Guatemala: IMF Financial Arrangements, 1981–2015

(In millions of SDRs)

article image
Source: Finance Department.

As of end-December.

Includes a purchase of SDR 76.5 million under the Compensatory and Contingency Financing Facility.

Includes a purchase of SDR 21.6 million under the Compensatory and Contingency Financing Facility.

Figures under the proposed program in italics.

3. Guatemala’s external debt is moderate, but the substantial share of short-term debt increases external financing requirements. At end-2008, Guatemala’s total external debt was estimated at 35 percent of GDP, of which about two-thirds was owed by the private sector (Table 3). The private sector debt, at 24 percent of GDP, is mainly owed to non-monetary institutions and about half of it is short-term debt. Public sector external debt, at 11 percent in 2008, is in turn owed mainly to multilateral institutions (Figure 1). External debt ratios for both total-and public sector debt compare favorably with the corresponding ratios for most of the exceptional access cases since the exceptional access framework was put in place in 2003 (Figure 2, Panels A and B).2 Likewise, Guatemala’s external medium and long-term debt service ratio to exports of goods and services is low vis-à-vis other exceptional access cases, reflecting the country’s relatively low debt stock (Figure 2, Panel C).

Table 3.

Guatemala: Total External Debt, 2004–2009 1/

article image
Source: Guatemalan authorities and IMF staff estimates.

End of year unless otherwise indicated.

Staff projections for end-2009.

Figure 1.
Figure 1.

Guatemala: Composition of Total External Debt, end-2008

(in percent)

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A002

Source: Guatemalan authorities and IMF staff
Figure 2.
Figure 2.

Debt Ratios for Recent Exceptional Access Arrangements 1/ 2/

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A002

Source: Guatemalan authorities and IMF staff estimates, and World Economic Outlook.1/ Year in parenthesis corresponds to the year of approval. Ratios are for the year indicated in parenthesis, with the exception of Belarus, El Salvador, Armenia, Mongolia and Costa Rica, for which 2008 ratios are shown.2/ For arrangements approved since September 2008, estimates as reported in each staff report on the request of the Stand-By Arrangement.

4. Public debt is relatively low and about half is owed to external creditors. Over the past four years external debt of the public sector has declined by over 4 percentage points of GDP, to 11 percent in 2008, while total public debt has been stable in the 20-22 percent of GDP range. At end-2008, the latter was estimated at about 22 percent of GDP, which is below the corresponding ratios for most of the previous exceptional access cases (Figure 2, Panel D).

II. The New Stand-By Arrangement—Risks and Impact on Fund’s Finances

A. Risks to the Fund

5. Access under the proposed arrangement would exceed by far that in previous arrangements for Guatemala and would surpass the annual access limit.3

  • The authorities plan to treat the proposed arrangement as precautionary. However, if all purchases were to be made as scheduled, Guatemala’s outstanding use of GRA resources would rise to 200 percent of quota upon approval, to 260 percent of quota during the first year of the arrangement, and then to 300 percent of quota in September 2010–June 2012.4 In terms of quota, this projected peak exposure would be the same as those of El Salvador, Mongolia, and Costa Rica—the lowest in recent exceptional access cases (Figure 3).

  • If the SBA is fully disbursed, GRA credit outstanding to Guatemala would be equivalent to 2.4 percent of GDP by end-2010 and 17 percent of gross international reserves (Table 4). These peak ratios would be lower than in most of the exceptional access cases approved since September 2008.

  • In terms of SDRs, the projected peak GRA exposure of SDR 630.6 million would be nearly four times higher than Guatemala’s previous peak in Fund credit outstanding reached in 1984–85. Nonetheless, this peak would be among the lowest in recent exceptional access cases (Figure 4, Panel A).

Figure 3.
Figure 3.

Fund Credit Outstanding in the GRA around Peak Borrowing 1/

(in percent of quota)

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A002

Source: IFS, Finance Department, and IMF staff estimates.1/ Peak borrowing ‘t’ is defined as the highest level of credit outstanding for a member. Repurchases are assumed to be on an obligations basis. Repurchases on expectations basis were eliminated on April 1, 2009.2/ The authorities have expressed their intention to treat the arrangements as precautionary, as balance of payments pressures have not materialized.
Table 4.

Guatemala—Capacity to Repay Indicators 1/

article image
Sources: Guatemalan authorities, Finance Department, World Economic Outlook, and IMF staff estimates.

Assumes full drawings. The Guatemalan authorities have expressed their intention to treat the arrangement as precautionary, as balance of payment pressures have not materialized.

Repurchases follow the obligations schedule. Repurchases on expectations basis were eliminated on April 1, 2009.

Includes surcharges and service fees.

Staff projections for external debt, GDP, gross international reserves, and exports of goods and services, as used in the staff report that requests the proposed SBA. For May 2009, projections for external debt, GDP, gross international reserves, and exports of goods and services are as of end-December 2008.

Figure 4.
Figure 4.

Exceptional Access Levels and Credit Concentration

Citation: IMF Staff Country Reports 2009, 143; 10.5089/9781451816679.002.A002

Source: Finance Department.1/ Commitments as of March 31, 2009. Does not include the potential FCL for Mexico.2/ Credit outstanding as of March 31, 2009 plus the first purchase under the proposed arrangement with Guatemala.

6. If all purchases under the proposed SBA were to take place as scheduled, the share of the Fund in Guatemala’s external debt and debt service would be relatively low.

  • By end-2010, Guatemala’s total external debt would rise to 40 percent of GDP, with public external debt following the same pattern to reach 17 percent of GDP. At that time, outstanding use of GRA resources would represent 2.4 percent of GDP, 6 percent of total external debt, and 15 percent of public external debt.

  • Guatemala’s projected debt service to the Fund would peak at about SDR 290 million in 2013, equivalent to over one-quarter of total external debt service and over half of public external debt service in that year.5

  • In terms of exports of goods and services, Guatemala’s external debt service to the GRA would peak at 4.2 percent in 2013, which is close to the median ratio projected for recently approved exceptional access cases. Peak ratios for total-and public external debt service to exports of goods and services of 15 percent and 8 percent, respectively, would also be reached in 2013.

B. Impact on the Fund’s Liquidity Position and Risk Exposure

7. Given the comparatively low access in nominal terms under the arrangement, the impact on the Fund’s liquidity and credit risk exposure is relatively small.

  • The proposed arrangement would reduce Fund liquidity by less than 0.7 percent. Commitments under the proposed arrangement would reduce the one-year forward commitment capacity (FCC), which currently stands at SDR 96.1 billion, by about SDR 0.6 billion (see Table 5).6 7

  • If the first purchase were to be made, Fund credit to Guatemala would represent 2.1 percent of total GRA Fund credit (Figure 4, Panel B). The share of the top five users of Fund resources of total outstanding credit would decrease by about two percentage points to 84 percent (see Table 5).8

  • In the event Guatemala were to fully draw on resources available under the proposed SBA, and to incur arrears on the charges accruing to its GRA obligations, the Fund’s burden sharing mechanism would be reduced significantly.9 Charges on the GRA obligations would equal about SDR 6 million in 2009, or 30 percent of the current estimated residual burden-sharing capacity (see Table 5).10 However, the impact on the Fund’s burden sharing capacity of potential arrears from this arrangement would be expected to decline to the extent the demand for Fund resources continues to expand.

  • Potential GRA exposure to Guatemala would be modest in relation to the current level of the Fund’s precautionary balances. After the first purchase, Fund credit to Guatemala would be about 6 percent of the Fund’s current precautionary balances (see Table 5), and the total access amounts to about 9 percent of current precautionary balances.

Table 5.

Guatemala—Impact on GRA Finances

article image
Sources: Guatemalan authorities, Finance Department, World Economic Outlook, and IMF staff estimates.

The Forward Commitment Capacity is a measure of the resources available for new financial commitments in the coming year, equal to usable resources minus undrawn balances under existing arrangements plus repurchases one-year forward minus a prudential balance. The FCC is determined on basis of available quota resources only; in addition, the Fund has access to SDR 34 billion under the NAB/GAB borrowing arrangements and $US100 billion under the borrowing arrangement with Japan.

A single country’s negative impact on the FCC is defined as the country’s sum of Fund credit and undrawn commitments minus repurchases one-year forward.

As of end-April 2008.

Reflects total Fund credit outstanding plus the first purchase by Guatemala.

Burden-sharing capacity is calculated based on the floor for remuneration at 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges and takes into account the loss in capacity due to nonpayment of burden sharing adjustments by members in arrears.

III. Assessment

8. The authorities intend to treat the proposed SBA as precautionary and are requesting it as an additional liquidity cushion in support of their policy program that seeks to preserve macroeconomic and financial stability, mitigate the effects of the global crisis on economic activity and strengthen social protections. However, if significant balance of payments pressures were to materialize, the authorities are likely to draw on the available resources, entailing some financial risk for the Fund. Although the proposed level of access is four times higher than the previous peak Fund exposure to Guatemala, it is moderate vis-à-vis other exceptional access cases in terms of relevant metrics such as economic size and debt-servicing capacity.

9. Risks to the outlook are significant and stem from a sharper-than-expected deterioration in the external current or capital accounts.. Guatemala’s large external financing requirements estimated at just over 16 percent of GDP in 2009 could result in a large financing gap even under a relatively benign scenario, in which there is a further decline in remittances and FDI, and private external debt rollover rates decline marginally. If global economic developments are significantly worse than expected, a more severe downturn could increase financial sector vulnerabilities as a sharp depreciation of the currency and capital outflows would adversely affect the banking sector.

10. The realization of significant downside risks could adversely affect Guatemala’s capacity to repay the Fund. Nevertheless, the impact of such an event in the Fund’s finances would be modest in light of the relatively low absolute access level. The authorities’ commitment to strong program implementation and to respond promptly to changes in underlying conditions and deviations from the program baseline scenario are essential to mitigate these risks and safeguard Fund resources. The authorities’ policy program supported by the Fund, and their track record of implementing prudent and sustainable macroeconomic policies, provide confidence in this regard.

1

See The Acting Chair’s Summing Up of the Review of Access Policy Under the Credit Tranches and the Extended Fund Facility, and Access Policy in Capital Account Crises—Modifications to the Supplemental Reserve Facility and Follow-Up Issues Related to Exceptional Access Policy (3/5/03).

2

The previous exceptional access cases used as comparators in this paper are four of the five arrangements approved since the exceptional access framework was put in place (Argentina, Brazil, Turkey, and Uruguay), and the recent cases approved in 2008–09. In contrast to most newly approved arrangements, Guatemala’s authorities intend to treat the arrangement as precautionary, as balance of payments pressures have not materialized. The 2008 extended arrangement for Liberia also involved exceptional access. However, this arrangement was different from other exceptional access cases since, in this case, exceptional access was granted in the context of Liberia’s clearance of arrears to the Fund.

3

The proposed access during the first year of the arrangement is 260 percent of quota.

4

Amortization payments to the Fund are calculated assuming that all repurchases are made as scheduled, i.e., each purchase is repurchased in eight quarterly installments, beginning in 3¼ years after each purchase and ending after 5 years.

5

Debt service to the Fund is calculated assuming that all repurchases are made as scheduled, i.e., each purchase is repurchased in eight quarterly installments, beginning in 3¼ years after each purchase and ending after 5 years. As for level-based surcharges, they are calculated according to the current schedule: 100 basis points for credit outstanding over 200 percent of quota and 200 basis points for credit outstanding above 300 percent of quota. The new system of surcharges, which applies to credit outstanding above 300 percent of quota, will go in effect on August 1, subject to grandfathering at the member’s request.

6

The FCC is the principal measure of Fund liquidity. The (one-year) FCC indicates the amount of GRA resources available for new financing over the next 12 months.

7

Data as of March 31, 2009. The FCC is determined on the basis of available quota resources only; in addition, the Fund has access to SDR 34 billion under the NAB/GAB borrowing arrangements and US$100 billion under the borrowing agreement with Japan.

8

Given the possibility of new financing operations, including some that will involve exceptional access, the concentration of the Fund’s lending portfolio is likely to change in coming months.

9

Under the burden-sharing mechanism, the financial consequences for the Fund that stem from the existence of overdue financial obligations are shared between creditors and debtors through a decrease in the rate of remuneration and an increase in the rate of charge, respectively. The mechanism is used to compensate the Fund for a loss in income when debtors do not pay charges. The Executive Board has set a floor for remuneration at 85 percent of the SDR interest rate. No corresponding ceiling applies to the rate of charge.

10

Burden sharing capacity has declined recently, despite the increase in credit outstanding, reflecting the steep decline in the SDR interest rate.

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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: Composition of Total External Debt, end-2008

(in percent)
Figure 2.

Debt Ratios for Recent Exceptional Access Arrangements 1/ 2/
Figure 3.

Fund Credit Outstanding in the GRA around Peak Borrowing 1/

(in percent of quota)
Figure 4.

Exceptional Access Levels and Credit Concentration