Guatemala: Staff Report for the 2013 Article IV Consultation
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International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
02 Aug 2013
eISBN:
9781484364840
Language:
English
Keywords:
ISCR; CR; financing; central bank; monetary policy; fund; real GDP; real interest rate; foreign currency; financial system; terms of trade; GDP deflator; Global
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This 2013 Article IV Consultation highlights that key developments in Guatemala since the 2012 Article IV Consultation have been positive. As commodity prices stabilized and domestic demand pressures weakened, inflation fell sharply in 2012—closing at 3.4 percent by December. Although subsequently inflation rose somewhat—to 4.3 percent by May 2013, owing mainly to domestic prices—it still remained within the central bank’s target range of 4.0±1 percent. The economic outlook is generally benign. Growth is expected to edge up to 3½ percent in 2013 and 2014, reaching its potential rate, supported by ongoing buoyant domestic demand and healthy private-sector credit.

Abstract

This 2013 Article IV Consultation highlights that key developments in Guatemala since the 2012 Article IV Consultation have been positive. As commodity prices stabilized and domestic demand pressures weakened, inflation fell sharply in 2012—closing at 3.4 percent by December. Although subsequently inflation rose somewhat—to 4.3 percent by May 2013, owing mainly to domestic prices—it still remained within the central bank’s target range of 4.0±1 percent. The economic outlook is generally benign. Growth is expected to edge up to 3½ percent in 2013 and 2014, reaching its potential rate, supported by ongoing buoyant domestic demand and healthy private-sector credit.

Overview

1. Guatemala’s economic performance has been solid since the 2008-09 global financial crisis. In its aftermath, activity rebounded quickly, spurred by both net exports and domestic demand—supported by rising world commodity prices and counter-cyclical policies—and buttressed by an 18-month precautionary Stand-by Arrangement (SBA). Growth is now nearing potential and macroeconomic policies stay a prudent course, not least with declining fiscal deficits—helping to maintain relatively low inflation. XR flexibility remains limited, while the financial system has strengthened. The macro outlook is broadly positive.

2. The main challenge is to unleash higher and more inclusive long-term growth, while enhancing resilience to shocks and preserving macroeconomic stability. Potential growth is constrained by weak investment in physical and human capital, and by the elevated crime and insecurity; poverty is widespread. Increasing high-quality public spending to support equitable growth is critical, but it will need to go hand-in-hand with boosting public revenue and strengthening expenditure management to safeguard macroeconomic stability. A nimbler handling of shocks would be allowed by widening the scope for counter-cyclical budget and monetary policies—fiscal space is currently limited by the very low tax burden, monetary space by sticky inflation expectations and modest XR flexibility. The financial sector, while firming, is mildly dollarized and under-developed. Addressing these structural weaknesses should help enlarge the policy toolbox further.

3. The government’s policy plans are aligned with these objectives, but advancing the reform agenda has proven harder than expected at the start of the administration. President Pérez-Molina, who took office in January 2012, pledged to mobilize revenue and step up the efficiency and transparency of public spending (IMF, Country Report No. 12/146). However, initial reform efforts have suffered setbacks or stalled. The ruling party may muster sufficient political clout to press on with its program, but the window of opportunity could be closing soon, as positioning for the next Presidential election begins during the second half of the four-year administration.

Recent Economic Develoments

4. Key developments since the 2012 Article IV Consultation have been positive:

uA01fig01

Real GDP growth (percent y/y) and contributions

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Source: Country authorities and Fund staff estimates.

  • Growth has been robust, while converging to trend. Rebounding from the global crisis and natural disasters in 2010, activity surged by 4¼ percent in 2011, helping close the output gap that opened during 2008-09 (AN 1). Economic expansion decelerated to 3 percent in 2012, underpinned by healthy domestic demand (Figure 1 and Table 1).

  • Inflation declined in 2012 but has begun to pick up. In 2011, high world food and oil prices pushed up headline inflation, which reached 6¼ by end-year. As commodity prices stabilized and domestic demand pressures weakened, inflation fell sharply in 2012—closing at 3.4 percent by December. However by May 2013, inflation rose to 4.3 percent owing mainly to domestic prices, but it still remained within the central bank’s target range (of 4.0±1 percent) (Figure 1 and Table 1).

Figure 1.
Figure 1.

Guatemala: Growth and Inflation

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: Country authorities and Fund staff estimates.1/ CAPDR excluding Guatemala comprises Costa Rica, Dominican Rep, El Salvador, Honduras, and Panama.2/ LA-6 comprises Brazil, Chile, Colombia, Mexico, Peru and Uruguay.
Table 1.

Guatemala: Selected Economic and Social Indicators

Does not include recapitilization obligations to the central bank.

Sources: Bank of Guatemala; Ministry of Finance; and Fund staff estimates and projections.
uA01fig02

Real GDP growth.

(percent)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: Country authorities and Fund staff calculations.
uA01fig03

Inflation.

(percent - y/y end of period.)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

  • The balance of payments has strengthened. The current account deficit declined to just below 3 percent of GDP in 2012 (from almost 3½ percent in 2011)—as a softening in traditional export prices was more than offset by a strong recovery in remittances from the U.S. and more favorable net factor income, amid tepid growth in import values (Figure 2). Rising FDI, as well as official and private capital inflows, more than financed this deficit. Thus, net international reserves (NIR) reached US$6.2 billion at end-2012—in line with reserve adequacy metrics. End-May 2013, NIR rose to US$7.3 billion following the issuance of an international bond in February totaling US$700 million (1¼ percent of GDP) with a 15-year maturity and a 5 percent yield (Figure 2 and Table 3).

Figure 2.
Figure 2.

Guatemala: External Sector Developments

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: Country authorites and Fund staff estimates.
Table 2.

Guatemala: Medium-term Framework

Does not include recapitilization obligations to the central bank.

Sources: Bank of Guatemala; Ministry of Finance; and Fund staff estimates and projections.
Table 3.

Guatemala: Summary Balance of Payments

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

Includes 2009 SDR allocations of US$271 million.

uA01fig04

Real and nominal effective exchange rate indices

(Jan 2008 = 100)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Source: Country authorities and Fund staff estimates.
uA01fig05

Net international reserves of the central bank

(US$, billions)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

5. Competitiveness is broadly adequate though with some signs of erosion. The Fund’s multilaterally consistent estimates under the External Balance Assessment (EBA) methodology imply that Guatemala’s REER is in line with current fundamentals, while the CGER methodology points to moderate overvaluation vis-à-vis medium term fundamentals. At the same time, the REER has appreciated substantially in recent years, accompanied by some trend widening of the external current account deficit (Box 1).

6. Monetary policy has been on hold until lately and foreign exchange intervention has declined. After reducing the policy rate by 50 bps in June 2012 (to 5 percent), the central bank kept it constant until late April 2013, when it was lifted by 25 bps. The modest hike aimed to stem incipient signs of inflationary pressures without exacerbating the possible adverse impact on domestic growth from prevailing downside global risks. The XR fluctuation margin used to determine intervention was widened in late 2012 (from 0.60 to 0.65 percent of the five-day moving average of the XR). Under this rules-based framework, the central bank’s cumulative FX purchases declined notably. Yet, XR flexibility remains limited—quite low relative to the rest of Latin America and somewhat below the regional average (Figure 4 and Table 5).

Figure 3.
Figure 3.

Guatemala: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: Country authorities and Fund staff estimates.1/ Corrected for non-recurrent revenue.2/ Simple average of Brazil, Chile, Colombia, Mexico, and Peru.
Figure 4.
Figure 4.

Guatemala: Money and Credit

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: Country authorities and Fund staff estimates.
Table 4A.

Guatemala: Public Sector Balance

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

2012 balance is a staff estimate.

Does not include recapitilization obligations to the central bank.

Table 4B.

Guatemala: Public Sector Balance

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

2012 balance is a staff estimate.

Does not include recapitilization obligations to the central bank.

Table 4C.

Guatemala: Statement of the Central Government Operations and Financial Balance, GFSM 2001 Classification

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

Based on available stock elements.

Changes in net financial worth do not equal net lending due to valuation adjustments and statistical discrepancies.

Does not include recapitilization obligations to the central bank.

Table 5.

Guatemala: Monetary Sector Survey

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

Excludes foreign currency liabilities of the central bank to financial institutions.

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

7. The fiscal deficit continued to narrow in 2012 but not enough to prevent a further rise in the public debt ratio. The central government deficit declined to just below 2½ percent of GDP in 2012, down from about 2¾ percent in 2011, entailing a neutral fiscal stance (Figure 3). Consolidation was driven by a cut in public spending (as a share of GDP). Net financing shifted from primarily domestic sources to external flows, with the placement of an international bond of US$700 million (some 1½ percent of GDP) at favorable terms and long maturity. Central Government debt remains low at about 24 percent of GDP; it is, however, on an upward trend, and high in relation to tax revenue (221 percent), when compared to peers with similar credit ratings (Figure 3 and Tables 4A-C).

uA01fig06

Fiscal revenue/expenditures vs. overall balance

(percent of GDP)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: Country authorities and Fund staff calculations.

Guatemala: External Stability Assessment

Guatemala’s share in global trade has fallen in the last decade, but its export markets have become more diversified. Between 2000 and 2012, Guatemala’s share in global trade decreased by nearly 25 percent to 0.06 percent of world trade, as its participation in US and European markets shrank. However, its position in Central America has been strengthened and export destinations have diversified as the top-five markets1 account for 67 percent of total exports in 2012, down from 80 percent in 2002.

uA01fig07

Guatemala: Export Market Shares

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Source: Direction of Trade (DOT) statistics and Fund staff estimates.
uA01fig08

Guatemala: Exports to Top-Five Destinations

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Source: Direction of Trade (DOT) statistics and Fund staff estimates.

Survey-based competitiveness indicators highlight some challenges for Guatemala. The country’s ranking in the 2012-2013 Global Competitiveness Index improved only slightly to the 83rd position (out of 144 countries), from 84th in the previous survey. Concerns about crime, corruption, excessive government bureaucracy and inadequate infrastructure and human capital as cited as main drawbacks. The country has a somewhat better position in the Doing Business Index, ranking 93rd out of 183 countries, above the Latin America and Caribbean average of 97.

The CPI-based real effective exchange rate (REER) has appreciated by 40 percent since 2000, partially driven by Guatemala’s inflation differential with its main trading partner (the US). Relative productivity increases in Guatemala may have alleviated the impact of this appreciation on competitiveness, but ULC-based REER indicators are not available. Shifts in US GDP have also led to movements in the remittances inflows and—in conjunction with the global demand for commodities—in the terms of trade (TOT). Although the nominal effective exchange rate (NEER) has depreciated somewhat since 2007, this change has been modest, at less than 10 percent in cumulative terms.

The current account (CA) deficit has widened in recent years, despite significant remittance inflows. Although Guatemala ran a small CA surplus in 2009, the deficit reached about 3 percent of GDP in 2012, mainly driven by a widening of the trade deficit from about 9 to nearly 11½ percent of GDP—still lower than the over 14 percent of GDP observed in 2004-2008. The services and income deficit has also widened from below 3 percent of GDP in 2004 to nearly 4 percent of GDP in 2012. During this period, large U.S. remittances (around 10 percent of GDP) have helped support an average current account deficit of about 3½ percent of GDP.

The financing structure of the current account deficit, the high levels of reserves and low external liabilities mitigate external risks to Guatemala. Although Guatemala’s net IIP position is negative, it is relatively small (19 percent of GDP in 2012) and almost 40 percent of total liabilities consist of FDI, equivalent to over 17 percent of GDP in 2012. The stock of net international reserves (NIR) stood at nearly 4 months of reserves in 2012 and 1.7 times the short term debt on residual maturity. The NIR is also well within Fund reserve adequacy metrics, with values of about 140 percent of the composite reserve adequacy metric since 2005, considered fully adequate for precautionary pruposes.2

uA01fig09

Guatemala: International Investment Position

(In U.S. billion)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: Central Bank of Guatemala and Fund staff estimates.

IMF’s multilaterally consistent estimates suggest that Guatemala’s REER is broadly in line with fundamentals both in the short term and relative to medium term benchmarks:.

  • External Balance Assessment (EBA) estimates based on current fundamentals and desirable policies point to a sustainable cyclically adjusted current account deficit of 4.1 percent of GDP, which is 1.3 percentage points above the current cyclically adjusted deficit of 2.8 percent.

  • CGER methodologies, which rely on medium term fundamentals, point to a moderate overvaluation ranging between 8.8 and 13.9 percent for the benchmark external sustainability and macrobalance approaches, respectively. However, in order to interpret appropriately these estimates the significant proportion of FDI in Guatemala’s total external liabilities should be taken into account. Thus, if an alternative estimate for the NFA position which excludes FDI is used, then the external sustainability approach instead implies an undervaluation of 3.7 percent, broadly in line with the EBA estimates.

  • A simple average across the different methodologies implies a moderate overvaluation of 3.1 percent. Given a mean squared error of 0.7 percent, Guatemala’s REER is broadly in line with fundamentals.

Estimates of Competitiveness

Source: Fund staff estimates.

Deviations from norms implied by fundamentals and desirable policies.

Deviations from levels implied by medium-term fundamentals.

Negative implies an undervaluation.

1 The top 5 destinations for Guatemala’s exports are: the U.S. (40 percent), El Salvador (12 percent), Honduras (8 percent), Mexico (6 percent) and Nicaragua (4 percent). 2. This is a weighted composite of export earnings, short-term debt, medium and long term debt and equity liabilities and broad money. For more, see Assessing reserve adequacy (SM/11/31).

8. Fiscal structural reform attempts have suffered setbacks and delays:

  • Revenue mobilization. Last year, a tax package was passed by parliament—yielding 1-1½ percent of GDP—to come into force in 2013.1 Claims against the reform have piled up before the Constitutional Court.2 So far these challenges have been largely unsuccessful, though associated uncertainties have weighed down on collections and possible amendments to the reform may erode revenues. A draft Competitiveness Law sent to Congress by the President grants fiscal incentives to firms incorporated outside Guatemala City, with possible significant fiscal costs in the medium term.

  • Expenditure management. A comparatively low revenue-to-GDP ratio, budget rigidities, and weak internal control systems keep Guatemala’s public social expenditure below the regional average3 and hinder resource allocation to high-priority areas. Accumulated domestic arrears, which spiked in 2010, remain unresolved. Some efforts to quantify their stock were made,4 but a plan to clear them has yet to be put in place—not least because the discussion is clouded by questions on the validity of the claims. Nor has there been progress in adopting a comprehensive strategy to avoid their recurrence, since needed amendments to the Organic Budget Law are stalled in Congress.

9. Though credit to the private sector is growing fast, the financial system remains solid and fundamental reforms have advanced. Bank deposits and credit to the private sector continued to expand—at 12½ and 15½ percent (y/y), respectively, in April—though private sector credit as a share of GDP had only recovered to levels above those observed before the global crisis by 2012 (Figure 4). Loan and deposit dollarization are at about 30 and 20 percent, respectively, with loan dollarization picking up (AN 4). Banks are profitable, liquid, well-capitalized, and domestically-funded. Non-performing loans are low (Table 6). Long-awaited amendments to the Banking Sector Law and the Central Bank Organic Law entered into force in April, reducing risks from offshore operations and connected lending, strengthening supervision and the enforcement powers of the superintendence of banks, as well as enhancing the banks’ safety net and resolution procedures—in line with staff recommendations. A law to regulate micro-finance institutions is in Congress, and a law to supervise cooperatives is being drafted. In 2012, Guatemala was reclassified into the OECD’s “white list” of countries that implement international standards for tax information sharing in the fight against money laundering, terrorism, and tax evasion. Measures to combat money laundering—which include repossession of illicit assets, reporting of transactions higher than US$10,000, greater use of technology in financial intelligence, and stricter monitoring of politicians’ finances—have led to an increase in prosecutions.

Table 6.

Guatemala: Financial Soundness Indicators

Source: Superintendency of Banks.
uA01fig10

Bank credit to the private sector

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Source: Country authorities.

Financial Soundness Indicators

(in percent)1/

Source: FSI tables, June 2013, IMF, http://fsi.imf.org/fsitables.aspx.

As of December 2012 unless otherwise noted.

As of June, 2012 ** As of July, 2012.

Comprises Guatemala, El Salvador, Honduras, Panama, and the Dominican Republic.

Comprises Brazil, Chile, Colombia, Mexico, Peru, and Uruguay.

10. Guatemala has gained some ground toward achieving the MDGs, but poverty and crime are widespread. Modest-to-strong progress has been recorded for 12 out of 16 MDG targets: extreme poverty has declined somewhat, primary enrollment has risen (albeit from low levels), and maternal mortality has fallen (Figure 5). However, a third of the population is below the minimum dietary energy consumption, and chronic malnutrition of children younger than 5 years is pervasive at about 50 percent. At the same time, the level of informality is very high, while security concerns are very serious—including those linked to drug trafficking (Box 2).

Figure 5.
Figure 5.

Guatemala: Social Development and the Millennium Development Goals

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: World Bank WDI and United Nations.1/ Simple average of Costa Rica, Dominican Republic, El Salvador, Honduras, Nicaragua, and Panama.2/ Simple average of Brazil, Chile, Colombia, Mexico, and Peru.

Guatemala: Social Expenditure and MDGs

Poverty in Guatemala is high, affecting mostly the large indigenous and rural populations. While classified as a lower-middle-income country—its per capita income was US$3,183 in 2011—its social indicators often fall below those of much poorer countries. More than 40 percent of the population resides in rural areas, and about 40 percent is indigenous (with 23 separate ethno-linguistic groups). According to UNDP data, total poverty declined from 45 percent in 2000 to 37 percent in 2010. However, indigenous poverty remains high at about 52 percent, while 35 percent of the indigenous population lives in extreme poverty. Moreover, the overall poverty rate measured with the national definition has remained above 50 percent. The country fares poorly in chronic malnutrition of children younger than 5 years, which, at nearly 50 percent, is worse than in Haiti.

uA01fig11

Guatemala: Public Social Expenditure

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Source: Ministry of Finance.

Guatemala’s overall HDI ranking remains stable. Guatemala’s ranking by the UNDP Human Development Index (HDI) for 2011 was 131 out of 187 countries, unchanged since 2005. This places Guatemala as a medium human development country, on par with Nicaragua (129), and Honduras (121), but well below the region’s more developed countries, Costa Rica (69) and Panama (58).

Progress has been made on achieving a number the Millennium Development Goals (MDGs). The proportion of the population living in extreme poverty has fallen, as has childhood mortality (albeit from low levels). Access to sanitary drinking water has improved and the enrollment rate in primary school exceeds that of Latin America as a whole, although total schooling and the quality of education are below those observed in the rest of the region. More worrisome, the incidence of hunger has almost doubled since the early 1990s.

Public expenditure devoted to social needs has been trending up and spiked in the wake of the natural disasters in 2010, though it remains low as a share of GDP. Due to the country’s historically low tax revenues, the government faces difficulties to fund increased spending in education, health, and infrastructure for excluded groups.

The authorities are implementing institutional reforms to better target social programs. The creation of the Ministry of Social Development (MIDES) is expected to ensure greater coherence in public social policy and coordination across agencies. MIDES directly implements a large number of social programs, including the conditional cash transfer (CCT) program Mi Bono Seguro. Additionally, the new Zero Hunger Plan is aimed at consolidating efforts against malnutrition. The Plan prioritizes interventions amongst the most vulnerable, and will ultimately be in place in the 166 municipalities most affected by malnutrition.

Macroeconomic Outlook and Risks

11. The authorities agreed that the economic outlook is generally benign. Under the baseline scenario, growth is expected to edge up to 3½ percent in 2013 and 2014, reaching its potential rate, supported by ongoing buoyant domestic demand and healthy private sector credit. Inflation would remain within the upper half of the central bank’s target range in 2013-14 before stabilizing toward the center of the band. The external current account deficit would decline to around 2½ percent of GDP in the medium term, more than fully financed by FDI and other capital inflows. This scenario envisages some fiscal consolidation with the central government balance stabilizing at 2¼ percent of GDP and public debt rising slowly to around 28 percent of GDP by 2018 (Table 2).

The Outlook for Guatemala is Generally Positive, but Structural Weaknesses Will Constrain Growth. Guatemala. Baseline Scenario

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

Stock in percent of weighted aggregate of M2, exports of goods and services, short-term external debt at a remaining maturity, and other external portfolio liabilities. For more details, see Assessing Reserve Adequacy (IMF Policy Paper 11/31).

In percent of potential output.

12. Near-term risks are prevalent on the downside, owing to global uncertainties and domestic policy constraints (as detailed also in the Risk Assessment Matrix):

  • External conditions. Weaker than expected growth in the U.S. (potentially also triggered by larger-than-anticipated fiscal tightening) would have adverse spillovers through trade and remittances on Guatemala’s economic activity and fiscal accounts, while shocks to neighboring countries would have a greater impact. Faster US growth would have opposite effects, most notably through stronger growth in remittances. In case global growth slows, the impact on the external accounts could be lessened by a potential downward effect on oil prices from reduced global demand. By the same token, a geopolitical oil shock could worsen Guatemala’s terms-of-trade, harming external stability and growth. Higher world interest rates would modestly raise the costs of public external financing. More generally, a hike in global risk aversion could curtail access to international capital markets, though, the estimated impact of a deleveraging episode by systemic international financial institutions and large banks would be modest (Box 3 and AN 2).

  • Domestic risks. These relate to policy implementation, including a reversal of crucial elements of the 2012 tax reform, or negative consequences from ongoing initiatives that introduce tax incentives. Weak public revenues could derail fiscal consolidation, aggravate debt dynamics, and lower Guatemala’s resilience to shocks—potentially giving rise to adverse feedback loops if external shocks were to materialize at the same time.

13. Longer-term risks are also tilted downwards. On the domestic front, the key concern is that insufficient revenue mobilization could persist and further entrench themselves, deterring investment in physical and human capital. In turn, this could significantly weigh on the country’s growth and social prospects in the long run. More generally, the currently envisaged consolidation plan is not yet sufficient to stabilize public debt as a share of GDP. If adverse government debt dynamics were not stemmed, macroeconomic and financial confidence could ultimately be eroded. On the other hand, incipient upside risks are surfacing: abundant global liquidity over a prolonged period could eventually find an attractive location in Guatemala given the country’s improving standing in international global markets, thereby stimulating investment and growth. In the same connection, however, the still maturing financial system and monetary policy framework may not be able to handle effectively strong capital inflows—particularly portfolio—nor guard against eventual bubbles and overheating.

Guatemala: Risk Assessment Matrix

(RAM)

Guatemala: Cross-Border Spillovers1

Compared to other countries in the CAPDR region, Guatemala has a lower sensitivity to shocks originating in the U.S., but a higher response to shocks from other countries within the region. This contrasts with analyses of other CAPDR countries, which point to larger effects from U.S. shocks. These differences might be associated with trade structures. According to the World Bank, Guatemala has a larger share of basic commodity exports (sugar, coffee, nuts) than Costa Rica and El Salvador. This could explain why Guatemala’s reaction during the 2009 crisis was milder than in the rest of the CAPDR countries, since a rebound was supported by the pickup in global demand for commodities.

Results from a multi-country VAR analysis show that a CAPDR shock would have the largest short-term impact on Guatemalan growth followed by a U.S. shock. A shock of ½ standard deviation reduction in the dynamic domestic growth component of the CAPDR countries could lower GDP growth by 0.5 percentage points, while a shock in the U.S could reduce growth by 0.1 percentage points. The relatively low near-term sensitivity of the Guatemalan economy to shocks in the U.S. contrasts with the high share of trade between these two countries. While the U.S. is Guatemala’s main trading partner, the correlation between the business cycles in both countries is very low. For the period 1976 - 2012, the correlation was only 0.1, and this is unchanged 2008–12. At the same time, the correlation between Guatemala and CAPDR countries is much higher. For the period 1976-2012 correlation was 0.4 in average, rising to 0.9 in 2008-12.

Fiscal adjustment in the U.S. could have significant but still limited effects on Guatemala. Simulations suggest that each percentage point of GDP of fiscal adjustment in the United States would reduce Guatemalan growth by about 0.3 percentage points.

The upstream exposure of Guatemala to all BIS reporting banks is limited. Guatemala is exposed to rollover risk through direct cross-border lending by international banks and lending of foreign affiliates operating in Guatemala that are funded by their parent banking systems. The upper-bound of the rollover risks is captured by the upstream exposure of Guatemala to all BIS reporting banks, which was about 7 percent of GDP or 21 percent of net credit to the public and private sectors by the Guatemalan banking system, as of March 2013.2

  • The analysis of various stress scenarios based on the RES/MFU Bank Contagion Module suggests that the impact of large haircuts in the sovereign debt of some European countries on international banks lending to Guatemala would be close to zero. This is due to the limited sovereign exposure of these banks to the euro area periphery countries.

  • The estimates also indicate that the direct impact on lending to Guatemala residents from large declines in the value in European sovereign assets held by international banks lending to Guatemala is minimal.

uA01fig12

Guatemala: Growth Forecast and Simulation, 2005-2015

(percent)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Source: World Economic Outlook (Spring-2013) and IMF staff estimates.

Spillovers to Guatemala from International Banks’ Exposures as of March 2013

Source: RES/MFU Bank Contagion Module based on BIS, ECB, and IFS data.

Magnitude denotes the percent of on-balance sheet claims (all borrowing sectors) that lose value.

Reduction in foreign banks credit to Guatemala due to the impact of the analyzed shock on their balance sheets, assuming a uniform deleveraging across domestic and external claims.

Greece, Ireland, Portugal, Italy, Spain, France, Germany, Belgium, Switzerland, and UK.

1 See Analytical Note 2. 2 Total credit to the non-bank sectors in Guatemala is calculated by adding IFS local (both domestic and foreign owned) banks’ claims on non-bank borrowers and BIS reporting banks’ direct cross-border claims on non-bank sectors (BIS Locational Banking StatisticsTable 6B).

Policy Discussions

14. Discussions focused on the policies required to preserve macroeconomic stability and enhance resilience while supporting higher long-term inclusive growth. In the near-term, with the output gap closed and incipient inflation pressures, the recent increase in the policy rate is appropriate and there may be a case for tightening monetary policy further, while maintaining a neutral fiscal stance. Building room to deal more effectively with shocks will require bolstering budgetary management including raising revenues, upgrading the monetary and XR framework, and strengthening the financial system while setting the basis for its orderly deepening. In order to reduce poverty and raise long-term growth, it is necessary to boost investment in physical and human capital to raise productivity, as well as to implement structural reforms to improve the institutional framework and foster greater security.

A. Near-term Policy Mix

15. There was agreement that the modest reduction in the fiscal deficit expected for 2013 is adequate from a demand management perspective. The 2013 budget aimed at a central government deficit of 2½ percent of GDP. However, disbursement of some multilateral loans will likely be delayed until next year and a moderate revenue underperformance is anticipated, arising from administrative problems in the implementation of new tax regulations and personnel issues, especially with the customs office. Both shortfalls will be largely offset by lower expenditure (¶16). Accordingly, a central government deficit of 2¼ percent of GDP in 2013 is now projected. This entails an approximately neutral fiscal stance which was considered appropriate in light of a virtually closed output gap and growth projected at potential. Moreover, the fiscal sustainability gap (¶s19, 20) is small and does not require immediate correction.5

16. The authorities noted that the shortfalls in revenues and external disbursements this year would be met primarily by spending cuts. In particular, expenditures on capital, goods and services, and transfers, would be lower since collections are earmarked to a significant extent. Staff counseled keeping consolidation efforts away from cutting already low public expenditure and making only targeted spending cuts to safeguard priority social programs and investment. The authorities were reluctant to undertake additional borrowing to counter the revenue and financing shortfalls and are determined to protect the critical elements of the 2012 tax reform. Staff reiterated the need to improve public financial management to avoid spending arrears, finalize a reliable estimate of their outstanding stock, and establish a strategy for their clearance. The authorities stressed their commitment to these actions and added that they were considering issuing a bond later in the year for the payment of domestic arrears, contingent on their proper documentation.

Guatemala: The Monetary Policy Stance

Monetary and financial conditions Index (FCI) was developed for Guatemala to reflect how financial variables influence economic activity. A change in the value of the overall FCI reflects the total contribution of financial conditions to GDP growth. The financial variables used are: a summary measure of interest rates (the real interest rate of bank loans), the real effective exchange rate (REER), the real growth of deposits and credit to the private sector, and a housing price index.

The FCI suggests that overall financial conditions were broadly neutral by the end of 2012. They were fairly loose or positive in the first quarter but turned more negative or tighter in the rest of the year. Overall, the average contribution of the FCI for the whole of 2012 was positive. Nonetheless, relatively underdeveloped financial markets in Guatemala may limit the interpretive value of the model.

  • Following Magud and Tsounta (2012)1, different methods were used to estimate the neutral real interest rate (NRIR). The first one is based on the uncovered interest parity condition. The second model estimates the NRIR using a Taylor rule augmented for inflation expectations. The third method solves a general equilibrium model that focuses on aggregate demand-supply equilibrium.

  • The main results suggest that there is some space for further monetary policy tightening. To different degrees, all estimations conclude that the monetary policy rate is below neutral levels. Specifically, the NRIR is estimated to lie in a range between 1.4 and 2.4 percent. However, some caveats apply for each of these models and results should be interpreted with caution given data limitations and shallow financial markets in Guatemala.

uA01fig13

Monetary and Financial Conditions Index (2007-2012)

(percentage points of y/y real GDP growth)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: Country authorities and Fund staff estimations.

Neutral Real Interest Rate for Guatemala

Sources: Country Authorities and Fund staff estimates. Notes: 1/ All units expressed as percent points unless otherwise stated. 2/ (bps): Basis points
1. Nicolas E. Magud and Evridiki Tsounta, “To Cut or Not to Cut? That is the (Central Bank’s) Question: In Search of the Neutral Interest Rate in Latin America,” IMF Working Paper, WP/12/243, October 2012.

17. The authorities concurred to remain vigilant of lingering inflationary pressures. The central bank lowered its end-year inflation target range by half a percentage point (to 4±1 percent) in January 2013. Headline and core inflation are at the mid range of the band, and have started to edge up, while expected inflation is at the top of the range for end-2013 and through 2014. After the entire borrowing needs of the government for 2013 were met with the issuance of a Eurobond in February, and with no further domestic state bond issuance planned for this year, banks remain very liquid. Moreover, the high growth rate of consumer credit is a sign of demand pressures, underpinned also by buoyant remittances. Accordingly, the authorities’ decision to raise the policy rate by 25 basis points in late April was fully endorsed by staff. The central bank also considered that sterilization operations to mop up excess bank liquidity had been adequate. Staff advised to raise further the policy rate and to step up liquidity absorption promptly if inflationary pressures do not abate (Box 4 and AN 5). Officials agreed, though they intend to assess the evolution of inflation and inflation expectations after the recent hike in the policy rate before taking further action in the near term.

B. Increasing Resilience to Shocks

Rebuilding fiscal space and enhancing fiscal sustainability

18. It was recognized that continuing increases in the burden of public debt are a source of vulnerability. While the government debt-to-GDP ratio is comparatively low, it has been rising steadily since the 2008 crisis. The authorities acknowledged that Guatemala cannot rely comfortably on debt financing to support expansionary counter-cyclical policies (particularly if prolonged)—funding risks are likely to escalate rapidly, especially in light of the high debt-to-revenue ratio. The debt structure is solid on many fronts,6 but exposures to rollover and FX risks are increasing, as the country gains access to international markets. The lack of depth in the domestic financial market (with its highly concentrated investor base and virtually non-existing secondary government debt market)7 and rigidities that curtail access to official financing in FX (IFI loans must be approved by Congress on a case-by-case basis, and are often made hostage to political negotiations) provide thin coverage against spikes in global risk aversion.

The Macro-Scenario Under the Staff’s Recommended Consolidation Path Differs Little from the Baseline.

Presupuesto Multianual, 2013-14, Minstry of Finance

Source: Fund staff estimates.

19. Hence, fiscal sustainability should be reinforced over the medium term. Stabilizing the debt-to-GDP ratio at its current level—thereby unlocking the ability to implement expansionary counter-cyclical policies without exacerbating budget funding risks) would require a permanent improvement in the primary balance of about 3/4 -1 percent of GDP. If the actuarial deficit of the social security system were taken into account (preliminary estimates are still being refined), the sustainability gap would be correspondingly larger. With output not exceeding potential, continuing global uncertainties exacerbating growth risks, and no pressing financing constraints, the common view was that immediate adjustment is not needed. At the same time, staff indicated that its recommended moderately paced adjustment, starting from 2014, with modest frontloading and spaced over several years, would strike the right balance between reducing the sustainability gap and limiting the negative impact on growth (AN 3), given an estimated fiscal multiplier of 0.4 (multipliers tend to be smaller when activity is at about potential).

20. The authorities agreed and highlighted that current policies are already on track gradually to reduce the sustainability gap. They noted that their medium term budget already envisages a steady reduction of the deficit through 2015. Staff’s recommended adjustment path (¶19) would be broadly similar to the authorities’ plan, if the latter were extended beyond 2015. In this case, the sustainability gap would be lowered to near-negligible levels without pushing growth significantly below potential. On the other hand, staff’s baseline projection anticipated a somewhat smaller and less frontloaded budget tightening than that planned by the authorities, owing to: (i) the expectation that some of the spending delayed in 2013 will be executed in 2014-15; and (ii) a less sanguine view of the yield of the tax reform, in light of the problems encountered in its early implementation. Nonetheless, staff accepted that the macroeconomic implications of the differences between the baseline and alternative scenarios were minor over the medium term, given the low fiscal multiplier. But some residual budget adjustment will be required after 2018 to ensure sustainability.

uA01fig14

Tax Effort in the Region (Actual/Potential Tax Revenues), 2010

(percent)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: Country authorities; and Fund staff estimates.
uA01fig15

Guatemala: Long-Term Fiscal Sustainability, 2012-2042

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

1/ This path is the baseline through 2018, with a constant primary balance thereafter.2/ Assumes an adjustment in 2014 which stabilizes the debt-to-GDP ratio.Source: Fund staff estimates.

21. Staff urged additional efforts to mobilize revenue beyond budget consolidation needs. Guatemala needs not only to achieve long-term fiscal sustainability, but also to maintain macro stability while addressing pressing social needs—not least reduction of widespread absolute and relative poverty—and paving the way toward high, inclusive long-term growth. Meeting these objectives will depend upon raising the currently low level of government revenues to support priority public spending (¶28).8 In particular, staff advocated reducing tax expenditures (equivalent to 8 percent of GDP), and realigning VAT rates (from 12 to 14 percent) with those prevailing in the region. Lowering the currently high degree of revenue earmarking (about 50 percent) will also be important to widen the fiscal adjustment toolbox. Further work to strengthen the tax and customs administration, and stepping up efforts to reduce informality, should assist in enhancing collections. The authorities saw merit in these recommendations, but emphasized that such an ambitious agenda will take time to implement.

22. The authorities are committed to improve the efficiency of public expenditure and reinforce budgetary management more generally. They noted that planned amendments to the Organic Budget Law would ameliorate transparency and efficiency of public spending, and help reallocate resources toward priority areas. Staff recommended that reforms should also grant more flexibility to the approval of official financing, thus providing room for a greater counter-cyclical cushion and preventing the under-execution of IFI-supported spending. Faster progress would be desirable with the approval of the rest of the transparency package, in Congress since last year, and with implementation of a results-based budget.

Upgrading monetary and exchange rate policy

23. It was agreed that monetary policy transmission should be bolstered to anchor further low and stable inflation. Guatemala’s annual inflation is below that of regional peers, and within its target band. Nonetheless, the transmission channels of monetary policy remain feeble, while pass-through effects from commodity prices continue to influence inflation heavily.9 The authorities concurred that there is scope for enhancing monetary policy transmission through a four-pronged approach. First, it is desirable to raise gradually XR flexibility, credibly conveying to the public that the inflation target is the monetary authorities’ primary objective. In this regard, consolidating the operational independence of the central bank from government and private sector interests would be important. Second, efforts ought to be stepped up to de-dollarize credit, mainly by allowing the XR to fluctuate and thereby forcing agents to internalize FX risks and promote hedging. Third, public debt and private securities markets need to be developed. To this end, it is also important to finalize the draft capital markets law in compliance with IOSCO best practices and enact it. Finally, the framework for monetary operations—including with technical assistance from the Fund—should be further refined.

24. The central bank favors progress towards greater XR flexibility, but at a very prudent and moderate pace. Increased flexibility would provide the economy with an extra shock absorber, while preventing excessive FX risk taking. Staff recognized that the rule-based FX intervention has allowed for some flexibility but also pointed out that intervention has been relatively high—as it is apparent from the high sterilization costs, which have weakened the central bank’s balance sheet (¶25). Indeed, a recent increase in net FX liabilities of the non-financial private sector (vis-à-vis 2007) may also be driven by a perceived implicit guarantee on a stable exchange by the central bank (AN 4). In this respect, staff welcomed the slight widening at the end of 2012 of the XR fluctuation margin used to determine intervention and the associated recent decline in FX intervention. There was agreement on the need to continue broadening the intervention rule. However, the authorities considered that the rule had served well to maintain stability and anchor expectations and thus it could be widened only slowly.

25. The government acknowledged the need to support the central bank’s balance sheet. In 2011-12, the central bank had annual operational losses of ¼-½ percent of GDP. The Ministry of Finance is obligated by law to compensate the central bank for part of the costs incurred in its monetary operations with a two year lag. However, Congress decided to exclude from the 2013 budget the refund corresponding to 2011, prompting a legal challenge by the central bank. Staff argued that the latter should be compensated for its 2011 losses with a modification to the 2013 budget, while provision should be made for the 2012 losses in the 2014 budget. The Ministry of Finance affirmed that the overdue refund to the central bank may be approved by Congress later this year.

Strengthening the financial system and setting the basis for its orderly deepening

26. The authorities are determined to strengthen the financial system. Guatemala is well placed to apply key Basel III components and is in compliance with most of the Basel I framework. The authorities are working to promote implementation of Basel III rules at the regional level to prevent regulatory arbitrage. However, staff cautioned that important work remains ahead, including full implementation of risk-based supervision, and consolidated supervision. Moreover, further upgrade of financial sector regulations would be desirable, including in preparation for the forthcoming FSAP scheduled for the spring of 2014. In this regard, officials noted that there has been good progress with implementing the amendments to the Banking Sector Law, as regulations have been issued to reduce risks from offshore banking, require credit ratings for banks, and limit loans to shareholders to control credit concentration and connected lending. Staff encouraged the authorities to spur congressional passage of the draft banking secrecy law and supported other measures to combat money laundering to comply with additional OECD and AML/CFT standards (AN 6).

27. Officials concurred that recent strong credit growth calls for great vigilance. In particular, fast expansion of consumer credit (including by micro-financial firms) and foreign currency credit have raised concerns. While this issue will be examined in more detail by the forthcoming FSAP update, staff cautioned that, although there are no immediate acute worries, the continuation over a long period of high rates of credit expansion could eventually undermine the stability of the financial system. The authorities agreed, while underlining that the ongoing credit growth is needed to foster deeper financial markets. They noted that approval of the law for micro-finance institutions, recently submitted to Congress, would also help assuage risks.

C. Poverty Reduction and Achieving Higher Long-Term Inclusive Growth

28. There was consensus on the need to step up well-targeted social spending. Social spending is too low in Guatemala—even relative to regional peers—leaving critical needs unmet. Beyond the inherent benefit of reducing poverty and hunger, effective action by the public sector has the potential to improve a broad range of social indicators and human capital, which impinge directly on the country’s productivity. Staff argued that this is critical to foster competitiveness and sustain growth, and to integrate fully vulnerable groups into Guatemala’s social fabric, which would also alleviate the high security risks. The authorities agreed that higher levels of social expenditure are required to build a skilled and productive labor force. Albeit officials stressed that resources to fund greater outlays are limited, they underscored social initiatives underway, such as the Zero Hunger Plan.

29. The private investment gap must be urgently bridged. Much scope remains to foster competitiveness through structural reforms to improve the business climate and reduce violence and impunity. The authorities are currently addressing these issues through their competitiveness agenda and several legislative initiatives, including one that aims to improve labor force flexibility and diminish informality. It was agreed that the Public-Private Partnerships (PPP) framework should be used to catalyze high-quality investment and infrastructure, though it first needs to be strengthened to grant the Ministry of Finance more powers to monitor and control contingent fiscal risks. Staff warned against plans, currently under consideration in Congress, to use tax incentives to attract investment, arguing that they are of dubious efficacy and prone to abuse. Indeed, the main determinants of investment by firms are the stability of the tax regime, infrastructure availability, and adequate legal frameworks. Widespread tax incentives may eventually endanger macroeconomic stability and thus hurt development.

30. The authorities viewed regional integration as providing new impetus to support faster growth. The region should complete the customs union, harmonize trade rules, and further integrate services and factor markets. The authorities explained that they are urging Congress to approve the Association Agreement with the EU which would boost regional integration in those areas. They also noted that a Central American free trade agreement with Mexico still needs to be ratified by Congress. Staff estimates Guatemala’s real GDP growth may increase by up to 0.8-1.6 percentage points per year by improving logistics, increasing partner diversification, deepening integration into global production chains, and increasing technological sophistication of exports to the levels of the five largest Latin American countries and the EU. Competitiveness could be augmented by market enlargement (from 14 to over 40 million people) and pooling resources for infrastructure and trade. Economies of scale could boost investment, and lowering intraregional trade costs would improve resource allocation.10

Staff Appraisal

31. Growth has been firm in the aftermath of the global crisis, fundamentals remain stable, and the near-term outlook is broadly positive. Economic activity is projected to be near potential, while inflation should remain contained and within the central bank’s target band. Nonetheless, risks to the outlook are tilted to the downside. External risks include weaker than expected growth in the U.S. which would weigh on economic activity, and a geopolitical oil shock that could impair Guatemala’s terms of trade and growth. Domestic risks pertain to policies, including a setback on the main items of the 2012 tax reform, or enactment of legislation that entails new fiscal incentives. Weak fiscal revenues could endanger fiscal consolidation and lower Guatemala’s resilience to shocks.

32. The anticipated broadly neutral fiscal stance for 2013 is appropriate while further monetary tightening may be needed.

  • The deficit outturn this year is likely to be only marginally lower than in 2012 (and than budgeted). Since capacity is nearly fully utilized, the resulting virtual absence of fiscal impulses is deemed adequate. Shortfalls in multilateral loan disbursements and revenue also mean that central government spending will be lower than planned. With expenditure levels already low, efforts should be made to limit the reduction in outlays, and at least to protect social programs and investment. Improvements in expenditure controls are necessary to prevent further accumulation of arrears. Clearance of outstanding payment arrears must be subject to rigorous audit of the claims.

  • Some evidence suggests that monetary policy stance may be, to a certain extent, accommodating. Thus, if inflation continues to rise, amid robust domestic demand, strong private credit growth, and abundant bank liquidity, the central bank should stand ready further to raise the policy rate and absorb residual excess bank liquidity.

33. Fiscal consolidation is necessary in the medium term to allow room for countercyclical policies and reduce vulnerability to shocks. Though public debt remains relatively low as a share of GDP, it has been steadily increasing since 2008 and it is quite high in relation to government revenue. Stabilizing the debt-to-GDP ratio will require a permanent improvement in the primary balance of about ¾ -1 percent of GDP. A moderately paced adjustment beginning in 2014-15, with limited frontloading, would balance the need to shrink the sustainability gap against any negative consequences on growth.

34. Additional revenue mobilization and improvements to public expenditure management should underpin budgetary adjustment. Raising revenues is essential not only for achieving long-term fiscal sustainability, thereby anchoring macro stability, but also for boosting health, education, security, and infrastructure outlays, which are all critical to reduce high levels of poverty and raise the potential for sustained inclusive growth. Specifically, reducing tax expenditures, adjusting VAT rates, and further strengthening the tax and customs administration would help lift collections. Enhancing the transparency and efficiency of spending would permit directing limited resources to priority areas, a goal that could also be supported by reforms to lower revenue earmarking and facilitate the approval of official external financing.

35. The monetary policy framework should be upgraded, including by enhancing XR flexibility. Strengthening monetary transmission would make it easier for the central bank to reduce the volatility of inflation in response to external shocks and thus help maintain it at moderate levels. To this end, it would be important to buttress further the central bank’s operational independence and the soundness of its balance sheet. Efforts to de-dollarize by allowing more XR fluctuation, developing domestic securities markets, and refining monetary operations are all critical for augmenting the monetary transmission mechanism. Likewise, more rapid progress in allowing greater XR flexibility would reinforce the role of inflation as the primary objective of monetary policy.

36. Further financial sector reforms are desirable while keeping careful watch over recent strong credit growth. Though much progress has been made, financial regulations should continue to be modernized, with special emphasis on full implementation of risk-based and consolidated supervision, gradual introduction of the Basel III framework, passage of the law for micro-finance institutions, and enactment of AML/CFT measures such as the banking secrecy law. Though not an immediate danger, the authorities should remain vigilant over high rates of growth of credit to the private sector—especially rapid expansion of consumer credit by micro-financial firms and foreign currency credit. Indeed, if sustained over a long period, a credit surge could eventually undermine financial stability.

37. High levels of poverty should be reduced by increasing social spending and by reforms aimed at boosting growth and regional integration. Higher social spending is essential to lift human capital, thus boosting competitiveness and growth, which would also be stimulated by greater public infrastructure expenditure. Private investment should also be raised through structural reforms to improve the business climate and reduce violence and impunity. The Public-Private Partnerships initiative should be strengthened to foster greater investment and improve infrastructure while managing fiscal risks. The recent congressional approval of the EU association agreement will help spur regional trade integration and the customs union.

38. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

Table 7.

Guatemala: Indicators of External Vulnerability

Sources: Bank of Guatemala and Fund staff estimates.

Stock in percent of weighted aggregate of M2, exports of goods and services, short-term external debt at a remaining maturity, and other external portfolio liabilities. For more details, see Assessing Reserve Adequacy (IMF Policy Paper 11/31).

Table 8.

Guatemala: External Debt Sustainability Framework, 2008-18

(In percent of GDP, unless otherwise indicated)

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 US dollar terms, g = real GDP growth rate, 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 (based on GDP deflator).

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.

Figure 6.
Figure 6.

Guatemala: External Debt Sustainability: Bound Tests1/2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: International Monetary Fund, Country desk data, and 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/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
Table 9.

Guatemala: Public Sector Debt Sustainability Framework, 2008-18

(In percent of GDP, unless otherwise indicated)

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

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.

Figure 7.
Figure 7.

Guatemala: Public Debt Sustainability: Bound Tests1/2/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2013, 247; 10.5089/9781484364840.002.A001

Sources: International Monetary Fund, country desk data, and 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/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
1

The reform modernized the income tax, eliminated several VAT exemptions, and improved administration (IMF Country Report No. 12/146).

2

The Constitutional Court has received claims against 35 (out of the total 45) articles in the reform, but so far suspended only two; one of them is relatively important, relating to more rigorous rules for transfer pricing, though the authorities estimate that the impact on fiscal revenue will be minimal.

3

A recent Fund technical assistance mission found that these budget rigidities are important, limit the flexibility to respond to shocks, and could interrupt payments for multi-year projects. An earlier study by the IADB reached similar conclusions (Los Sistemas de Gasto Público en América Central y la República Dominicana: Disciplina Fiscaly Eficiencia, IADB, 2006).

4

The estimated stock is Q3.5 billion (¾ percent of GDP), but this has yet to be certified by the Office of the Comptroller.

5

The fiscal sustainability gap is the improvement or in the (structural) primary balance required to stabilize the debt-to-GDP ratio.

6

Guatemala’s total gross financing needs are small (3½ percent of GDP in 2013), and a large share of debt is contracted at long maturities (10 years), fixed rates and reduced spreads (nearing 200 bps for SCDS).

7

Most central government domestic debt is held by the three major banks and the social security institute.

8

Guatemala’s tax “effort”—the ratio of actual revenues to potential—is the lowest among its peers, while the “revenue gap”—the difference between the current level of tax collections and the level that would result from achieving the tax effort prevailing in comparator countries—is estimated to be about 7 percent of GDP. Guatemala’s level of public expenditure, 14 percent of GDP in 2012, lags both its CAPDR peers and other EM countries (23 and 32 percent of GDP, respectively). As a broad goal for the long term, the authorities target an increase in revenue to 18 percent of GDP. Consistent with a debt-stabilizing deficit, this would imply an increase of around 5 percentage points of GDP in expenditures.

9

The pass-through rate for the policy rate has been estimated at 60 percent. See “Medina Cas, Carrion-Menendez and Frantischek “Effectiveness of Monetary Policy, “Piñon and other, eds., Central American, Panama and the Dominican Republic, Challenges Following the 2008-09 Global Crisis, IMF, 2012.

10

See S. Medina Cas, A. Swiston and L. Barrot, 2012, “Central America, Panama, and the Dominican Republic: Trade Integration and Economic Performance”, IMF Working Paper 12/234.

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Cover IMF Staff Country Reports
Guatemala: 2013 Article IV Consultation
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2013: Issue 247
Publisher:
International Monetary Fund
ISBN:
9781484364840
ISSN:
1934-7685
Pages:
61
DOI:
https://doi.org/10.5089/9781484364840.002

Real GDP growth (percent y/y) and contributions
Figure 1.

Guatemala: Growth and Inflation

Real GDP growth.

(percent)

Inflation.

(percent - y/y end of period.)
Figure 2.

Guatemala: External Sector Developments

Real and nominal effective exchange rate indices

(Jan 2008 = 100)

Net international reserves of the central bank

(US$, billions)
Figure 3.

Guatemala: Fiscal Sector Developments
Figure 4.

Guatemala: Money and Credit

Fiscal revenue/expenditures vs. overall balance

(percent of GDP)

Guatemala: Export Market Shares

Guatemala: Exports to Top-Five Destinations

Guatemala: International Investment Position

(In U.S. billion)

Bank credit to the private sector

(Percent of GDP)
Figure 5.

Guatemala: Social Development and the Millennium Development Goals

Guatemala: Public Social Expenditure

Guatemala: Growth Forecast and Simulation, 2005-2015

(percent)

Monetary and Financial Conditions Index (2007-2012)

(percentage points of y/y real GDP growth)

Tax Effort in the Region (Actual/Potential Tax Revenues), 2010

(percent)

Guatemala: Long-Term Fiscal Sustainability, 2012-2042

(Percent of GDP)
Figure 6.

Guatemala: External Debt Sustainability: Bound Tests1/2/

(External debt in percent of GDP)
Figure 7.

Guatemala: Public Debt Sustainability: Bound Tests1/2/

(Public debt in percent of GDP)