Guatemala: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Guatemala
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International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
11 Jun 2021
eISBN:
9781513573205
ISBN:
9781513573205
Language:
English
Keywords:
public finance; eba CA methodology; foreign currency; credit fund; return on equity; COVID-19; Loans; Credit; Natural disasters; Global; CA norm
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1. COVID-19 came at a time of macroeconomic stability and firming growth. Guatemala proved the steadiest economy in Latin America post-GFC (with an average growth of 3½ percent) and economic momentum was strong pre-pandemic. Robust remittances, soaring investor confidence upon the inauguration of Giammattei’s administration (January 2020) and accommodative fiscal and monetary policies supported growth while keeping inflation expectations firmly anchored. The external position remained strong and the banking system liquid and well capitalized.

Abstract

1. COVID-19 came at a time of macroeconomic stability and firming growth. Guatemala proved the steadiest economy in Latin America post-GFC (with an average growth of 3½ percent) and economic momentum was strong pre-pandemic. Robust remittances, soaring investor confidence upon the inauguration of Giammattei’s administration (January 2020) and accommodative fiscal and monetary policies supported growth while keeping inflation expectations firmly anchored. The external position remained strong and the banking system liquid and well capitalized.

Recent Developments and Outlook

A. The Pre-COVID-19 Landscape

1. COVID-19 came at a time of macroeconomic stability and firming growth. Guatemala proved the steadiest economy in Latin America post-GFC (with an average growth of 3½ percent) and economic momentum was strong pre-pandemic. Robust remittances, soaring investor confidence upon the inauguration of Giammattei’s administration (January 2020) and accommodative fiscal and monetary policies supported growth while keeping inflation expectations firmly anchored. The external position remained strong and the banking system liquid and well capitalized.

2. Social development remained a significant challenge pre-COVID. At 0.1 percent of GDP, social spending was dwarfed by social challenges. The poverty rate was close to 60 percent of the population and one out of five Guatemalans lived in extreme poverty. Basic healthcare covered just about 50 percent of Guatemalans, leaving the poor and rural populations (60 and 46 percent of Guatemalans, respectively) with minimal access to these services. Only 25 percent of the population had access to safe water and sanitation. At 46½ percent, and up to 70 percent in some departments, Guatemala’s prevalence of stunting in children under 5 was one of the highest in the world.

3. The National Innovation and Economic Development Plan (PLANID) rightly aimed at improving Guatemalans livelihoods. Broad-based fiscal and business climate reforms pursued the modernization of the public sector for an expanded provision of health and education, and greater competitiveness and employment. And improved accountability and transparency would curb corruption.

B. The COVID-19 Shock

4. Pandemic infections and deaths have remained relatively moderate despite an early reopening of the economy. The swift declaration of the State of Calamity and associated country-wide curfew, border closures, and suspension of non-essential activities provided necessary containment at the early stages of the outbreak. The early reopening of the economy amid strict biosecurity protocols, effective mask use, and low incidence of megacities, allowed for the recovery to materialize while stabilizing infections, which have remained contained during the latest third wave.

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COVID-19 Pandemic Developments

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: Population Reference Bureau, John Hopkins University.

5. 2020 growth proved resilient in regional comparison. A 4-month strict lockdown and the collapse of external demand weighed on private consumption, investment, and exports. Guatemala’s recovery turned around in June and accelerated during the summer in line with the reopening of the economy (complete by early October), with a jobs’ recovery rate of 75 percent as of December 2020. Overall, GDP contracted by 1½ percent in 2020, versus 7.2 percent on average in CAPDR. Guatemala’s resilience during the pandemic reflects:

  • A favorable production and exports mix tilted towards essential agriculture, food and chemical activities—unaffected by lockdown measures and on high demand in international markets. As such, growth in nominal merchandise exports reached 14 percent (y/y) in 4Q2020.

  • Remittances’ resilience. After a sharp decline through May, remittances rebounded strongly posting an annual growth of 7.9 percent (Box 1). With remittances accounting for around 30 percent of households’ income and private consumption standing at 85 percent of GDP, remittances helped support growth.

  • Unprecedented fiscal and monetary support. Already laid out by March 19th, the National Emergency and Economic Recovery Plan entailed a comprehensive policy response (¶6, 8).

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Sources: National authorities and IMF staff calculations.

6. Fiscal policy promptly supported the economy and the most vulnerable. The authorities drew on available fiscal space to enhance healthcare capacity, secure lifelines, and sustain demand. The scope of the government’s interventions is commendable given very low levels of health coverage and social protection pre-COVID.

  • Saving lives and protecting livelihoods. The authorities (i) ramped up temporary hospitals and medical equipment; (ii) deployed food support and emergency funding for SMEs; (iii) expedited relief to firms through tax credit refunds and the deferral of tax payments and social security contributions; (iv) provided targeted cash transfers (Family Bonus), salary subsidies (Employment Protection Fund) and firms’ loans at favorable terms (Working Capital Credit Fund).

  • Unprecedented deployment of cash transfers. The Family Bonus reached almost 80 percent of Guatemalan households, up from 5 percent covered by social transfers pre-COVID. Lacking a public registry of households, the government used electricity bills to identify beneficiaries, rolled out internet and phone platforms to register them, and channeled transfers digitally in a transparent and effective manner.

  • Financing swiftly mobilized. MINFIN mobilized around US$1,900 million in domestic bonds, US$1,400 million in direct bond placements with Banguat, US$1,200 million in Eurobonds, and US$535 million in IFI loans. As a result, public debt increased from 26.5 percent of GDP to 31.6 percent.

  • Sizable fiscal impulse of 2.3 percent of GDP due to relief spending and faltering revenues, only partly offset by budget underexecution from lockdown disruptions. In all, the fiscal deficit reached 4.9 percent of GDP.

Main Economic Measures to Mitigate COVID-19 Impacts

article image
Source: Staff based on First General Report of the Republic 2020.
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Sources: National authorities and IMF staff calculations.

7. Despite these unprecedented measures, social indicators have deteriorated. The pandemic and the two major hurricanes hitting Guatemala last November, Eta and Iota, have compounded long-standing social challenges.

  • The pandemic. Job losses and labor income reductions are estimated to have increased poverty by 3 percentage points during 2020 (UN-ECLAC). Mobility restrictions reduced informal work, and rising food prices might have increased acute malnutrition sharply by 80 percent, to about 120 children under 5 per 10,000 population (preliminary data). In parallel, the pandemic has lowered the provision of basic health services.

  • The hurricanes. While their growth impact is expected to be limited (0.2 percentage point at most in 2020), the overall infrastructure damage, foregone income and additional costs are estimated at almost 1 percent of GDP. Furthermore, the hurricanes battered the poorest regions with a large share of indigenous communities, overall affecting livelihoods of 311,000 people and fueling migration.

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Sources: National authorities, ECLAC and IMF staff calculations.

8. The authorities eased monetary policy, provided additional liquidity, and facilitated loan restructuring. Banguat lowered the policy rate by 100 basis points (to a historic low of 1¾ percent) and provided additional liquidity to support the payments systems and meet precautionary demand for cash. The monetary board temporarily eased regulations to facilitate the renegotiation of past-due loans (with no detriment to their credit risk classification), redefine default from 90 to 180 past-due days, and allow banks to record interest from restructured loans on an accrual basis.

9. Credit conditions turned moderately accommodative as a result. Private credit slightly accelerated to 6.4 percent (y/y) in 2020, from 4.9 percent (y/y) in 2019, bringing the credit-to-GDP gap to positive territory as nominal output shrank. By type of borrower, loans to large corporates, consumer loans, microcredits and mortgages all grew, whereas loans to small corporates contracted marginally. 26.2 percent of banks’ credit portfolio (9.7 percent of GDP) were restructured under regulatory forbearance, of which 15.7 and 35.4 percent consumer loans and loans to corporates, respectively. Private sector debt levels remain moderate at about 38 percent at end-2020, with firms and households contributing to total debt in about equal proportions.

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Guatemala: Total Credit and Private Sector Indebtedness

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: IMF Integrated Monetary Database, IMF Financial Access Survey, and IMF Staff estimates.

C. Outlook and Risks to the Recovery

10. The near-term outlook is positive. Staff projects growth of 4½ percent in 2021, with leading indicators showing a recovery in the key sectors of commerce, manufacturing, and construction, and a slower recovery in hospitality (accounting for just 3 percent of GDP). The outlook will be supported by the U.S.’ recovery, powered by the vaccine and the American Rescue Plan, and improving prospects in remaining trade partners. Domestically, the continued recovery in employment, sustained monetary accommodation, and initially planned vaccination coverage of about 60 percent of the population this year, are expected to lift consumption and investment.

11. Efforts are needed to raise medium-term growth. Given Guatemala’s relatively low exposure to contact-intensive industries, and resilient agro-industrial exports and remittances, growth is expected to stabilize at its pre-COVID potential rate of 3½ percent by 2023 (closing the output gap by 2025).1 However, pre-existing social and infrastructure needs due to inadequate government revenue and business climate conditions, alongside the deterioration of poverty and malnutrition during the pandemic, underscore the need to lift potential growth through greater provision of public health and education and pro-business reforms that spur foreign and domestic investment—both declining as a share of GDP over the past decade.

12. Temporary inflationary pressures are expected to abate. Local supply constraints and precautionary hoarding of basic foods in early stages of the pandemic, higher transportation fares from costly biosecurity protocols, and logistic disruptions following Eta and Iota, pushed inflation to the upper bound of the target band for most of 2H2020. Inflation expectations have remained well anchored throughout, consistent with soft demand conditions and core inflation. Near-term inflation is set to converge to the mid-point of the target b and (4 ± 1 percent) as supply shocks wane, outweighing inflationary pressures from diminishing economic slack. Staff’s baseline scenario presumes, as intended by Banguat, the sterilization of any excess liquidity stemming from the partial monetization of the 2020 fiscal deficit.

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CPI Inflation

(Year-on-year, percent change)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Source: INE; staff calculations

13. The external position was substantially stronger than the level consistent with medium term fundamentals and desirable policies in 2020.

  • Current account (CA) recent developments. The CA balance increased significantly to 5.5 percent of GDP in 2020 (from 2.4 percent in 2019) reflecting resilient remittances and a lower trade deficit from stronger terms of trade, imports compression, and robust agriculture, food and chemical exports. As the pandemic recedes, the CA is expected to deteriorate to -0.6 percent of GDP over the medium term due to lower exports growth, improving imports, and an increase in the FDI payout.

  • CA trend developments. The REER has appreciated by 37 percent cumulatively over the past decade. In parallel: (i) growing remittances have outweighed the deterioration in the trade balance; (ii) exports and imports shares in GDP, and trade openness 2 have all declined; and (iii) the consumption (investment) share in GDP has fallen (increased).

  • EBA CA assessment. The EBA CA methodology suggests a CA norm of -4.0 percent of GDP in 2020 reflecting Guatemala’s relatively low output per worker and youth population. As in the 2019 AIV, staff estimates Guatemala’s CA norm at -2 percent of GDP, once relatively weak security conditions discouraging investment are accounted for (Annex I). Even so, the CA norm remains below the debt stabilizing CA deficit of -0.9 percent, which would lead to the deterioration of the NFA position and build-up of external vulnerabilities, not least because the business climate is not conducive to FDI. The corresponding CA gap of 7.1 percent of GDP3 implies a REER undervaluation of -69 to -49 percent (compared with -26 to -10 percent at the time of the 2019 AIV). While the REER appreciation may be effective at closing the CA gap, it may further worsen the trade balance. In this context, structural and fiscal reforms that improve business conditions and increase productivity are essential to attract investment, decrease migration and remittances inflows, and support closure of the CA gap over the medium term.

Remittances as a Stabilizing Source of Income During the Pandemic

Pre-COVID, remittances had been growing steadily in Guatemala, increasing from 8 percent of GDP in 2002 to 13.7 percent in 2019, overweighting the trade deficit and expanding the CA surplus. Mostly originating from migrants to the U.S., remittances have helped reduce inequality and poverty through investments in human and physical capital 1. However, their impact on growth has likely been muted once REER appreciation effects and declining trade openness, are accounted for. Remittance growth was predominantly driven by a boost in the number of transactions—likely reflecting a growing flow of migrants from Guatemala to the U.S. over time—while the average amount remitted per transaction remained stable around US$333.

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Remittances: Number of Transactions and Average Amount per Transaction

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Source: National Authorities.1/ Data covers four largest financial institution transferorremittances.
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Remittances and Guatemala-born population in USA

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: ACS, Haver, and IMF staff calculations.

Remittances have proved resilient during the pandemic. Despite a sharp decline in remittances between March and May, remittances rebounded in the second half of the year and overall achieved a yearly growth of 7.9 percent in 2020, supported by a higher number of transactions while the average amount remitted remained, on average, below 2019 level.

Remittances’ resilience reflects differing economic conditions in the U.S. and Guatemala and strengthened migrants’ solidarity.

Historically, a 1 percent improvement in U.S. building permits (proxy for U.S. economic conditions given the large share of Guatemalan migrants working in the U.S. construction sector) is associated with an increase in remittances by 0.47 percent. A 1 percent worsening of agricultural activity in Guatemala (key employment sector in rural areas where most migrants come from) is associated with an increase in remittances flows by 0.57 percent. Remittances developments in 2020 are broadly consistent with the model. Furthermore, there is some evidence that U.S. income relief measures under the CARES Act, and heightened solidarity of Guatemalan migrants to support the livelihood of their families, are behind remittances’ strength during the COVID crisis. 2

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COVID-19 Pandemic and Remittances Inflow to Guatemala (Year-on-year percent change)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Source: National Authorities. * – data covers four largest financial institution that transfer remittances.
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Remittances are expected to normalize in 2021 as temporary support factors in 2020 wear off. Such factors include: (i) the official U.S. pandemic support, (ii) higher transfers of funds to migrants’ families as economic and health conditions deteriorate in Guatemala, (iii) transfers of migrants’ savings to home countries due to the fear of repatriation.

1 Adams Jr, R. H., Cuecuecha, A. (2010). Remittances, household expenditure and investment in Guatemala. World Development, 38 (11), 1626-1641. 2 IMF. (2019). Annex IV. External Adjustment to Terms-of-Trade Shocks Guatemala. 2019 Article IV Consultation – Press Release and Staff Report, 49-51.

14. Risks to the outlook are tilted to the downside. Slower vaccine rollout and/or new virus strains could draw out the global and domestic recovery. Protracted worsening in poverty and malnutrition could trigger social discontent, and further natural disasters could weigh on the recovery and Guatemalans’ livelihoods. A premature withdrawal of the financial sector support measures (before the recovery firmly takes hold) might curtail banks’ profitability and credit flow to the recovery. On the upside, a quick resolution to the pandemic, alongside faster-than-expected progress with business reforms, could further lift investment and growth (RAM Annex II).

Policy Priorities

To support the recovery, staff recommends maintaining monetary accommodation and targeted fiscal support to tackle increased poverty and malnutrition, while gradually unwinding credit support measures. Over the medium term, the authorities should create fiscal space to durably raise social and infrastructure spending.

A. Fiscal Policy

15. The authorities are envisaging a gradual withdrawal of the fiscal stimulus. Amid lack of Congress approval of the 2021 Budget, the government is working with the 2020 nominal target for revenues, or 9.9 percent of GDP, and an envisaged spending envelop of 14 percent of GDP. Fiscal support will shift from providing lifelines during the lockdown and reopening phases to supporting the recovery and improving social indicators. The implied deficit of 3.4 percent of GDP deviates by about 1½ percentage points from the historical mark of 2 percent—to be attained gradually by 2026. Financing needs are expected to be met primarily with a mix of do mes tic bonds, Eurobonds, and IFIs loans.4 Public debt is projected at 34 percent of GDP on average during 2021–26 and deemed sustainable (Annex III).

16. The overall fiscal stance in 2021 is appropriate and the authorities should persevere in their efforts to prioritize social and infrastructure spending. Ongoing efforts to reshuffle spending, given the lack of Congress approval of the 2021 Budget, should aim for (i) an increase in cash transfers (for education, health, and nutrition) commensurate with the deterioration in social indicators, drawing on improvements during the pandemic on targeting and enrollment (i.e., Social Registry of Households) while enhancing transparency via payments digitalization; (ii) enhanced provision of education through virtual or in-person learning, which is critical to prevent human capital losses; (iii) stepped up public investment that catalyzes private investment amidst prevailing uncertainties and the low-interest rate environment. Should social indicators worsen beyond expectations, staff recommends using the available fiscal space to expand the coverage of cash transfer programs (Annex III).

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Primary Balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Source: MINFIN; staff estimates.

17. As the recovery becomes entrenched, the authorities should raise overdue social and infrastructure spending as a matter of social cohesion and economic success. Guatemala’s low indebtedness provides fiscal space, although a narrow tax base somewhat limits debt carrying capacity. As the economy operates near its potential, fiscal policy should thus aim at a broadly stable debt-to-GDP ratio to guard against any unexpected shocks while raising necessary social and infrastructure spending. To reconcile these two goals, it is essential to enhance revenue mobilization and spending efficiency (¶18, 20), and more effectively manage natural disasters risks (Box 4) and public debt. Fostering the development of the domestic debt market is key to allow for more stable and cost-effective budgetary funding, especially amid volatile external financing conditions (Box 2).

Financing the Recovery: Enhancing the Local Currency Bond Market (L CBM)

Guatemala’s public debt metrics have benefitted from fiscal prudence. In 2020, the debt-to-GDP reached 32 percent, of which 18.3, 7 and 6.7 percent of GDP were domestic bonds, Eurobonds, and external bonds respectively. With external financing being, on average, 250 basis points cheaper than domestic financing, Guatemala has maintained a regular presence in international markets (EMBI spread of 263 in 2020) offering 10- to 30-year instruments. Domestically, the Ministry of Finance has sought to extend maturities from 1- to 3-year term instruments to 20-year treasury bonds, standardize and dematerialize securities, conduct regular auctions throughout the year, and coordinate with Banguat on amounts and maturity issued. Long-term domestic bond yields have steadily converged towards the emerging markets median.

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Local Currency Bond Yields EME and CADR

(Percent; tipically 10-year bonds)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: JP Morgan GB Index, SECMCA, staff calculations.Note: Shading represents 10-90th percentile of the distribution of domestic bond yields in EMEs.
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LCBM Development Indicators

(Score relative to CADR; 100 Maximum score)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: National authorities, staff calculations.

Enhancing the LCBM could lower borrowing costs and provide more stable budgetary resources. In line with available evidence for emerging market economies (e.g. GFSR, 2014), staff estimates based on panel data for the 6 CADR countries suggest that further financial deepening (larger and/or more diversified investor base) and liquidity in LCBM are associated with lower yields and exposure to global shocks. 1 On average, an increase in (i) financial depth of 1 percent of GDP reduces bond yields by 5 bps, (ii) traded volumes in the secondary market of 1 percent of the outstanding public debt reduces bond yields by 4 bps; (iii) the non-bank participation share of 1 percent reduces bond yields by 4 bps; and (iv) a decrease in banks’ excess reserve balances of 1 percent of total deposits brings down financing costs by 5 bps. Staff also finds that greater investor base diversification and financial depth could save up to 30 and 45 basis points in treasury bond yields, respectively, following a 100 basis point increase in the Fed funds rate. 2

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CADR Local Currency Bond Yield Determinants

(estimated coefficients)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: SECMCA, EIU, Staff calculations.The dataset compiles indicators of local currency bond market development in Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua (monthly, 2007–2019). These indicators comprise the depth of the financial market (assets as percent of GDP), the liquidity of the secondary market (turnover ratio), the diversification of the investor base (non-bank investor base) and the excess liquidity in the money market (banks’ excess reserve balances).
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Yields Sensitivities to Global Liquidity Shocks

(interaction effects of the FED rate on LCBM; basis points)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: SECMCA, EIU, Staff calculations.The dataset compiles indicators of local currency bond market development in Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua (monthly, 2007–2019). These indicators comprise the depth of the financial market (assets as percent of GDP), the liquidity of the secondary market (turnover ratio), the diversification of the investor base (non-bank investor base) and the excess liquidity in the money market (banks’ excess reserve balances).

To capitalize on these benefits, the authorities should further develop the LCBM. Priorities include (i) passing the new Securities Market Law to modernize debt management and diversify the investor base; (ii) publish a Medium-Term Debt Strategy/Annual Borrowing Plan to enhance transparency and predictability; (iii) place instruments on a wide maturity spectrum to expand investment alternatives while using liability management to mitigate refinancing risks; (iv) further enhance coordination between debt management and monetary policy to reduce market segmentation, increase treasury bond liquidity, and secondary market trading.

1 Control variables for domestic macroeconomic conditions (one-year-ahead expectations) and external environment (liquidity and risk appetite) resulted significant and with the expected signs. 2 Panel estimation results using interaction effects on the Fed funds rate and LCBM indicators. Savings from benchmarking Guatemala’s development indicators with those of the 75th percentile across the sample.

18. Spending efficiency and fiscal transparency efforts can help free up resources and enhance public finances. The authorities’ intent to expand the provision of public services in a cost-effective manner is timely in the pandemic context. Welcome measures under the PLANID include an e-government strategy to reduce red tape and exposure to corruption and the recent approval by Congress of the Administrative Simplification Law. Ongoing efforts to improve fiscal transparency—via information portals on the use of COVID-related programs, external loans, NGOs, trusts—should be complemented with the financial strengthening of the Comptroller General’s Office. The authorities should pursue long-awaited fiscal structural reforms, notably: (i) a reform of laws on civil service and salaries to align compensations with an effective provision of public services and to promote recruitment based on merit; (ii) an integral reform of the procurement law to reinforce transparency and accountability of public spending, and ensure an adequate balance between agility and competition; (iii) enhancing public investment management through multi-year budgeting; and (iv) strengthening results-based budget management with medium- and long-term planning.

19. The authorities should persevere in their anti-corruption efforts. Following the termination of UN-backed International Commission against Impunity in Guatemala (CICIG) in 2019, the authorities kept strengthening the Attorney General’s Office (AGO), including through two IFIs loans of US$360 million, and extended its territorial coverage. There is also further scope to fortify the investigative and prosecutorial competences of the AGO, and to reduce the judicial backlog.

Strengthening Public Finance Transparency and Governance

Guatemala’s public finance management (PFM), which is broadly aligned with international good practices, needs to be further strengthened. About two thirds of indicators under the Public Expenditure and Financial Accountability (PEFA, 2018) Assessment are in line or above the basic levels required by international good practices. Nonetheless, the PEFA assessment highlights areas for improvements in about ¾ of its indicators, notably in the areas of (i) management of assets and liabilities (expansion of single Treasury account to decentralized institutions, automation of payments), (ii) control of budget execution, (iii) external scrutiny and auditing, (iv) accounting and reporting (automation of registration processes) and (iv) policy-based budgeting (availability of financial programming and forecasting model). The pandemic makes it more important to enhance transparency in the use of resources.

Building on progress in recent years, it is essential to keep enhancing control in budget execution, including public procurement (PEFA pillar V). While over 80 percent of the value of public procurement was contracted under non-competitive procurement practices a decade ago (such as single source or emergency procedures), the authorities have sought to improve efficiency, control and transparency through procurement reforms in recent years, resulting in over half of total procurement conducted competitively by 2018. Some of the major steps in this area included: (i) the use of reverse auction as procurement method; (ii) an increase in use of competitive procurement processes; (iii) the creation of a Vice Ministry for Transparency; (iv) the use of a centralized, web-based registry; and (v) improvements in the national procurement platform. There is a need to enhance the system for processing complaints and appeals related to public procurement, as highlighted by the latest PEFA.

Building on progress in recent years, it is essential to keep enhancing control in budget execution, including public procurement (PEFA pillar V). While over 80 percent of the value of public procurement was contracted under non-competitive procurement practices a decade ago (such as single source or emergency procedures), the authorities have sought to improve efficiency, control and transparency through procurement reforms in recent years, resulting in over half of total procurement conducted competitively by 2018. Some of the major steps in this area included: (i) the use of reverse auction as procurement method; (ii) an increase in use of competitive procurement processes; (iii) the creation of a Vice Ministry for Transparency; (iv) the use of a centralized, web-based registry; and (v) improvements in the national procurement platform. There is a need to enhance the system for processing complaints and appeals related to public procurement, as highlighted by the latest PEFA.

The authorities have taken several measures to enhance the transparent use of resources (PEFA pillar V), including those related to Covid-19. The Ministry of Finance publishes overall expenditures in a fiscal transparency portal (https://transparencia.minfin.gob.gt/), including open data (https://datos.minfin.gob.gt/). It also administers and regulates the State Procurement System through the Guatecompras portal (https://www.guatecompras.gt/), used to buy public goods and services, and to disseminate all procurement contracts, including Covid-19-related. Guatecompras provides details on all purchases by the general government, key information on competition rules and requirements, the list of awarded companies and the amounts paid. Registro General de Adquisiciones del Estado (https://rgae.gob.gt/) publishes the names of the beneficial owners of each awarded company. In addition, the Comptroller General is in charge of supervising the negotiations and the implementation of Covid-19 contracts (https://www.contraloria.gob.gt/).

20. Revenue mobilization should be scaled up substantially post-pandemic. Significant imports compression, and related VAT receipts, explain most of the ½ percent of GDP decline in revenues last year, from an already historical low of 11.2 percent of GDP in 2019. Greater management continuity at the tax agency and improvements in voluntary compliance—through, e.g., a dispute resolution mechanism—are welcome. Improved interagency coordination against contraband is bearing fruit and should be underpinned by a robust regulatory framework. Priority areas for the tax agency include (i) rationalizing tax exemptions; (ii) strengthening the clearance process and imports valuation controls in customs; (iii) enhancing the control of medium and large tax payers, and those under special tax regimes; (iv) implementing a comprehensive plan on VAT credit control; (v) updating the taxpayer register; and (vi) automatizing core revenue administration processes.

B. Monetary Policy

21. Monetary policy should remain accommodative to guard against downside risks from the pandemic. At 1.75 percent, the monetary policy rate is about 220 basis points lower than what a neutral stance would imply. Unprecedented monetary easing should continue provided inflation expectations remain anchored. Under staff’s baseline scenario, inflation is expected to ease as pandemic-related shocks wane (¶12), overweighing inflationary pressures from the normalization of oil prices and the output gap. Furthermore, inflationary risks are tilted to the downside given prevailing uncertainties about the recovery.

22. The current account surplus and FX intervention by Banguat improved reserve adequacy. Banguat’s net purchases amounted to US$2,010 million in 2020 with a sizable acceleration between May and August 2020 and following decline towards the end of the year. This represents a sizable increase compared to US$1,329 million in 2019 (1.7/2.9 percent of GDP in 2019/2020). The FX measures taken by Banguat to improve reserve adequacy were appropriate given disorderly market conditions in the early stages of the pandemic, protracted uncertainty, and Guatemala’s vulnerability to climate risks, as evidenced by two major hurricanes hitting the country last November. Nonetheless, the quetzal has been considerably more stable than other currencies in the CAPDR region in 2020, largely reflecting Banguat’s intervention policy.5 Allowing two-way FX flexibility is important to stimulate market finance development and support de-dollarization efforts.

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FX Market Monthly Intervention by Banguat

“(Millions of U.S. dollars; percent)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: Banguat and IMF staff calculations.

23. Banguat should remain vigilant to avoid any unintended consequences of last year’s monetization. Potential credibility and inflationary risks from the partial monetization of the fiscal deficit in 2020 (¶6) have been contained thus far, as evidenced by well-anchored inflation expectations. The one-off nature of monetization to finance measures to protect the most vulnerable, and its compliance with Constitutional law for emergency circumstances, are likely behind this positive outcome. As in the rest of the CAPDR region, money growth accelerated significantly (to 18 percent y/y in December 2020, from 9½ percent on average over 2010–19), although active monetary operations by Banguat alongside increased precautionary savings have so far prevented inflationary pressures, with core inflation remaining consistently below 3 percent. Going forward, Banguat should continue to closely watch monetary aggregates and neutralize any excess liquidity as warranted.

C. Financial Sector Policy

24. The banking sector seems to have weathered the crisis so far. The banking system’s capitalization remains above the regulatory level (16.1 and 10 percent of risk weighted assets, respectively) and liquid assets covered 72½ percent of short-term liabilities in 2020, compared to 71 percent in 2019. With over ¼ of banks’ loan portfolio under credit moratoria, and a temporary shift from cash to accrual basis for interest payments, NPLs declined on aggregate (to 1.9 percent last year from 2.2 percent in 2019) and across all borrower types. In parallel, ROE profitability was eroded (from 17.9 percent at end-2019 to 16.1 at end- 2020), reflecting cautious provisioning (194 percent at end-2020 versus 137.9 percent at-end 2019) in anticipation of possible deterioration of loans quality.

25. Banks may need to use their buffers as regulatory forbearance is phased out. Credit moratoria granted to impaired customers could mask the actual increase in NPLs, which might rise once these moratoria are lifted. The authorities’ exit strategy foresees the gradual normalization through September of the default period (to 90 past-due days from 180 days currently), gradual recognition through September in expenses of all interests accrued but not paid, and a return to cash basis for interest revenues as of January 2020. As these exceptional measures started to be phased out in 1Q2021, NPLs remained broadly stable, and banks’ capital positions and profitability healthy. Staff stress tests (Annex V) indicate that the banking sector is resilient to severe scenarios and could withstand significant shocks as normalization unfolds. Although staff overall deems risks to financial stability as moderate, the SIB should continue to closely monitor NPLs and engage with banks to ensure early intervention and maintain financial stability; even more so if downside risks materialized.

26. The adoption of FSAP recommendations would help enhance financial stability and integrity post-COVID. The adoption of the bill on banks and financial groups, currently in Congress, would align national legislation with Basel III standards for capital requirements and the bank resolution framework. The passage of the draft AML/CFT law, also in Congress, would align with FATF standards, notably on the adoption of a risk-based approach, a sound sanctioning regime for noncompliance, and greater protection for supervisors. Ensuring transparency on the ultimate beneficial ownership of corporate vehicles (by e.g. keeping up-to-date the corporate registry and facilitating its access) is also needed to tackle money laundering and corruption.

D. Unlocking Potential Growth and Building Resilience

27. Undertaking business and labor market reforms during the recovery would lift potential growth. The authorities’ Economic Recovery Plan rightly aims at improving the business environment and labor market flexibility. To support the recovery, the authorities should prioritize measures to promote e-commerce and digital services, and new regulations to facilitate formal part- time employment and firms’ reorganization through efficient insolvency procedures. A new legal framework to modernize road infrastructure management, catalyze private funding for connectivity and logistics, and increase legal certainty for large-scale projects, is key to stimulate domestic and foreign investment.

28. The recent major hurricanes Eta and Iota have brought to the fore the need to strengthen Disaster Risk Management. Highly exposed to climate events, natural disasters in Guatemala are macro-critical and disproportionately affect the most vulnerable (Box 4). The authorities’ past efforts to lay the legal foundations for climate change mitigation and adaptation should be complemented by i) an effective implementation of its emissions reduction programs, and ii) a financial strategy to enhance fiscal and infrastructure resilience to natural disasters.

Managing Climate Change Risks to Support Resilience and Sustainable Growth

Guatemala is highly vulnerable to climate risks and geophysical hazards. Situated in the conjuncture of three tectonic plates and in the inter-tropical convergence zone, the country is highly exposed to earthquakes, volcanic activity, hurricanes, floods, and other extreme weather events. Along its Dry Corridor, severe droughts are recurrent during El Niño phenomenon. As such, Guatemala is placed 10 th in the world ranking 1 of countries most vulnerable to natural disasters, with climate change compounding its frequency and severity. The landfall of Eta and Iota in November 2020 is a case in point.

uA001fig17

Disaster Risk: Exposure and Vulnerability

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Source: UNU, Institute for Environment and Human Security.
uA001fig18

Municipal Risk Index

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Source: INFORM Guatemala (2017).

Climate risk is macro-critical for Guatemala, and disproportionately affects the poor. With an average cost of 1.7 percent of GDP per event over the past four decades, natural disasters have dented growth, depleted fiscal buffers, and crowded out scarce resources for social spending. Guatemala’s dependence on agriculture (accounting for almost 24 percent of GDP and employing 72 percent of the population in extreme poverty, including economic linkages) makes it highly sensitive to climate change. 2 Furthermore, climate events disproportionately affect the vulnerable populations that usually live in high- risk, poor-infrastructure areas. For example, tropical storm Agatha reduced households’ per capita consumption by 5½ percent and increased poverty and child labor force participation by 18 percent and 3.1 percentage points, respectively. 3

uA001fig19

Main Natural disasters 1982–2020

(Percent of GDP; affected people in millions)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: ECLAC, World Bank.Note: Bubble size represents affected people (also in labels).

Efforts are ongoing to enhance climate change mitigation. While Guatemala’s share of global greenhouse gas (GHG) production was small in 2005 (0.06 percent), net emissions had been increasing significantly during the 1990s and early 2000s. Deforestation explains the largest share of GHG emissions, followed by transportation, agriculture, livestock and the energy sector. To comply with the Paris Agreement, Guatemala foresees emission reductions of between 11.2 and 22.6 percent (unconditional and conditional, respectively) by 2030, relative to a no-policy-change scenario. Key actions include: i) promoting renewable energy through the National Energy Plan, ii) reducing emissions from deforestation and forest degradation, iii) implementing the Low Emission Development Strategy, and iv) facilitating the certification of emission reduction. Going forward, the authorities should reinforce Guatemala’s Environmental Fiscal Strategy by considering (i) a tax proportional to the carbon content of domestically consumed fossil fuels, (ii) a vehicle taxation including an ad valorem component and a sliding scale of taxes/subsidies for relatively high/low emission rate vehicles, and (iii) pricing schemes that reduce hazardous products and manage the volume of solid waste.

Past adaptation efforts can be further enhanced.

  • Fiscal resilience. The new DRM law (pending Congress approval) aims for improved financial resilience and transparency. To enhance capacity response while preserving fiscal resilience, the authorities are encouraged to supplement risk retention instruments (contingent credit lines, budgetary reserves) with larger risk transfer instruments (so far the Caribbean Catastrophe Risk Insurance Facility solely).

  • Infrastructure resilience. Guatemala’s estimated annual financing gap to meet its adaptation targets reaches 1.2 billion dollars over a 12-year period (or 1½ percent of GDP per annum, UNDP 2018). To close this gap, Guatemala should prioritize those investments generating the strongest externalities and with the highest potential for cost recovery; and devise a prudent financing strategy jointly with development partners and the private sector.

1 2020 WorldRiskReport. 2 Sistema Guatemalteco de Ciencias del Cambio Climático, 2019, “Primer reporte de evaluación del conocimiento sobre cambio climático en Guatemala”. 3 Baez, J., L. Lucchetti, M. Genoni, M. Salazar, 2015, “Gone with the Storm: Rainfall Shocks and Household Well-Being in Guatemala”, World Bank.

Authorities’ Views

29. The authorities broadly concurred with staff’s outlook. They emphasized that the effective 2020 policy response improved private sector expectations and investment prospects in 2021. While they see risks primarily tilted to the upside, they regard delays in the immunization process and the threat of new virus variants as important downside risks. The authorities agree with staff that the current account in 2020 was stronger than the level implied by fundamentals and desirable policies although they do not see any misalignment in the REER once temporary factors are accounted for and, unlike EBA, expect the REER to depreciate as temporary strong remittance inflows and terms of trade deteriorate. They noted that excessive FX inflows could not be smoothly absorbed by a small FX market and expressed concerns that they could have a significant impact on the real sector, which provided justification for their participation in the FX market. Nonetheless, they reiterated their desire to gradually allow more exchange rate flexibility.

30. The Ministry of Finance’s priority is to sustain the recovery and strengthen social programs. They are confident that the ongoing budget reshuffling will allow to redirect resources towards necessary health, education, and public investment outlays, and have placed transparency at the heart of their fiscal strategy. To durably raise social spending and the provision of public services the authorities plan to strengthen tax revenues, building on substantial efforts deployed during the pandemic to curb tax evasion and contraband. The authorities concurred on the need to undertake comprehensive reforms to public procurement system and the civil service.

31. The authorities agree with the staff’s assessment of the monetary stance. They concur there is room for monetary policy to maintain its accommodative stance and support the recovery, provided that inflation expectations remain well anchored. As extraordinary credit support measures are phased out, the authorities will continue to closely monitor financial stability risks, which are deemed moderate. To enhance financial stability and integrity, the authorities intend to pass the banking la w and the revised AML/CFT law.

32. The authorities acknowledged the need for wide-ranging reforms to lift employment and increase resilience. As per their Economic Recovery Plan, they are aiming for business-climate- enhancing reforms to generate an investment push that creates employment opportunities and retains talent in Guatemala. To reduce their vulnerabilities to natural disasters, the Ministry of Finance is actively enhancing its disaster management strategy by scaling up their risk retention instruments and exploring new risk transfer instruments.

33. The authorities emphasized their recent efforts to improve transparency and governance. To reduce red tape and corruption, they have launched a suite of fiscal transparency portals and an e-government strategy under the General Government Policy 2020−24, and passed the Administrative Simplification Law initiative. They emphasized ongoing efforts to increase the financing of the Office of the Public Prosecutor, expand its territorial presence throughout the country, and fortify its investigative and prosecutorial competences. They recognized the need for further progress in this area and stand ready to pursue additional measures.

Staff Appraisal

34. The near-term outlook is favorable although further efforts are needed to raise medium-term growth. After rebounding in 2021, underpinned by the strong U.S. recovery, growth is expected peak at 4½ percent in 2021, then to converge to its potential rate of 3½ percent by 2023. Inflation is set to reach the mid-point of the target band as supply shocks abate, offsetting any inflationary pressures from the closure of the output gap. The external position remains stronger than the level implied by medium-term fundamentals and desirable policies, but the gap is expected to narrow by 2026. Lifting potential growth through wide-ranging business climate reforms remains a priority given significant social and infrastructure challenges.

35. Fiscal and monetary policies should remain supportive in the near term until the recovery takes hold, guarding against any downside risks from the pandemic. As fiscal stimulus is gradually withdrawn, social and infrastructure spending should be scaled up while increasing efficiency. The accommodative monetary conditions should continue provided inflation expectations remain well-anchored. Banguat should remain vigilant to avoid any unintended consequences from last year’s monetization. The SIB should closely monitor NPLs and any potential risks to financial stability.

36. As the recovery firms up, the authorities should raise overdue social and infrastructure spending to raise potential growth and improve social cohesion. Enhancing revenue mobilization and spending efficiency is necessary to expand fiscal space. SAT should persevere in strengthening its tax controls and redouble efforts against contraband. Spending efficiency reforms should focus on increasing transparency and governance, while bolstering procurement cost-effectiveness and the quality of public services.

37. The authorities’ reform agenda to lift potential growth and build resilience is commendable and should be expedited. The authorities’ Economic Recovery Plan has rightly identified a set of legal initiatives to improve business climate and foster employment opportunities. As Guatemala is at high risk of natural disasters, past efforts on climate change mitigation and adaptation should be complemented with an enhanced disaster risk management strategy and the effective implementation of its emission reduction programs.

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

Figure 1.
Figure 1.

Guatemala: Recent Economic Developments

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: National authorities and IMF staff calculations.
Figure 2.
Figure 2.

Guatemala: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: National authorities and IMF staff calculations.
Figure 3.
Figure 3.

Guatemala: External Developments

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: National authorities and IMF staff calculations.
Figure 4.
Figure 4.

Monetary Sector Developments

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: National authorities and IMF staff calculations.
Figure 5.
Figure 5.

Financial Sector Developments

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: National authorities and IMF staff calculations.
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.

Does not include recapitalization of obligations to the central bank.

Table 2.

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

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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 3.

Guatemala: Summary Balance of Payments

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

Includes 2009 SDR allocations of US$271 million.

Table 4.

Guatemala: Monetary Sector Survey

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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).

Table 5.

Guatemala: Financial Soundness Indicators

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Source: Superintendency of Banks.
Table 6.

Guatemala: Financial Soundness Indicators Heat Map

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Source: IMF FSI database; and Fund staff calculations.

Annex I. External Sector Assessment

The trade deficit declined in 2020 due to exports resilience and significant imports compression, which combined with strong remittances inflows resulted in substantial widening of the current account (CA) surplus. Reserves continued to increase, and the net international investment position remained healthy. Staff estimates based on the EBA CA methodology suggest that the external position is substantially stronger than the level implied by fundamentals and medium-term desirable policies. Structural reforms that improve the business climate, enhance productivity and labor market conditions would help close the CA gap over the medium to long term while mitigating REER appreciation and a worsening of the trade deficit.

A. Recent Developments

1. The CA surplus increased significantly in 2020 supported by a decline in the trade deficit and resilient remittances. The CA surplus broadened to 5.5 percent of GDP in 2020 from 2.3 percent in 2019. A decline in exports from the contraction in external demand, particularly for tourism and travel services, was tempered by a favorable export mix of agro-industrial products (cardamom, vegetable oils, among others) and pandemic-related manufacturing products (chemical supplies and disinfectants). Moreover, the overall contraction in exports was overweighted by strong imports compression, including due to lower fuel prices. Despite a severe drop between March and May 2020, remittances experienced a strong rebound in the second half of the year and achieved an annual growth of 7.9 percent, reaching 14.6 percent of GDP, up from 13.7 percent in 2019. In the short run, the CA surplus as a share of GDP is expected to decrease on the back of recovery of imports (including due to rising fuel prices) and of nominal GDP.

2. The real effective exchange rate (REER) appreciated slightly in 2020. Supported by robust remittances inflows, the REER experienced a steady appreciation over the last decade by 37 percent cumulatively. In 2020, the real and nominal effective exchange rates continued to appreciate by 1.3 and 1.8 percent respectively. The quetzal remained relatively stable and depreciated by 1.2 percent relative to the US dollar.

3. FDI has been falling steadily over time. FDI inflows have decreased from 2.9 percent of GDP in 2013 to 1.5 percent in 2019. This reflects weak infrastructure, relatively high levels of crime and other factors discouraging investment. Portfolio investment and other investment contributions to net inward capital flows remain volatile. FDI inflow is estimated to have shrunk to 1 percent of GDP due to the pandemic shock in 2020, while an increase in projected portfolio inflows reflects a Eurobond issuance of US$1.2 billion in April 2020. In the medium term, FDI is expected to remain stable around 2019 level and finance CA deficit.

Table I.1.

EBA External Sector Assessment

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Source: IMF staff estimates.

Data featured in the previous Article IV consultation in 2019.

Estimates from the EBA CA model. The standard error of the CA norm is 1.2 percent of GDP for Guatemala in 2020.

Adjustment to the norm upward reflects the negative impact of Guatemala’s security conditions on investment which is not captured by the EBA CA model.

Of which, 1.7 percent owes to lower fiscal deficit and 0.5 percent owes to lower health spending than desirable policies.

“-” indicates undervaluation

4. External liabilities remain at low levels, as desired given Guatemala’s weak investment climate. The net international investment position (NIIP) has been declining over the last 5 years to -15.8 percent of GDP in 2019 and further to -10.3 percent in 2020 remains much stronger than the average for Central America countries of -69 per cent o f GDP. External liabilities are divided among 43 percent of FDI, 19percent of portfolio investment and 38 percent of other investment. Public external debt comprised around 16 percent of external liabilities in 2020 or around 13.5 percent of GDP.

B. External Sector Assessment

5. The external balance assessment (EBA) methodology suggests that the external position in 2020 was [substantially stronger] than the level consistent with fundamentals and desirable medium-term policies. The EBA model in 2020 includes the additional adjustors to the CA that capture the temporary impacts of the COVID-19 pandemic through a decline in tourists flows and oil prices. The EBA assessment for Guatemala further includes the adjustor for remittances’ resilience (as a share of GDP). The CA norm is estimated at -4 percent. However, as in the 2019 Article IV, the CA norm is revised up by staff to -2 percent of GDP to account for relatively poor security conditions negatively impacting investment and that are not captured by the ICRG index.

6. The estimated CA gap is large at 5.9 to 8.3 percent of GDP once estimation uncertainty is accounted for. Under the assumption that the CA gap will be closed by an adjustment in the trade balance, the EBA model implies that REER undervaluation in the range of – 69 to -49 percent once uncertainty around estimates is considered.1 Policy gaps account for about 30 percent of the CA gap and reflect lower fiscal deficit and health spending than desirable. In the short run, the CA gap is expected to decrease on the back of weaker CA surplus following recovery of imports and nominal GDP. 2 In the medium-term, business climate reforms and spending on infrastructure, including those envisaged under the government’s Plan for Economic Recovery, should facilitate investment, improve labor conditions, and abate migration and remittances—hence mitigating the scale of REER appreciation needed to close the large CA gap.

C. Reserve Adequacy Assessment

7. Reserves continue to increase in line with a stronger CA balance and crisis uncertainty. End-of-year net international reserves (NIR) under the IMF definition increased by US$3.5 billion and reached the level of around US$17.3 billion in 2020, or 165 percent of the IMF’s metric for Assessing Reserve Adequacy (ARA metric) for countries with stabilized exchange rates. Reserves continue being above other traditional metrics and cover more than 9 months of next year’s imports, 39 percent of broad money, and 343 percent of short-term external debt.

uA001fig20

Reserve Adequacy, 2020

(Percent; relative to benchmark metrics)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Source: IMF staff calculations.

Annex II. Risk Assessment Matrix 1/

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Annex III. Public Debt Sustainability Analysis

This annex presents an assessment of Guatemala’s medium-term debt sustainability. The results suggest that central government debt is sustainable at 34 percent of GDP under the current policies. Public debt is resilient to short-term shocks as debt-to-GDP ratios remain below 40 percent in all standardized macro-fiscal stress tests. The sustainability of public finances was also secured under two severe alternative scenarios. The first one assumes that the outbreak lasts longer than in the baseline, hampering the recovery and delaying the withdrawal of fiscal support. The second one assumes additional social spending to mitigate the impacts of the protracted pandemic. Both scenarios assumed a 20 percent exchange rate depreciation in 2021. Even under these stringent scenarios, debt stabilizes below 45 percent of GDP, while gross financing needs converge to below 5 percent of GDP.

A. Introduction

1. In 2020, Guatemala drew on its fiscal space to protect lives and livelihoods. With an average primary deficit around 0.5 percent of GDP and interest payments at 1½ percent of GDP during the last decade, Guatemala entered the pandemic with ample fiscal space. The government’s steadfast policy response delivered an unprecedented fiscal impulse of 2.3 percent of GDP, widening the fiscal deficit to 4.9 percent of GDP (2.1 percent over the last decade). To secure its gross financing needs, MINFIN deployed a hybrid financing strategy, mobilizing around US$1,900 million through domestic bond placements, US$1,400 million through direct bond placements with the central bank, US$1,200 million in Eurobonds, and US$535 million in IFI loans (comprising a US$200 million WB loan for disaster relief and US$271 million IADB loans, primarily for budget support). Guatemala’s financing conditions have remained relatively favorable. As such, yields of the Eurobonds issued in April 2020 were similar or lower than those issued in 2019. In the domestic market treasury bond yields also presented a downward trend in 2020, owing to the increased financial system liquidity.

uA001fig21
Sources: WEO, and IMF staff estimates.

2. Guatemala’s tax burden, the lowest in the region, somewhat limits debt affordability. Despite the massive policy support, public debt stood at 31.5 percent of GDP in 2020, well below the indicative benchmark of 60 percent of GDP for countries with market access and one of the lowest ratios in the region and across emerging market peers. 1

3. Guatemala’s low indebtedness, coupled with a track record of prudent economic policies, has proved attractive to investors especially in international markets. However, these strengths are somewhat offset by a narrow tax base that limits productive spending and debt carrying capacity. As a share of revenues, Guatemala’s public debt (around 300 percent) has converged to the average of emerging markets, reflecting its low tax revenues in global comparison. In 2020, domestic debt stood at 18 percent of GDP, accounting for almost 57 percent of total debt, while external public debt stood at 13.5 percent of GDP.

uA001fig22
Sources: WEO, and IMF staff estimates.1/ Indicative benchmark of 50 percent of GDP for emerging market countries beyond which higher scrutiny and a deeper assessment of risks is required.

B. Assessing Debt Dynamics and Fiscal Sustainability

4. The sustainability of public finances was analyzed under a baseline scenario and two alternative scenarios. The baseline scenario draws upon the 2021 budget setting with an overall deficit of 3.4 percent of GDP and a negative fiscal impulse of 1½ percent of GDP. From 2022 to 2026, the baseline fiscal deficit gradually improves from 2.8 percent of GDP to 2.0 percent of GDP. The first alternative scenario assumes that the virus surge (including from new variants) proves difficult to contain, infections and deaths mount rapidly before vaccines are widely available, and voluntary distancing proves stronger than anticipated. This leads to a lower-than-expected GDP growth by 1 percentage points in 2022, increased support to firms and households in 2021, and an overall deficit of 2¾ percent of GDP, on average, over 2021–26. The second alternative scenario assumes, in addition to the response in the previous scenario, upscaled social programs2 of 0.9 percent of GDP and a fiscal deficit of 3.6 percent of GDP per year during 2022–26, to mitigate the social scars from a protracted pandemic.

5. The fiscal position remains sustainable in the medium-term under all three scenarios. In the baseline scenario the debt-to-GDP ratio stabilizes at 34 percent of GDP in 2026 while the debt-to-revenue ratio remains at around 300 percent. In the first alternative scenario, the debt-to-GDP ratio rises slightly in the short term and stabilizes at 39 percent of GDP in 2026, with debt-to -revenue ratio reaching 340 percent. Under the second alternative scenario, the debt-to-GDP ratio stabilizes at 43 percent of GDP, with the debt-to-revenue ratio reaching 370 percent. Under all three scenarios the debt-to-GDP does not exceed the 60 percent indicative benchmark for countries with market access.

6. The sensitivity analysis suggests that Guatemala’s debt burden indicators are resilient to short-term macroeconomic shocks. Five sensitivity tests are considered, including shocks to the primary balance, the real GDP growth, the real interest rate, the real exchange rate, as well as a shock combining all of the above. The size of each shock was based on the historical standard deviations of the corresponding variables.

  • Real GDP Growth Shock. GDP growth rate is reduced by 1 standard deviation for 2 consecutive years, dropping growth rate to 2 and 1½ percent in 2022 and 2023, respectively. The decline in growth leads to lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth).

  • Primary Surplus Shock. The portrayed shock is equivalent to 0.6 percent of GDP (half of the 10-year historical standard deviation). The shock triggers an increase in interest rates of 25 basis points for every percentage point of GDP worsening in the primary balance.

  • Inter est Rate Shock. The interest rate increases by 200 basis points relative to the baseline.

  • Real Exchange Rate Shock. The shock translates to a nominal exchange rate depreciation of 10 percent with a pass-through elasticity to inflation of 0.25.

Figure III.1.
Figure III.1.

Guatemala Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Source: IMF staff.1/ Public sector is defined as central government.2/ Based on available data.3/ EMBIG.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r – π(1+g) – g + ae(1+r)]/(1 +g+π+gπ)) times previous period debt ratio, with r = interest rate; π = 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).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π(1 +g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 +r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ 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 III.2.
Figure III.2.

Guatemala Public DSA – Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Source: IMF staff estimates.
Figure III.3.
Figure III.3.

Guatemala Public DSA – Stress Test

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Source: IMF staff estimates.

Annex IV. External Debt Sustainability

Table IV.1.

Guatemala: External Debt Sustainability Framework, 2016–26

(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 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 IV. 1.
Figure IV. 1.

Guatemala: External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: International Monetary Fund, Country desk data, and staff 8501/ 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 a re 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.4/ One-time real depreciation of 30 percent occurs in 2019.

Annex V. Banking System Vulnerabilities and Stress Tests1

Stress tests are conducted on the Guatemalan banking system to assess both the solvency and liquidity stance of banks in the face of potential shocks. Results suggest that the banks are well prepared to absorb a range of shocks with available buffers, including the possible materialization of a substantial increase in impaired loans as regulatory forbearance is phased out.

A. Soundness of the Banking System and Risks

1. Guatemala’s banking system remains highly concentrated. Over 80 percent of total assets are concentrated in the largest five banks (out of 17) and the top two banks account for nearly 50 percent of market share.

2. The banking sector seems to have weathered the crisis so far. The capital adequacy ratio (CAR) for the banking system was 15.6 percent as of December 2020, significantly higher than the minimum 10 percent threshold required by the regulatory authorities. For the banking system, a low 1.9 percent of total loans was impaired at end-2020 (Table 1). However, given the gradual phasing out of regulatory forbearance through September 2021, measured impaired loans might underestimate the true state of the loans portfolio. Relatedly, banks’ provisions increased to more than 190 percent at end-2020, from less than 140 percent at end-2019, in anticipation of possible deterioration in loans quality.

3. Deposits continued to be banks’ main source of funding. Deposits represented over three fourths of total liabilities at end-2020 and liquid assets covered over two-thirds of short-term liabilities. The deposit-to-loans ratio remains well above 100 for the system and individual institutions.

4. Most potential losses and risks to solvency are likely to originate from credit risks in the loan book. Loans represent about half of the banks’ asset portfolio, the rest comprising long-term government bonds and central bank paper (about three tenths and expanding at a fast pace over the last three years)2, cash and T-bills (around one sixth), and other assets (less than one twentieth of the total). Given the composition of banks’ balance sheets, most potential losses and risks to solvency are likely to come from direct and indirect credit risks in the loan book. In addition, foreign-exchange long-term government bonds are affected by changes in their prices in international markets.

5. Although declining over the past few years, dollarization continues to expose the system to FX risks. Dollarization of both assets and liabilities has been recently declining but remains a source of risk to the banking system. Nearly 37 percent of banks loans are denominated in foreign currency, and 39 per cent of them have been extended to un-hedged borrowers, exposing the system to FX risk through credit risk.3

B. Solvency Stress Test

6. The stress test covers the main risks to solvency and liquidity faced by the banking system. The top-down solvency stress test includes: (i) credit risk, through an aggregate NPL shock as well as differentiated sectoral shocks; (ii) market risk, through interest and exchange rate risk; (iii) contagion risk through interbank exposure; and (iv) a set of reverse tests. The liquidity stress test models a simple liquidity drain that affects all banks in the system proportionally to each bank’s liquidity holdings.

Table V.1.

Guatemala Selected Banking System Soundness Indicators

(Percent, December 2020)

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Sources: SIB; and IMF staff calculations.

Including: El Credito Hipotecario Nacional de Guatemala, Banco Inmobiliario, Banco de los Trabajadores, Banco Industrial, Banco de Desarrollo, Banco Internacional, Citibank, Vivibanco, Banco Ficohsa, Banco Promerica, Banco de Antigua, Banco de America Central, Banco Agromercantil, Banco G&T Continental, Banco Azteca, Banco INV & Banco Credicorp.

Regulatory Capital (Assets minus Liabilities) is used in the calculation of the CAR.

7. The impact of individual shocks to solvency is moderate and could be handled by existing buffers (Figure 1 and Table 2):

  • The credit risk shock is modeled as a system-wide proportional increase in NPLs to 3.3 percent of total loans (the highest NPLs rate over the last 12 years); and sectoral shocks of 10 percent in the manufacturing, trade and non-bank financial sectors—which account for almost two fifths of loans. Results suggest that credit risk losses from a credit shock, both system-wide and sectoral, would materially affect banks capital adequacy, but losses would be measured in most cases. The CAR for the system would fall by 1.4 and 1.6 percent, to 14.2 and 14 percent, respectively. The CAR of two banks would decline slightly below the 10 percent minimum in the former case, and one bank’s CAR would fall below 9 percent in the latter case.

  • Additional credit risk shocks are conducted where the NPLs for regular loans remains at its baseline level of 1.8 percent whereas 1/8th, 1/4th and 3/8th of those loans under regulatory forbearance in 2020 fall into arrears (low, medium, high impact scenarios). For the latter, the shock distribution across sectors is made proportional to the regulatory forbearance loans distribution. In all cases, the CARs post-shock still remains above the 10-percent regulatory minimum.

  • The interest rate risk shock assumes an increase of 150 basis points, which affects both flows and stocks: (i) the flow impact from the gap between interest-sensitive assets and liabilities; and (ii) the stock impact from bond repricing as interest rates rise. While the simulated increase in interest rates would result in a marginal gain in interest income, valuation losses on sovereign bond holdings would reduce the system-wide CAR by four fifths of a percentage point, with the CAR of one bank falling slightly below the minimum 10 percent.

  • The FX risk shock assumes a 20 percent nominal depreciation of the bilateral exchange rate with the US dollar, calibrated to match the highest depreciation rate (year-over-year) since the mid-1990s, and looks at: (i) the direct exchange rate risk effect on FX exposures; and (ii) the indirect effect through credit risk considering that 39 percent of loans denominated in foreign currency were extended to borrowers without natural edges. Results indicate that the hypothetical FX depreciation would lower banks capitalization both directly through the exchange rate risk and indirectly through higher credit risk. Overall, the CAR for the whole system would decline by four fifths of a percentage point to 14.8 percent, and below the regulatory minimum for just one single bank.

8. A combined solvency shock would require recapitalization of some banks, although the system would still meet the minimum CAR requirement. The combined shock includes the effects from: (i) credit risk following the proportional increase in NPLs; (ii) interest rate risk; and (iii) FX risk. Such a combined shock represents a very extreme scenario with a low probability of materialization. Results show that, even under these extreme assumptions, the CAR would fall by 2.9 percentage points to 12.7 percent, thereby still complying with the 10 percent regulatory minimum. However, four individual banks would fall short of the minimum regulatory CAR thus requiring recapitalization. However, the identified capital shortfalls would amount to just 0.2 percent of GDP (Figure 1 and Table 2).

9. Contagion risks stemming from domestic interbank exposures are limited and there is no second-round effect following the combined macro-shock. Contagion risks are assessed using a matrix of interbank exposures containing, for each bank, the net credit to every other bank in the system. Intuitively, the higher the obligation, the stronger the impact. This exercise illustrates what happens to other banks when one bank fails to repay its obligations in the interbank market because of the combined shock. Results show that there is no contagion stemming from domestic interbank exposures through second-round effects. This is because interbank lending in Guatemala is very narrow.

10. The reverse test suggests that NPLs would need to increase substantially for the system CAR to fall below minimum requirement. The reverse stress test answers what would have to be the NPL increase necessary for: (i) the system-wide CAR, (ii) the CAR of at least nine banks (half of total), and (iii) the CAR for 50 percent of the total market share, to fall below the regulatory minimum of 10 percent. While an NPL increase to 13.1 percent would be necessary for the system-wide CAR to fall below 10 percent, NPLs would need to increase to 23.5 and 7.8 percent of currently performing loans, respectively, for nine banks or half of the total market share to fall below the 10 percent regulatory minimum (Figure 1 and Table 2).

11. The liquidity stress test suggests that liquidity shortfalls following a short-lived drain on deposits would be manageable. The liquidity stress test assumes a widespread liquidity drain of 10 and 3 percent per day of demand and time deposits respectively, affecting all banks in the system proportionally, without liquidity contagion. Results indicates that, although the share of liquid assets would tumble, all banks would remain liquid after 5 days, with no need for outside liquidity support (from other banks or the central bank) mainly because of maturing assets being rolled off and converted into new cash inflows (Figure 1 and Table 2).

Table V.2.

Guatemala: Stress Tests

(December 2020)

article image
Source: SIB; and IMF staff estimates.

Assumes NPLs of 3.3 percent of total loans in the system-wide shock and of 10 percent in the sectoral shock to the manufacturing, trade, and non-bank financial sectors.

Assumes that a fraction of the loans granted during regulatory forbearance (26.2 percent of total loans on end-2020) become non-performing. The fractions used to define low, medium and high impact scenarios were 1/8th, 1/4th, and 3/8th, respectively. Sectoral shocks are propotional to their share in loans granted under regulatory finance.

Assumes a 150 basis points increase in nominal interest rates.

Assumes a 20 percent depreciation of the bilateral USD exchange rate.

Combines the system-wide credit shock, the interest rate, and the FX shocks.

Assumes a 10 and 3 percent per day withdrawal of demand and time deposits, respectively.

Figure V.1.
Figure V.1.

Guatemala: Stress Tests 1/

Citation: IMF Staff Country Reports 2021, 111; 10.5089/9781513573205.002.A001

Sources: SIB; and IMF staff estimates.1/ The credit risk assumes 3.3 percent of performing loans becoming non-performing in the system-wide shock and 10 percent on the sectoral shock to the manufacturing, trade, and non-bank financial sectors. The interest rate risk assumes a 150 basis points increase in the nominal interest rates. The exchange rate risk assumes a 20 percent depreciation of the bilateral USD exchange rate. the combined shock assumes all of the above. The liquidity shock assumes a 10 percent per day withdrawal of demand deposits and a 3 percent per day withdrawal of time deposits.
1

Staff’s estimated GDP loss amounts to about 3½ percent by 2025 relative to pre-COVID levels.

2

Measured as a share of gross external trade in GDP.

3

The estimate of CA gap incorporates cyclical contributions as well as COVID-19 related factors (Annex I).

4

Staff’s baseline scenario excludes Guatemala’s approved RFI of US$594 million. During the AIV mission, the authorities reiterated their intent to pursue Congress’ approval to draw the RFI before it expires, although the likelihood of a purchase was deemed low. Delays with the processing of the RFI Law Initiative to comply with the national legislation, Guatemala’s aversion to external debt, and available domestic financing, underly the undrawn RFI.

5

Guatemala’s de facto exchange rate arrangement is classified as crawl-like.

1

The EBA REER index model indicates that REER is over-valuated by about 38 percent in 2020. The staff assessment is based on the EBA CA model because Guatemala is not included in the EBA REER index model so the model’s estimate relies on imputed values for the missing data, such as country fixed effect.

2

Similarly, CA increased in 2009 during the global financial crisis due to import compression followed by a normalization in 2010.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

1

See Annex II of the IMF “Staff Guidance Note for Public Debt Sustainability Analysis in Market Access Countries,” 2013 at https://www.imf.org/external/np/pp/eng/2013/050913.pdf.

2

Based on an UNDP costing exercise for Guatemala “Social Protection for Post-COVID-19 Recovery”. Assumes that an average of 880,000 households receive a monthly cash transfer of 64 dollars, covering 1¼ times the extreme poverty line, with an equivalent annual cost of 0.87 percent of GDP.

1

We are grateful to Guatemala’s Superintendency of Banks for providing the data necessary for this analysis.

2

The share of investments in government bonds and central bank paper has expanded nearly GTQ 40 billion while loan portfolio has grown GTQ 31 billion over the last three years.

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Cover IMF Staff Country Reports
Guatemala: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Guatemala
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2021: Issue 111
Publisher:
International Monetary Fund
ISBN:
9781513573205
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9781513573205.002

COVID-19 Pandemic Developments

Guatemala: Total Credit and Private Sector Indebtedness

CPI Inflation

(Year-on-year, percent change)

Remittances: Number of Transactions and Average Amount per Transaction

Remittances and Guatemala-born population in USA

COVID-19 Pandemic and Remittances Inflow to Guatemala (Year-on-year percent change)

Primary Balance

(Percent of GDP)

Local Currency Bond Yields EME and CADR

(Percent; tipically 10-year bonds)

LCBM Development Indicators

(Score relative to CADR; 100 Maximum score)

CADR Local Currency Bond Yield Determinants

(estimated coefficients)

Yields Sensitivities to Global Liquidity Shocks

(interaction effects of the FED rate on LCBM; basis points)

FX Market Monthly Intervention by Banguat

“(Millions of U.S. dollars; percent)

Disaster Risk: Exposure and Vulnerability

Municipal Risk Index

Main Natural disasters 1982–2020

(Percent of GDP; affected people in millions)
Figure 1.

Guatemala: Recent Economic Developments
Figure 2.

Guatemala: Fiscal Sector Developments
Figure 3.

Guatemala: External Developments
Figure 4.

Monetary Sector Developments
Figure 5.

Financial Sector Developments

Reserve Adequacy, 2020

(Percent; relative to benchmark metrics)
Figure III.1.

Guatemala Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(In percent of GDP unless otherwise indicated)
Figure III.2.

Guatemala Public DSA – Composition of Public Debt and Alternative Scenarios
Figure III.3.

Guatemala Public DSA – Stress Test
Figure IV. 1.

Guatemala: External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)
Figure V.1.

Guatemala: Stress Tests 1/