Publish in Perspectives - Monday, February 2, 2015
Guatemala has the lowest debt to GDP ratio in Central America and the Caribbean and is less than half of Panama’s debt load. Here the Torre Banrural in Guatemala City.(Photo: Edfelopi)
Despite Guatemala’s sound macroeconomic picture, the country suffers serious social difficulties.
BY WALTER T. MOLANO
Guatemala is the largest country in Central America and the Caribbean. Although there are few cultural ties between the two, they are often treated as the same by the large multilateral and financial institutions. This is done mainly for administrative purposes. While it was often more of a nuisance than a benefit, it may become more of an opportunity as the region becomes more important. The looming reintegration of Cuba into the global financial community will give it more heft. The recent wave of corporate bond issuance also heightened the importance of Central America. Fortunately, Guatemala was at the top of the heap. A half dozen high quality Guatemalan corporates recently entered the marketplace, demonstrating the country’s vitality. Not only does it have an economy with a strong tradition of sound corporate management, it has the scale to help consolidate Central America and the Caribbean into a more cohesive marketplace.
The Guatemalan economy grew 3.4 percent y/y in 2014, after expanding 3.7 percent y/y in 2013. Part of the slowdown was attributed to a slight deceleration in credit growth. In 2013, credit expanded 16 percent y/y, but it softened to 12 percent y/y in 2014. However, the slighter slower pace of expansion put the economy back on track with its full potential output. As a result, inflationary pressures subsided, and consumer prices rose only 3.7 percent y/y in 2014. This was well within the central bank’s target. The acceleration of the U.S. economy promises to be a boon for Guatemala. The improving employment situation in the U.S. is translating into a big boost in remittances, as immigrants send more money back to loved ones. Transfers crested over the $5.3 billion mark in 2013, and are poised to go even higher. Econometric analysis shows the tight correlation between the levels of U.S. and Guatemala’s economic activities. This should be no surprise, given that remittances account for more than 10 percent of the country’s GDP. Moreover, 40 percent of Guatemala’s trade is with the U.S. Therefore, a boost in U.S. activity will have a similar effect on the country’s economic output. The burgeoning remittances are the reason why the Guatemalan Quetzal (GTQ) was one of the few currencies that appreciated during the latter part of the year. While most emerging market currencies were in the midst of a meltdown, the GTQ appreciated 3 percent between August and the end of December, 2014. Besides, the increase in remittances, Guatemala continues to enjoy strong inflows into the capital account. Foreign Direct Investment (FDI) and public sector borrowing have easily met the modest current account shortfall, thus allowing international reserves to have a positive trend. It has also allowed Guatemala to post the lowest debt to GDP ratio in Central America and the Caribbean. Coming in at less than 30 percent of GDP, it is less than half of Panama’s debt load—which is more than 70 percent of GDP.
Despite the sound macroeconomic picture, the country suffers serious social difficulties. A weak education system and poorly developed infrastructure helps explain the widespread poverty that abounds throughout Guatemala. A centuries-old problem with the cultural-assimilation of the various indigenous groups is another major challenge. The country’s fertile land and favorable climate gives it an enormous comparative advantage in agriculture and food production. Unfortunately, communal land holdings and the inability to fully embrace modern farming techniques means that a large swath of the population has not been able to benefit from the commodity boom of the past decade. As a result, organized criminal groups have penetrated deep into rural regions, and crime has been rampant. Rivalries between criminal elements from neighboring countries, such as Mexico, Nicaragua and Colombia, have resulted in countless massacres and atrocities. The Guatemalan government needs to increase spending in order to establish a greater security presence in rural areas, improve education and provide basic services. However, the government’s deep commitment to macroeconomic prudence keeps a lid on expenditures. Guatemala’s primary outlays, as a percentage of GDP, are the lowest of Central America and the Caribbean. An attempt to introduce a tax reform in 2012 fell short of the mark due to implementation and legal issues. As a result, the government actually trimmed back outlays. Guatemala has a huge opportunity to become the driving force of Central America and the Caribbean. Its companies are top-rate. They have the economies of scale to act as a consolidating force. However, the government must take steps to improve the social situation to harness the full potential of its very young work force.
Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development.