Country Report Guatemala October 2009

Summary

Mr Colom will continue to battle with a weak congressional position and splits within his own party, undermining his efforts to progress with planned economic reforms and social spending plans in 2010-11.
A subdued economic recovery in 2010-11 will keep government revenue at low levels, and with spending falling only slightly from the 2009 peak, the fiscal deficit will stay wide at 3.6% of GDP in 2010 and 3.7% in 2011.
GDP growth will recover only slowly from the 1.4% contraction in 2009, with private consumption still weak and investment low. Export growth, in line with fluctuating US demand, will fall from 4.2% in 2010 to 3% in 2011.
Given the slow pace of the economic recovery, low demand will lead inflation to undershoot the central bank's 4.5-6.5% target band again in 2010, despite currency depreciation, before it returns to target in 2011.
Our forecast of only a moderate weakening of the quetzal in 2010-11 reflects a strong (multilateral-supported) reserves position and an assumption that the central bank will intervene in the foreign-exchange market.
The current-account deficit will widen to 2.1% of GDP in 2010, as the income deficit widens, before narrowing to 1.5% of GDP in 2011 as favourable terms of trade help reduce the trade deficit.

Efforts have continued to make the judicial system more transparent, although progress remains halting, with objections raised at the Constitutional Court over the rigour of the selection process for magistrates.
In a blow for Mr Colom, the minister of education has resigned following tensions over the proposed 2010 budget allocation.
The arrest of ten men in connection with the May murder of a lawyer, which had implicated Mr Colom, has given a boost to Mr Colom, who appears to have had nothing to do with the affair.
A former military commissioner has become the first person to be convicted for forced disappearances committed during Guatemala's civil war (1960-96), paving the way for further prosecutions.
Given poor revenue collection so far in 2009 and poor prospects for 2010, the executive has cut its proposed budget for 2010, with capital spending suffering the greatest cuts. A domestic bond has helped to finance this year's deficit.
With inflation falling much faster than official interest rates, rising real rates continue to inhibit credit.
Inflation turned barely positive in September, with transport costs rising.

This report covers the following industry codes:
SIC Code: 60;10;47;49
NAICS Code: 52;212;48;22