Country Report Guatemala September 2008

Outlook for 2008-09

• The president, Alvaro Colom Caballeros of the left-of-centre Unidad Nacional de la Esperanza (UNE), lacks a working legislative majority, obliging him to forge alliances to pass legislation, with negative implications for governability.
• The Economist Intelligence Unit expects the government economic policy to focus on widening the tax base and increasing international assistance to fund development programmes in 2008.
• Pressure on the government to step up social spending in line with election commitments will underscore the importance of government efforts to reform the tax system in 2009.
• GDP growth will slow to 3.9% in 2008 and to 3.4% in 2009 owing to difficult external conditions and their influence on domestic demand. We expect private consumption, investment and exports to slow significantly.
• After overshooting the 4-7% target band in 2008 by a wide margin, inflation will moderate in 2009 as oil prices fall and domestic demand eases, but will remain outside the central bank's target.
• In 2008 Guatemala's terms of trade will deteriorate, causing the trade deficit to widen, as export growth slows in the face of a weakening US economy. Falling import demand in 2009 will allow a narrowing of the deficit.

Monthly review

• An espionage scandal has highlighted the vulnerability of the public administration to criminal groups whose reach extends to the highest levels of government.
• A first report by the Cicig since it began operating a year ago has underscored the problem of impunity that persists amid a weak judicial system, widespread corruption and high violent crime rates.
• The government has retreated from its plan to introduce changes to the direct tax regime from 2009 amid strong opposition from the private sector, choosing instead to stagger reform.
• The IDB has approved a US$400m loan to support the government's planned programme of strengthening fiscal management.
• Under-execution of capital spending resulted in the central government recording a strong fiscal surplus in the first seven months of the year.
• The central bank has revised down its growth forecast for 2008, from 4.8% to 4.3% amid signs of a faster than anticipated slowing of the economy.
• The external accounts have undergone a steady deterioration since the start of the year amid slowing export demand and high import spending.