Country Report Guatemala September 2009

Outlook for 2009-10

• Mr Colom will continue to battle with a weak congressional position and splits within his own party, and risks becoming a lame-duck president less than two years into his four-year term.
• A sharp economic slowdown in 2009-10 will hit government revenue, and with spending rising the fiscal deficit will widen to 4% of GDP in 2009 and 4.2% in 2010, presenting financing challenges.
• Forward-looking economic indicators in the developed world have improved, boosting prospects for US demand in 2010 (the US accounts for 40% of Guatemala's exports).
• We forecast that GDP will contract by 2% in 2009, the weakest performance in two decades, reflecting the global downturn, weaker private consumption and tight credit conditions. Recovery in 2010 will be weak, at 2.2%.
• Inflation will undershoot the central bank's 4.5-6.5% target band in 2009-10, as weak domestic demand offsets inflationary pressures coming from a weaker quetzal and rising oil prices.
• Our forecast of only a moderate weakening of the quetzal in 2009-10 reflects a strong (multilateral-supported) reserves position and an assumption that the central bank will intervene decisively in the foreign-exchange market.
• The current-account deficit will narrow sharply in 2009, as reduced trade and income deficits outweigh falls in current transfer inflows, before widening again in 2010 to 3.4% of GDP.

Monthly review

• Mr Colom has continued to struggle, failing to advance a tax reform, and facing criticism for a child malnutrition crisis that highlights the extent of the social and health challenges facing him.
• Continued falls in tax revenue have prompted a second cut in spending this year, further frustrating the government's social agenda.
• The central bank has intervened again to slow the depreciation of the quetzal, which has weakened by 6.8% since January.
• Tourist arrivals fell by around 20% in May and June, with swine flu the main reason, although the deteriorating security environment and global recession also appear to be behind the fall.
• A combined rise of 35% in sugar, cardamom and banana export earnings in the second quarter was not enough to prevent an overall fall in earnings.
• The fall in import spending deepened in the second half of the year, with all major categories of imports sharply down owing to falling domestic demand.

This report covers the following industry codes:
SIC Code: 60;48;10;70
NAICS Code: 52;517;212;72;11