Country Report Guatemala August 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 to make efforts to widen the tax base and increase international assistance to fund development programmes.
• 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 2008-09.
• GDP growth will slow to 3.9% in 2008, and further 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.
• Inflation will remain well above the 4-7% target as a result of persistently high international food and oil prices, increasing pressure for further monetary tightening despite slowing growth.
• In 2008-09 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.

Monthly review

• Six months into his term and struggling to make headway on key commitments, Mr Colom has undertaken the most extensive reshuffle of key government personnel to date.
• The most important of these, given Guatemala’s struggle to tackle organised crime, was the replacement of the attorney-general who resigned amid criticism of the poor record of the Ministry of Public Works in recent years.
• The central government fiscal accounts recorded a surplus in the first half of 2008. However, the result was largely influenced by capital underspending, resulting from weak institutional capacity and poor budget execution.
• The Banco de Guatemala (the central bank) tightened monetary policy for the first time in four months in July, raising its seven-day benchmark interest rate by 50 basis points to 7.25% in the face of growing inflationary pressures.
• Annual inflation reached 14.3% in July, more than double the upper limit of the central bank's 2008 inflation target band of 4-7%, as high oil, maize and wheat prices contributed in a sharp increase in overall consumer prices.
• High commodity prices caused Guatemala's structural trade deficit to widen sharply in the first five months of the year, by 24.5% to US$2.9bn.

Source: Country Report