Country Report Guatemala December 2008

Outlook for 2009-10

• Mr Colom lacks a working legislative majority and the alliances he has built in his first year in office will break down as economic difficulties mount in 2009-10.
• Pressure on the government to step up social spending in line with election commitments will underscore the government's need to implement tax reforms in 2009-10, but their scope is likely to be watered down by Congress.
• After slowing to 3.9% in 2008 GDP growth will drop to 2.1% in 2009 as US and global recession hits private consumption, investment and exports. A modest recovery will occur in 2010, with the economy growing by 3.2%.
• After overshooting the 4-7% target band in 2008 by a wide margin, inflation will moderate in 2009 amid weaker oil prices and domestic demand slows, but will remain above the central bank's 2009 target band of 4.5-6.5%.
• The current-account deficit will narrow in 2009, despite falling exports, as import demand wanes and the oil import bill falls.
• Guatemala's exposure to weaker capital inflows underpins financing and currency risks. After strengthening in 2004-07, the quetzal will undergo an adjustment, but will remain overvalued in real terms by historical standards.

Monthly review

• The Colom government continued to exhibit an ability to maintain political alliances with other parties in November when it secured the passage of the 2009 budget on first reading.
• Congress approved an expansionary budget for 2009, mandating a 16.9% increase in overall spending and an historic 32.6% increase in social development spending.
• Slowing revenue growth alongside a deteriorating economic outlook contributed to a fiscal deficit for the second consecutive quarter in June-September, reversing a strong first-quarter outturn.
• Policymakers have taken steps to inject liquidity into the banking system by relaxing the rules on the accounting of reserves, providing a fund for banks in US dollars and allowing early retirement of government paper.
• Remittance flows, tax revenue and private-sector credit growth have all slowed sharply, amid concerns over slowing domestic demand.
• Tightening remittance and short-term capital flows have increased downward pressure on the quetzal, forcing the government to intervene as part of its strategy to oversee a gradual currency adjustment.

This report covers the following industry codes:
SIC Code: 49;65;60;70
NAICS Code: 22;53;52;72