Country Report Guatemala February 2009

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 and conflicting interests mount in 2009-10.
• Pressure on the government to meet election commitments on social spending and to cushion the poorest from the economic downturn increase the urgency of tax reform, but proposals will be watered down by Congress.
• The government plans to reallocate Q6.9bn (US$874m) in budget spending in 2009 towards the productive sectors and social programmes in an effort to stimulate economic growth.
• Our projection that Guatemala will record positive real GDP growth in 2009, despite the severe global downturn, assumes that enhanced access to the US market under DR-CAFTA will place a floor under the decline in exports.
• Inflation will ease to an average of 6.1% in 2009, given weak oil and soft commodity prices, despite a depreciation of the currency, before rising to 8.5% in 2010 as commodity prices rise and domestic demand starts to recover.
• The quetzal is forecast to undergo a moderate adjustment in 2009-10 as capital inflows weaken and Banguat eases monetary policy in a bid to stimulus growth and encourage commercial banks to lower lending rates.
• The current-account deficit will narrow in 2009, despite falling exports, as import demand wanes and the oil import bill falls.

Monthly review

• Amnesty International has delivered a damning assessment of human rights violations in Guatemala, and of the criminal justice system, which it says is unable to deliver justice for the majority of Guatemalans.
• The president's assurances of progress in addressing security have been undermined by figures showing a sharp increase in incidents of violent crime in 2008.
• A deterioration in fiscal performance in 2008 has highlighted the difficulties the government faces in meeting its social spending commitments amid a deteriorating economic environment.
• Inflation eased to 7.9% in January. In the same month the authorities cut the intervention interest rate for the first time since a period of monetary tightening began in 2005.
• Workers' remittances contracted by 7.7% year on year in January which, together with slowing short-term capital inflows, contributed to pressure on the currency, forcing a nominal depreciation of 2.2% during the month.

Source: Country Report