Country Report Guatemala July 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.
• We expect 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 increase the likelihood of the government introducing a reform of the tax system in 2009.
• 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 consumption, investment and exports to slow significantly.
• Inflation will remain above the 4-7% target band of the central bank 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 both import and export growth slows in the face of a weakening US economy.

Monthly review

• Loss of the presidency of Congress over a scandal involving the illicit use of congressional funds has left the government, which already lacks a working majority, further weakened in its ability to advance its legislative agenda.
• The Centro de Asistencia Legal Anticorrupcion (ALAC, the centre for legal assistance in anti-corruption cases) formally began operations in June. It aims to promote citizen participation in the fight against corruption in public office.
• The strong fiscal performance seen since the start of the year continued in May, although there are some signs that the effects of a slowing economy are beginning to be felt.
• The central bank left its seven-day benchmark interest rate unchanged at 6.75% for the third consecutive month in June, as the monetary authorities struggle to cope with rising inflation, a strong quetzal and slowing economic growth.
• Although growth has been slowing steadily since the third quarter of 2007 and business confidence indicators are low, sectors such as banking and tourism continue to show a robustness that lacked in previous downturns.
• High commodity prices caused Guatemala's structural trade deficit to widen sharply in the first four months of the year, by 21.3% to US$2.3bn.