Country Report Guatemala June 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 increase the likelihood of the government introducing a reform of the tax system in 2009.
• GDP growth will slow to 3.9% in 2008 owing to difficult external conditions and their influence on domestic demand. We expect consumption, investment and exports to slow significantly.
• Notwithstanding a period of sustained monetary tightening, inflation will remain above the target of 4-7% set by the Banco de Guatemala (the central bank), owing to persistently high international food and oil prices.
• In 2008 Guatemala's terms of trade will deteriorate, so that although both import and export growth will slow in the face of a weaker US, the trade deficit will widen.

Monthly review

• Internal disputes continue to cause tension within the official party, which make it harder for the president to pass initiatives at the Congress if he cannot count on his own party's full, unified support.
• The government declared a two-week state of prevention to quell a lorry drivers' dispute, which had brought Guatemala's main cities to a standstill.
• Increased output and tax reforms have boosted revenue. A sharp fall in capital expenditure led to a widening of the first-quarter fiscal surplus.
• The Central Bank kept its reference rate on hold, at 6.75% in May, despite inflation hitting a 15-year high.
• The government has launched a solidarity programme to combat rising food prices and boost rural employment and income.
• Private-sector bodies have raised concern at proposed tax reforms.
• The government has announced a tourism development plan for the northern region of Peten.
• The currency appreciated strongly in April and May.
• Export growth failed to stem a widening trade deficit in the first quarter.