Country Report Guatemala March 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 in2009-10.
• Pressure on the government to meet election promises on social spending and to cushion the poorest from the economic downturn have raised 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 5% in 2009, given weak oil and soft commodity prices, despite a depreciation of the currency, before rising to 8.4% 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 stimulate 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

• Government plans to introduce its economic stimulus programme were bolstered in February when it won congressional approval for a relaxation of the rules preventing the transfer of budget allocation between ministries.
• The determination of the newly formed legislative alliance, the Gran Frente Democratico, to block pending tax reform proposals has damaged the UNE's chances of passing wide-ranging tax reform in 2009.
• Banguat accelerated its easing policy stance in February, cutting its benchmark short-term interest rate by 50 basis points. This takes the reduction in the intervention rate to 75 basis points since the start of the year.
• Banguat is preparing to revise down its growth forecast for 2009 after conceding that its forecast of growth of 3-3.5% is unsustainable in the face of deteriorating economic conditions.
• Pressure on the quetzal continued to force a gradual depreciation in February-March, although the pace of depreciation has eased, with the currency falling 3.3% against the US dollar between the start of the year and March 9th.