Guatemala

Guatemala’s economy continues to recover after proving relatively resilient to the pandemic shock. Real GDP rebounded by +7.5% in 2021 compared to decline of -1.5% in 2020. This relatively good performance compared to regional peers was due to the increase in remittance flows partially offsetting the negative impact of containment measures on domestic demand, and to the resilience of Guatemala’s exports. The government’s stimulus program (2.3% of GDP) and the accommodative monetary policy, with a 100bps cut to the policy rate to 1.75% in the first half of 2020, contributed to supporting economic activity.

Economic growth remains on track for the forecast period - we expect GDP to increase by +3.6% in 2023. But risks remain on the horizon, particularly given the uncertainty of the rapidly shifting global environment and local Covid-19 developments. As of early 2022, just 29% of the Guatemalan population was fully vaccinated, according to the World Bank. The slow progress of vaccination efforts increases the country’s susceptibility to further outbreaks and greater developmental losses. It also undermines the confidence of households and firms, and amplifies economic uncertainty. Moreover, prospects of a recession in 2023 in the US, the main market for Guatemalan exports and its principal source of workers' remittances, impose serious challenges to growth in the year ahead.  

Inflation pressure could be persistent in the short run. We expect headline inflation to reach 5.6% in 2023, above the upper bound of the Banguat's 3-5% target range. Due to the ongoing Russia-Ukraine conflict, we expect price pressures to remain high as Guatemala is a net importer of oil and other fuels. Price pressures should ease in the medium-term as the supply shock fades and monetary tightening takes effect amid the anchoring of inflation expectations.

Political risks are moderate. The government of the incumbent President Alejandro Giammattei has focused on fiscal consolidation and sustained economic growth, but low representation in Congress has weighed on governability. Given the inflation spike driven by the Russia-Ukraine crisis and supply shocks, the pressure on the government to increase social spending to help households to deal with strong inflation could result in social unrest. We attribute low to moderate political risk in the presidential elections next year and expect an overall continuity of current po-market policies. However, a high level of party fragmentation undermines political effectiveness in the medium term.

The business climate is weak. On some aspects, such as the ease of dealing with construction permits, to get electricity or to register a property, Guatemala’s environment is not favourable. Therefore, starting a business remains difficult, although some reforms aimed at reducing the minimum capital requirements and registration fees were initiated in 2019. In addition, a weak infrastructure environment with widespread violence, crime and corruption undermine the business environment. However, expropriation and protection of minority investors’ risks remain low. In the medium term, Guatemala will struggle to implement the structural reforms needed to boost long-term growth and improve the business environment. These include measures to strengthen Guatemala's low-skilled workforce, bolster its weak institutional framework and tackle its poor energy infrastructure. The distribution of income remains highly unequal, with the richest 20% of the population accounting for more than 51% of Guatemala's overall consumption. More than half of the population is below the national poverty line and 23% of the population lives in extreme poverty, according to the World Bank.