Standard & Poor's Ratings Services said today that it affirmed its 'BB-' long-term foreign rating and its 'BB' long-term local currency sovereign credit ratings on the Republic of Guatemala. Standard & Poor's also affirmed its 'B' short-term sovereign credit ratings on the republic. The outlooks on the long-term ratings remain stable.
According to Standard & Poor's credit analyst Roberto Sifon Arevalo, the ratings reflect a long track record of conservative fiscal polices, improvements in public administration, a strong international reserve position, and improved economic prospects after the approval of the Central America Free Trade Agreement (CAFTA).
"The Administration of President Oscar Berger implemented a series of difficult policies and drastic actions in order to cope with the elimination of the Impuesto a Empresas Mercantiles y Agricolas (IEMA) tax at the end of
2003," said Mr. Sifon Arevalo. "These drastic measures included an unprecedented reduction in the size of the armed forces by about one-third and a 20% reduction in the civil service. At the same time, Congress passed a
watered-down version of the government's tax package, reducing its potential fiscal impact," he added.
However, this was more than offset by an improvement in the efficiency on the public administration, in particular in the tax superintendence. Tax revenue was 10.3% of GDP at the end of 2004, unchanged from 2003. The general
government deficit was 1% of GDP in 2004 and is expected to reach 1.5% of GDP in 2005, a considerable improvement from the 2.5% recorded in 2003 and in line with the government's public investment program and its policy of keeping the fiscal deficit below 2%.
Real GDP is estimated to grow at 3% in 2005 and 3.5% in 2006, bringing per capita growth to 0.4% and 0.8%, respectively. "Another factor supporting the ratings is the prospects of economic integration with the U.S. through CAFTA, which was ratified by the U.S. Congress in July 2005," explained Mr. Sifon Arevalo. "Advances under the CAFTA framework will provide new economic growth opportunities as well as an institutional anchor for economic policy and reform," he said.
The ratings continue to be constrained by still-evolving democratic institutions within a highly polarized political environment divided among social and ethnic lines. The ability of Mr. Berger's Administration to maintain momentum on the implementation of his government strategy in the context of a divided Congress seems key to assuring economic progress over the medium term.
Standard & Poor's said that the highly divided Congress continues to challenge both Guatemala's institutional strength and the government's ability to implement economic reform. A narrow tax base limits the government's capacity to implement public policies.
"The issue has become increasingly politicized, and no major improvement is expected in this regard," noted Mr. Sifon Arevalo. "A narrow tax base will continue to constrain Guatemala's fiscal flexibility and creditworthiness over
the medium term. In addition, continuous current account deficits undermine an otherwise sound macroeconomic framework; similar imbalances are expected to continue going forward, despite large family remittances and a more vibrant export sector," he concluded.