The Big Idea

Guatemala | Diversification

| October 21, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Every investor now and then needs to play defense, and Guatemala looks like a good choice. Emerging markets debt remains a little wobbly after 23% losses so far this year and continuing risk from the Fed, global inflation and uncertain growth. But Guatemala stands apart in Latin America for its unparalleled strong fundamentals and low integration with global financial markets. It offers diversification to bouts of global risk aversion as well as higher yield relative to investment grade credits, a buffer against risk of rising US Treasury rates. Illiquid ‘BB’ credits like Guatemala have combined carry and resilient fundaments to become relative outperformers this year.

Guatemala ticks all the boxes across liquidity and solvency indicators with no obvious setbacks other than the country’s inflationary spike. There is policy flexibility against this inflationary shock with a strong foreign exchange rate and a clear fiscal anchor. This has prompted a less aggressive central bank response relative to other high beta foreign exchange rates like COP and CLP.  There are no disruptive capital outflows or speculative foreign exchange-related volatility due to low integration to global markets. The current account remains in surplus in the second half of 2022 with strong foreign direct investment inflows and huge stock of foreign exchange reserves—equal to 23% GDP at the end of September 2022. There has also been less deviation from the inflationary trend relative to other countries in the region while the central bank survey expectations predict a slow path towards convergence of the inflationary band towards the end of 2023.

The central bank prefers a more flexible monetary stance in light of downside risks to growth from potential external shocks. The expectations for GDP growth remain fairly robust at 3.5% for 2022 and 3.4% for 2023 under the latest central bank survey while confidence indicators hover around the 50 threshold.  Guatemala ranks mid-tier on the stage of economic recovery within the region but should benefit from a less restrictive monetary policy, assuming the majority of countries maintain their policy rates higher for longer to beat inflationary pressures. Continuing high workers remittances remain the primary engine for domestic demand. However, high fuel prices remain the primary constraint on the inflation and growth tradeoff, similar to the rest of Central America.

The clear differentiation is the robust fiscal performance for a country with a small fiscal imbalance that has already adjusted even below 2019 pre-Covid levels. The central government deficit finished 2021 at 1.2% of GDP, the best levels over the past 10 years. The track record of fiscal discipline explains the low roughly 30% of GDP ratios and the high FDI inflows. This provides a cushion against a relaxation on program targets this year.  The fiscal deficit through September 2022 has slightly increased at a deficit of 0.63% of GDP versus 0.53% of GDP for the same period last year.  The fuel subsidies should inflate the deficit this year to 2.4% of GDP and back near the 10-year average.

The bottom line is that the strong fundamentals provide a cushion against external shocks and diversification against other emerging markets credits. Guatemala is unique as one of the few credits besides Costa Rica that have benefited from positive rating action this year, with Moody’s shifting the negative outlook to stable on the ‘Ba1’ rating and S&P and Fitch both shifting the stable outlook to positive on the ‘BB-‘ rating.  Guatemalan bonds trade on the ‘Ba1/BB-‘ credit rating and its scarcity value of $6.1 billion Eurobonds outstanding within the similar peer group of Paraguay. The intermediate sector of the curve GUAT’29 and GUAT’30 look like best relative value on what appears as a flat curve against the GUAT’41 and GUAT’50.

Siobhan Morden
Santander Investment Securities
1 (212) 692-2539


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Siobhan Morden
1 (212) 692-2539

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