The Big Idea
Guatemala | More good news
Siobhan Morden | April 14, 2023
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.
Guatemala has now graduated to the solid ‘BB’ rating category after S&P’s 1-notch upgrade this week. The country leads the pack of regional upgrades across Central America and the Caribbean and has earned its low beta status with strong credit momentum and small stock of bonds outstanding. S&P validated the “long-standing macroeconomic stability” with a neutral outlook “notwithstanding presidential and congressional elections on June 25 and unfavorable global conditions.” This represents a serious vote of confidence that downplays any event risk of the approaching elections. But Guatemala’s path towards investment grade still depends on higher potential economic growth and a stronger regulatory and legal framework to “reduce uncertainties and strengthen the rule of law.”
The one notch upgrade from ‘B-‘ to ‘B’ from Fitch in February and now S&P in April shows confidence in moderate economic policy management through the election cycle on the centrist front-running candidates and a political establishment that defends the status quo. There is not much definition to the approaching election cycle with infrequent polls showing a tight race between center-right candidate Zuri Rios and center-left candidate Sandra Torres. The most recent poll last month shows a slight advantage at 23.2% to Rios against 17.7% for Torres with a third independent candidate Mulet (former UN diplomat) maybe challenging this two-way race.
The rating agencies have not penalized Guatemala for the programmed increase in the 2023 central government budget deficit from 1.7% of GDP in 2022 to 2.5% of GDP in 2023. It would be difficult to rebuild on the stronger tax revenues at a mature phase of cyclical and efficiency gains and lower global inflationary pressures. It’s too early to assess the underlying trends on the variability of the high frequency data; however real tax revenues show a deceleration through February. The macro assumptions for this year expect a slight deceleration in public debt to 28.5% of GDP from 30.8% in 2021 and 29.3% in 2022. The broader public sector fiscal surplus allows for some margin of higher social spending while still maintaining extremely low debt levels comparable to investment grade credits. The stock of debt remains at low 29% of GDP levels (compared to around 50% of GDP for other BB rated credits) while the stock of assets remains at high levels with foreign exchange reserves above 20% of GDP.
The growth and inflation tradeoff still looks reasonable with GDP growth rate of 4.1% in 2022 as the fastest economic recovery within Latin America and expectations of 3.5% GDP growth this year. The central bank maintains a cautious approach towards monetary tightening with still negative real rates and downsized 25bp rate hikes to maximize policy flexibility against latent external shocks. The March 0.38%m/m inflation data provide some breathing room; however there isn’t yet a definitive trend towards convergence of 4% trend inflation with the central bank still targeting reversion within the 5% ceiling of the inflationary band for year end.
The headline of another rating upgrade again shows the divergence between Central America/Caribbean to the rest of Latin America. Guatemala, Costa Rica, and the Dominican Republic have been the outliers with rating upgrades this year that bucks the regional trend of consecutive rating downgrades across the region (with Brazil, Paraguay and Uruguay the other outliers with unchanged ratings). These CAC countries represent an alternative against benchmark credits like Brazil, Mexico, Colombia, and Chile, especially the Dominican Republic for its benchmark size of $27 billion Eurobonds outstanding (wider spreads than Brazil despite higher credit rating and stronger credit momentum versus Colombia).
Guatemala trades at a spread discount to the benchmark ‘BB’ credits for its small stock of Eurobonds outstanding, similar to Paraguay, with defensive characteristics for the diversification away from global financial markets and the relative insulation of its domestic financial markets. The smaller credits with smaller gross financing needs translate into lower rollover/financing risks with strong credentials providing financing flexibility to access alternative sources of funding and a track record of effective crisis management. These characteristics are favorable against the uncertainty through the global liquidity unwind while also offering a pickup in yield to investment grade credits that partly immunizes against latent US Treasury risks. Guatemala remains our recommendation for core exposure throughout 2023, similar to Costa Rica and the Dominican Republic for a region of rating upgrades and diversification to external risk.