The Big Idea
Guatemala | Trump contagion
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Guatemala has underperformed its ‘BB’ peers lately, likely penalized by concerns over economic contagion and vulnerability to US policy risks. This isn’t my view. The country’s proactive diplomacy may not only mitigate risks of US retaliation but bring constructive collaboration. The economy also remains resilient against external shocks with a track record of stable growth and inflation, fiscal discipline and policy flexibility from a low stock of debt and a high stock of assets. Ratings momentum also is positive. The sovereign looks like good value compared to benchmarks like the Dominican Republic.
There are quite a few moving parts to consider in Guatemala with the fluidity of US policy risk and the proactive domestic policy of President Bernardo Arevalo. Concerns about economic retaliation subsided after the regional Central American tour by US Secretary of State Marco Rubio last month. None of the Central American countries are tariff targets for their trade deficits with the US, and none are exporters of sensitive or competitive sectors. Guatemala also benefits from export diversification. And Guatemala has a unique diplomatic advantage with already strong US relations, unique pro-Taiwan relations and no relevant China investment. The US diplomatic cooperation instead focuses on immigration and security issues. President Arevalo was not only able to diffuse any tensions over immigration with Secretary Rubio but was also able to extract some economic concessions. The diplomatic credentials of President Arevalo were on display with the joint press conference announcing the US cooperation from the Army Corps of Engineers on modernizing the ports as well as foreign aid to assist on joint security operations.
Guatemala will have to accept maybe double the annual returned migrants, rising from around 75,000 recently to between 100,000 and 150,000 this year but these higher skilled workers should be easily reabsorbed in the construction, tourism, manufacturing and agricultural sectors. The private sector, complaining about labor shortages, should welcome the displaced migrants. There is also the benefit of the 20% year-over-year surge in workers remittance in January and February. This is far above average and contrasts to the central bank forecast of an average annual 6% year-over-year increase this year. This recent surge in liquidity should create upside to expected 4% GDP growth this year with remittances representing a bulky 20% of GDP in annual inflows.
The economy is at risk for structurally lower inflows from workers either through a higher cumulation of displaced migrants out of the US, with an estimated one million illegal immigrants from Guatemala in the US, or a slower flow of migrants into the US due to more restrictive border policies. The medium-term impact could hurt trend 3.5% GDP growth and will require more proactive policy from the Arevalo administration.
Guatemala has always been resilient to shocks after decades of conservative policy management with investment grade repayment credentials. The timing now is opportune. The Arevalo administration has launched initiatives to transform the economy with a combination of fiscal stimulus and efforts to attract foreign direct investment. Both should encourage higher trend growth. The investment inflows would be a critical offset to lower remittances and would require stronger infrastructure and regulatory framework and would encourage a cycle of rating upgrades.
The recently resolved social unrest over mandatory car insurance reinforces the need for a more proactive fiscal agenda. Temporary fiscal stimulus is a more direct strategy to improve social indicators and provide a buffer to any fallout on the returned migrants. The International Monetary Fund recommends temporary fiscal stimulus to tackle weak social indicators, and Guatemala has a lot of flexibility with debt below 30% of GDP. The stronger regulatory framework reflects a more difficult and indirect strategy for raising trend GDP growth through higher foreign direct investment inflows. It’ll be important to monitor the effectiveness of the 2025 budget with the January data already showing a surge in capex and social spending. The increase in deficit from 1% of GDP in 2024 to 3.2% this year should provide considerable budgetary flexibility to improve social indicators. This should reinforce the positive rating trajectory, with Guatemala on track for a composite ‘BB+’ rating and a positive rating differential to peers that contrasts against its wider spread premium. Fitch recently shifted the ‘BB’ rating to positive last month while the annual S&P review of their positive rating quickly approaches next month.
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