The Big Idea
Guatemala | Economic revisions
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An uncertain global backdrop has cascaded a wave of downward revisions to growth across Latin America with Guatemala no exception. These revisions nevertheless still allow for above-trend GDP growth for Guatemala this year and reflect the resiliency of the economy. There have been no obvious signs of financial contagion in the foreign exchange rate, and higher worker remittances should help offset slower exports. The rating agencies may retreat to the sidelines to observer the Liberation Day fallout, but the S&P upgrade to ‘BB+’ should remain on track. Guatemala remains a safe-haven similar to Costa Rica and a defensive alternative to other credits like the Dominican Republic.
Guatemala’s central bank just updated their economic assumptions for this year, taking advantage of the latest weaker IMF global macro revisions. The GDP growth for this year was scaled back from 4.0% to 3.8%, within the target 2.8%-4.8% range. The bank also revised growth for 2026 to 3.9% within a slightly higher 2.9%-4.9% range. This downshift aligns with the slow deceleration in the private sector confidence indicators on economic activity and concerns of a global economic slowdown. These revised growth projections are still above 3.5% trend GDP growth and still compare favorably to the high growth Central American region.
It is important to remember the resiliency of economic growth in Guatemala with a shallow recession in 2020 and the fastest economic recovery post pandemic. There is also maximum flexibility for monetary stimulus with current inflation below trend inflation and a restrictive policy rate that could adjust prior to any US Fed rate cuts. Guatemala probably has the highest policy flexibility within the region with latest inflation at 1.47% year-over-year in April, far below 4% target and still the same resilient foreign exchange rate and no cross-border contagion due to low integration with global financial markets.
The strategic shift toward temporary fiscal stimulus also provides a cushion with broader spending across strategic sectors like capex and social areas. The budget deficit was upsized to -3.2% of GDP against trend average of -2% of GDP (and near -1% of GDP in recent years). The January fiscal report shows emphasis on a better allocation of spending towards capex and social sectors (education, health, and housing). The spending efficiency will be critical since the aggregate first quarter 2025 data shows below budgeted spending at 20.8% of current spending and 12% of capital spending. The below-trend spending and budgeted revenues have resulted in a nominal fiscal balance for the first quarter. There is still the possibility of an upsize in spending closer to the budget for the remains of the year and the counter-cyclical stimulus against adverse external trends. There is also the motivation to accelerate spending in strategic areas to directly improve social indicators via social spending and indirectly through infrastructure spending and higher trend growth led by foreign direct investment.
There is also the temporary benefit that higher workers remittances compensate against any downside risk to exports. The workers remittances for the first quarter of 2025 have spiked to 20% year-over-year with the central bank revising up the 6% annual growth rate to a conservative 9% rate. This assumes that the deceleration back to 7% year-over-year trend for April continues through the remainder of the year. The workers remittances are highly impactful at 19% of GDP against 13% of GDP in total exports in 2024. This should provide a cushion with remittances edging higher from 19% to 20% of GDP against bilateral US exports at 4% of GDP (last available data in 2022) and downward estimates for 2% export growth from 12.8% of GDP in 2024 to 12.6% of GDP in 2025.
This economic resiliency should continue to encourage positive rating action with a recent trip from S&P coinciding with the 12-month annual review of the positive outlook on the ‘BB’ rating from April 2024. The window is fully open for a one-notch rating upgrade for a composite ‘BB+/Ba1’ rating and the highest within the region. Fitch also isn’t that far behind S&P with a positive outlook on the ‘BB’ rating last February. This is what explains the tight relative valuation metrics with Guatemala typically trading with the lowest spreads in the region. The potential for a credit rating upgrade through the broader global uncertainty would provide a vote of confidence on the resiliency of the economy and reaffirm the defensive attributes with tight differentials among the ‘BB’ credits. There isn’t yet a breakaway trajectory towards an investment grade rating until there is progress on the weak social indicators with specific focus on the targeted (and upsized) spending later this year.
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