The Big Idea
Guatemala | Rating upgrade
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. This material does not constitute research.
The S&P upgrade of Guatemala to ‘BB+’ comes as no surprise, a reminder of the resiliency of the country even with current global uncertainty. Potential contagion from US de-globalization did not deter the rating agency. It also invites debate about which of its peers could be first to secure a prestigious investment grade rating and about relative value across the region. Guatemala sovereigns look attractive against parts of the Costa Rica and Dominican Republic curves.
Guatemala valuations are attractive against the illiquidity of the front end of the Costa Rica curve and the technical local bid for the long end of the Dominican Republic curve. The trajectory for an investment grade rating will depend on the ability of the country to improve social indicators either directly through public spending or indirectly through economic reform and higher growth, led by foreign direct investment. S&P specifically references the latter on the upgrade scenarios. There is room for optimism with not only low beta resiliency but also alpha outperformance on the potential for infrastructure reform.
The S&P rating upgrade arrives at an opportune moment and provides a vote of confidence amidst the latest external uncertainty. There have been some periodic jitters about the one-two punch of trade tariffs and workers remittance taxes for the vulnerability of the small, open economies in Central America. However, any weakness for now looks like a buying opportunity. There is not much to dent our optimism for a country with a track record of resiliency through external shocks as well as offering now maximum policy flexibility on an active reform agenda and potential for counter-cyclical stimulus.
The US tax proposal on workers remittances has been downsized from 5% to 3.5% while local banks (Banco Industrial) are finding workaround solutions to lower the cross-border bank transaction fees through stablecoin. The tighter US borders are actually increasing the near-term remittance flows. Those flows spiked to 20% year-over-year in the first quarter while current economic activity rose at 3.8% year-over-year, still above 3.5% GDP trend growth. There hasn’t yet been any visible economic contagion under the upsized US dollar remittances that fuel above-trend domestic consumption. There are no signs of any financial contagion, which then allows for maximum policy flexibility to the central bank for counter-cyclical monetary stimulus, especially with current inflation trending below target inflation.
More important is the benefit of a larger budget and reform agenda. This not only allows for counter-cyclical fiscal stimulus but also a structural shift that specifically targets the weak social indicators or supports strategic capital expenditure. Guatemala has the lowest debt metrics in the region at less than 30% of GDP with the potential for some temporary fiscal stimulus to target social and capital spending. The IMF is offering technical advice for more effective budgetary spending. The budget still needs to improve for higher capex, this could occur under the catalyst of the ambitious cooperation with the US Army Corps of Engineers (USACE) to develop strategic infrastructure.
There has been too much focus on the strong diplomatic relations in Argentina and El Salvador and maybe not enough focus on the tangible US collaboration after the visit from US Secretary of State Marco Rubio last February. The Panama Canal tensions show the importance of strategic infrastructure to the Trump administration. Guatemala already boasts strong US diplomatic relations and could offer further integration as a regional transportation hub.
The Arevalo administration signed an agreement with the Southern Command last week for collaboration from the USACE to modernize and expand Puerto Quetzal, currently at 60% port capacity. The USACE has also promised technical assistance for developing the railway network and the metro system. This was the logical motivation for the recent submission of a new Port Authority reform to the legislature and plans from Minister Menkos to amend the private/public partnership legislation. It is coincidentally the current PPP framework that supports the critical highway concession to Puerto Quetzal. The open support from the private sector as well as the US government for modern infrastructure should provide some leverage for legislative approval on the reform agenda.
This may offer the path towards an investment grade rating. S&P shifted to a neutral outlook but qualifies another rating upgrade on “strong and protracted signs that the Guatemalan government and Congress can consistently collaborate on policy initiatives to improve the resiliency of its economic model and increase the wealth level of its population. This could raise investor confidence and lead to higher-than-expected economic growth, higher per capita income, and better social indicators.” The US diplomatic support to build transportation infrastructure may offer the catalyst for a deeper reform agenda and the trajectory towards an investment grade rating. The potential for faster potential growth as well as targeted social spending would provide a faster track towards stronger social indicators.
The rating upgrade also opens debate about relative value. This is particularly relevant considering the potential Eurobond issuance from the region in the second half of 2025 including $1 billion from Costa Rica, $1.5 billion to $2 billion from Guatemala, $1 billion from Panama, and maybe another $2 billion from the Dominican Republic if the country diverts local issuance offshore. Costa Rica is maybe better at self-promotion as the typical frontrunner among investors for an investment grade rating. However, Guatemala may not be too far behind. Both countries will need a successful reform agenda with rating upgrades in Guatemala dependent upon the secondary impact on social indicators. This would provide the similar optionality of not only maintaining tight differentials to Costa Rica but also the potential outperformance with convergence with split IG rated credits like Paraguay.
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