The Big Idea
Guatemala | Investment grade debate
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Guatemala now stands just one notch below investment grade with ‘BB+/Ba1’ ratings from two of the three largest rating agencies and confirmation of a neutral outlook. Debate about an investment grade rating continues with the next review of the ‘BB+’ rating from Fitch in October. That next notch may require a stronger legal framework, more efficient budgetary spending and the foreign direct investment needed for higher trend growth and rising GDP per capita. This may mean another two to three years for an investment grade rating with the leading indicators being progress on the country’s reform agenda and rising investment.
There has been some consistent progress on the reform agenda to strengthen the regulatory framework that could attract higher foreign direct investment. The scorecard so far includes approval of the anti-trust/competition law, the infrastructure law and the public/private alliance law. The next on the agenda is the AML/CFT law that awaits final approval in extraordinary legislative sessions. The business community as well as the US government is lobbying hard for final approval to avoid any negative backlash that could deter investment as well as strengthen the regulatory framework that could attract higher investment.
There has already been a notable strengthening across institutions including the recent turnover of the attorney general, strong US-Guatemala diplomatic relations and efforts to improve technical functioning across institutions with multilateral collaboration. This has all been achieved through the Arevalo administration with general elections now only 12 months away. This will set the stage to test the institutional integrity of another successful political transition, especially after the turnover of the judiciary authorities.
The ‘quality of the institutions’ ranks the lowest score on the Moody’s sovereign rating model at b within the ba2 ‘institutions and governance strength category’ against the much more favorable Baa2 to Ba1 model aggregate rating range. The forward guidance from Moody’s is quite insightful and similar to the other rating agencies:
Upward pressure on the rating could emerge if policy reforms are increasingly likely to be effective, supporting expectations of a durable improvement in the economic structure. Early evidence that reforms are strengthening the investment climate, such as rising public and private investment or increasing FDI inflows, would support upward pressure. Over time, a longer track record of effective reform implementation, including durability across electoral cycles, that materially strengthens institutional effectiveness and supports a more inclusive growth model would further reinforce upward rating pressure.
The potential path towards an investment grade rating would include further progress on economic reform (AML/CFT, procurement law, port authority law) with a virtuous circle of higher investment and higher trend growth through a smooth political transition.
The leading indicators for an investment grade rating would include the successful reform agenda, higher investment commitments and higher overall investment ratios. Strong workers’ remittances that allowed for above-trend GDP growth of 4.3% in 2025 did show higher investment ratios at 17.4% of GDP compared to 16.4% in 2024. However, these ratios are quite low against regional peers while foreign direct investment remain modest at 1.5% of GDP for 2025. It would probably require 3% to 4% of GDP in annual foreign direct investment or domestic investment ratios well above 20% of GDP to sustain higher GDP trend growth near 5%.
The Arevalo administration could ramp-up capital expenditures (similar to El Salvador) that’s running at 20% of the budget through end April (versus 26% of overall budgetary execution). The with the US Army Corps of Engineers may also provide the catalyst to increase infrastructure investment over the next few years. The commitment from private investors would also probably require an uneventful political transition that supports stronger institutions, greater transparency, budget effectiveness and outward-oriented collaboration with multilaterals and bilateral partners. The success on these fronts could suggest an investment grade rating within the next two to three years or sooner depending on the investment and growth ratios. This latent optimism is what sustains the tight differentials within the ‘BB’ rating category and the defensive buffers against the uncertain externals.
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