The Big Idea
Guatemala | Policy flexibility
This material is a Marketing Communication and does not constitute Independent Investment Research.
The strong performance in March for Guatemala is not a surprise. As one of the highest rated credits across Latin America, Guatemala is known for its diversification and resiliency through repeated stress tests. The one-two punch of higher oil prices on inflation and growth is just the latest. The windfall from workers’ remittances provides extra buffers. This is why Guatemala has been one of the outperformers, with the intermediate part of the sovereign curve still attractive.
The outperformance of Guatemala relative to Costa Rica and the Dominican Republic is a function of both technicals and fundamentals and a reminder about diversification from strong ‘BB’ credits. Guatemala doesn’t have the benchmark liquidity of larger ‘BB’ credits like the Dominican Republic and also has been a less frequent issuer relative to Costa Rica (EUR GDNs). This illiquidity lowers the sovereign’s sensitivity to broad market moves as it discourages active trading with global financial markets. There is also less incentive to reduce exposure if the fundamentals are not at risk of a rating downgrade. The more interesting analysis focuses on fundamentals and specifically the ability of policy to respond flexibly to a protracted oil price shock.
The timing of the oil shock is not so inconvenient. There has been a recent windfall of external liquidity from the surge in workers’ remittances, up 19% year-over-year to reach 21% of GDP. The remittances have begun to decelerate this year; however, there is still an enormous stockpile of liquidity with foreign exchange reserves at 30% of GDP. The inflation and growth tradeoff is in good shape with inflation at 1.6% year-over-year in February 2026. That leaves inflation below the target band of 4% plus or minus 1% while expected GDP growth of 4.2% this year is above the 3.5% trend. There has been no financial contagion to local markets with central bank flexibility to intervene against economic contagion.
The central bank estimates higher inflation at 1.14% month-over-month and 2.61% year-over-year for March with the supply side shock fully emerging in April. The central bank could accommodate some of the inflationary shock or, alternatively, try to minimize the fallout on the economy by restarting monetary easing if there is no increase in inflation expectations. The central bank adopted a conservative approach in the monetary policy meeting this week by shifting to the sidelines after a previous 25 bp rate cut to 3.5% on the benchmark policy rate. However, the surprise 25 bp rate cut from Banco de Mexico reminds the markets about the policy option to address downside risks to growth.
The other alternative shifts the policy burden to the Finance Ministry. The current proposal is to seek legislative approval for partial fuel subsidies over three months for Q8/gallon in diesel and Q5/gallon in gasoline and six months for Q20/cylinder in propane gas. The initial official estimates are 0.2% of GDP financed with treasury deposit drawdown and without higher debt accumulation. This isn’t too different from the 0.4%-of-GDP budget enhancement during the last oil shock in 2022. The fiscal deficit increased from 1.2% of GDP to 1.7% of GDP. It’s not clear whether the final proposal will translate into higher budgeted spending or a reallocation of the existing budget. There should be considerable policy flexibility to reallocate spending on the upsized fiscal deficit target this year at 3.7% of GDP against the track record of 2% of GDP.
Guatemala has policy flexibility to counter external shocks with little deterioration across credit metrics. There should be almost no fallout across the composite +’BB+/BB+/Ba1’ credit ratings. This is why Guatemala offers diversification benefits through the oil shock with the latest stress test a reminder about the importance of core exposure to defensive credits. These gains may encourage adding into any weakness through the oil shock or conversely, adding into strength on a recovery into external risk. The intermediate sector of the curve (2031s) looks most attractive with a pronounced flatter trend versus peers like Paraguay.
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