Moody's affirms Guatemala's 'Ba1' ratings; changes outlook to stable from negative
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Loading... - Ambrose Mavros
- 18 Jul 2022
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Moody's Investors Service ("Moody's") has today affirmed the Government of Guatemala's long-term 'Ba1' issuer ratings and senior unsecured bond ratings and changed the outlook to stable from negative.
The change to a stable outlook reflects Guatemala's demonstrated ability to cope with the pandemic shock with a minimal impact to its overall credit profile. Guatemala's economy recovered strongly from the pandemic-induced recession which combined with conservative fiscal policies limited the increase in the country's debt metrics. Moody's expects that in 2022 and 2023 continued economic growth will support the stabilization of the country's debt burden.
The Ba1 rating affirmation reflects the balance between the country's track record of conservative fiscal management and resiliency to domestic and external shocks and credit pressures derived from low per-capita income and weak institutions, evidenced by low overall government effectiveness and rule of law scores.
Guatemala's local-currency (LC) and foreign-currency (FC) ceilings remain unchanged. The 'Baa1' LC ceiling, 3 notches higher than the sovereign rating, reflects limited government intervention in the economy and a history of respect for the rule of law. The 'Baa3' FC ceiling, two notches below the LC ceiling, reflects the risk of potential transfer and convertibility controls in the event of a default given domestic dollarization.
RATINGS RATIONALE
RATIONALE FOR THE CHANGE IN OUTLOOK TO STABLE FROM NEGATIVE
Guatemala managed the economic, fiscal, and debt shocks resulting from the pandemic without significant changes to its credit standing. The 2020 recession was among the shallowest in the region and the subsequent recovery among the strongest. The solid economic results and a conservative fiscal policy stance kept the pandemic-related increase in the debt burden to less than 5 points of GDP. The economy is expected to grow 3.7% on average this year and next which will support stabilizing the government's debt burden below 31% of GDP.
After contracting 2% in 2020, compared to a 5% average decline in similarly rated sovereigns, Guatemala's economy jumped 8% in 2021, driven by large increases in domestic consumption. Workers' remittances have been a key driver of private consumption, reaching the equivalent of 18% of GDP last year. Data from the first four months of this year shows continued strong growth with remittances rising 25% compared to the same period a year ago.
For 2022 and 2023, Moody's expects Guatemala's economy to remain slightly above the 3.5% pre-pandemic trend rate and fiscal deficits to fall as well. The fiscal deficit rose to almost 5% of GDP in 2020, pushed by Covid-related outlays in health and social assistance. Fast economic growth last year led to a sharp reduction in the deficit to 1.2% of GDP and in 2022 and 2023 fiscal deficits will average close to 2% of GDP.
The strong growth and limited deficits allowed Guatemala to limit the increase in its debt burden. Government debt will remain below 31% of GDP this year, a modest increase from the 27% of GDP debt burden in 2019 before the pandemic.
RATIONALE FOR AFFIRMING THE Ba1 RATING
The 'Ba1' rating balances Guatemala's history of prudent fiscal policies that have kept fiscal deficits comparatively low and its resiliency to domestic and external shocks with the credit challenges resulting from low per-capita income and weak institutions, evidenced by low overall government effectiveness and rule of law scores.
Guatemala has a long track record of moderate fiscal deficits. The average fiscal deficit has been close to 2% of GDP, never breaching 3.3% of GDP in the decade prior to the pandemic. Low fiscal deficits are mainly the result of spending restraint given that the government's revenue base is among the lowest in Moody's rated universe - tax evasion, a large informal sector, and low tax rates have led to modest government revenues in the order of 10% of GDP.
Guatemala further benefits from a stable economy with a history of resiliency to external shocks. Its $93 billion economy (2022 estimate) is the largest in Central America, and larger than the median of US$69 billion for rated peers. It also grows faster than peers and with less volatility, the result of a combination of reasons, including the relevance of light manufacturing aimed at the US market (compared to more traditional commodity exporters), support from remittances and a history of prudent monetary policies that have led to stable and low inflation.
Guatemala's ratings are constrained by weak institutions and low income per capita. The country's Worldwide Governance Indicators, which are incorporated as part of Moody's assessment of 'institutions and governance strength', are lower than those of most of its peers with key weaknesses in the rule of law and overall government effectiveness. And the country's per capita GDP (PPP basis) of $9,153 in 2021 is more than 30% lower than the median for rated peers. Moody's considers Guatemala's weak development indicators as structural credit constraints for the sovereign rating.
Guatemala's overall institutional scores are bolstered by the effectiveness of its fiscal and monetary institutions. But among the subset of institutional scores that more directly measure the capacity of a government to address social demands, Guatemala lags peers. In past years widespread protests against political corruption have been recurrent, raising domestic political risk including that of lower business confidence and investor sentiment. Read More...
