Prudent fiscal management, stable macro-economy and limited external vulnerability offset a reduced base of tax revenue and weak governance indicators, agencies say.
The country risk rating agency Moody – Investors Service announced Tuesday that the Ba1/Estable rating for Guatemala remains, although it warns that this confirmation does not announce a credit rating action and does not indicate whether or not another credit rating is likely in the near future.
The rating agency updated and made public a review document through a rating committee held on February 8, in which it reports that it reassessed the appropriateness of the ratings in the context of relevant main methodologies and recent developments.
The Guatemalan monetary authorities reported a few days ago that a visit from a mission from the aforementioned agency is expected next May to carry out the annual review, in which they assess different macroeconomic indicators, fiscal, performance of the financial sector, and also an evaluation sociopolitics, among others.
The country risk rating for Guatemala as of November 31, 2023, according to the report from the Public Credit Directorate of the Ministry of Finance is: Ba1/Stable.
What is the content?
The document sent highlights a summary of considerations and the foundations of the key qualification, in addition to addressing the political part of the country after the general elections of June 2023.
It begins by stating that Guatemala’s rating, including the Ba1 long-term issuer rating with a stable outlook, remains unchanged and is forceful in saying that Guatemala’s credit profile balances low income levels and the weakness of institutions with a history of prudent fiscal management and limited external vulnerability.
The country’s main credit challenges, it indicates, include a narrow income base, due to a large proportion of employment in the informal economy, which is approximately 70% of the economically active population, and weak governance indicators.
It notes that debt metrics have remained largely stable despite a slight deterioration in 2020, as a result of the coronavirus pandemic.
Regarding Guatemala’s debt/GDP ratio, it was 29% in 2022 (28.2% as of November 2023, according to the Public Credit Directorate) and is among the lowest of its peers with the same Ba rating.
Other parameters
In the economic strength score, the Moody’s Investors Service report places Guatemala at “baa3” which is based on the country’s stable economic growth, balanced by comparatively low levels of gross domestic product (GDP) per capita.
“Its “ba3” institutions and governance strength reflect weak results in corruption control measures, the rule of law and government effectiveness. The fiscal strength score is “baa2” and is indicative of a comparatively low debt burden, persistently low revenue collection and a moderate proportion of foreign currency debt, balanced by a long history of prudent fiscal management.”
Susceptibility to event risk places the country at “ba” and is driven by political risk, which stems from polarization, high income inequality, a large proportion of the population living in poverty and risk that high levels of corruption can lead to a significant backlash against the government.
Guatemala’s ESG credit impact score is 4, indicating that the rating is lower than it would have been, if ESG risk exposures did not exist.
Environmental exposure to recurring droughts and hurricanes, which can deplete agricultural production and harm Guatemalan exports, are among the main drivers, as well as exposure to social risk derived from long-standing levels of poverty, economic inequality and social exclusion. .
Moody’s Conclusions
In conclusion, the document states that it is unlikely that there will be an improvement in Guatemala’s rating in the short and medium term.
“Upward pressure on the credit profile will require both an improvement in economic conditions that leads to higher GDP growth on a sustained basis, and a significant improvement in the country’s constitutional framework in general, and its governance indicators in particular.” .
In any case, it is warned that the rating “could experience downward pressure, if there is an erosion in the country’s long-standing commitment to prudent fiscal management; worse-than-expected economic performance leads to persistently higher debt ratios; or if social development indicators weaken and internal security problems begin to represent a threat to political stability.”
The agency reiterates that the document summarizes the opinion as of the date of publication and will not be updated until the next periodic review announcement, which will incorporate material changes in credit circumstances, if any, during the interim period.
What Fitch says
Yesterday afternoon, the Fitch Ratings agency also affirmed Guatemala’s long-term foreign currency issuer default rating (IDR) at ‘BB’ with a stable outlook.
“Guatemala’s ‘BB’ rating is supported by a track record of macroeconomic stability, conservative fiscal policies that have resulted in low public debt, and strong external liquidity. These strengths are balanced by a low income-to-GDP ratio that restricts fiscal flexibility, governance and human development indicators that compare unfavorably with those in the ‘BB’ category, and political stagnation that limits the sovereign’s ability to address these weaknesses.”
He also notes that the elections highlighted governance challenges and that President Bernardo Arévalo and his party face a challenging governance landscape, so his success in advancing his legislative agenda depends on his ability to manage complex and fluid dynamics. in Congress.
On the other hand, it points out that external debt covers financing needs and unlike in the past, Guatemala relied heavily on external debt to meet its financing needs in 2023 amid a legislative impasse that delayed multilateral disbursements and the increase of local currency yields due to the tightening of domestic monetary policy.
“In 2024, we expect the deficit to be financed through domestic and multilateral debt and through Eurobond issuances, but the mix could be sensitive to relative rates and congressional loan approvals.”
Finally, it indicates that the revision of Guatemala’s country ceiling to ‘BBB-‘ from ‘BB+’ reflects Fitch’s view that the risks of exchange controls are mitigated given the central bank’s solid reserves and external liquidity position. broader, and trade integration under the agreement between the United States and CAFTA (Free Trade Agreement with the US).
Moody’s and the political context
In the political section, Moody’s Investors Service states that President Bernardo Arévalo recently took office as president of Guatemala after last-minute political disputes in Congress delayed the inauguration.
The document states that this occurs after months of legal and political challenges led by public prosecutors – the Public Ministry – after Arévalo became a serious contender for the presidency after the first round of the June 25 elections and his victory in the second round on August 20, 2023.
“Despite the delays and political risks still present, the completed transition of power helps secure the position of the new government, supported by the ruling of the Constitutional Court of December 14, 2023 confirming that the elected president and vice president should take office on January 14, 2024,” the report states.
On the other hand, under current budget parameters, the government will not be required to obtain congressional approval for new Treasury bond issues this year, as previously anticipated in the 2024 budget, which was ultimately suspended by the Court. Constitutional before coming into force.
Qualification for Guatemala
According to the Public Credit Directorate, these are the notes for Guatemala as of November 31, 2023:
Standard and Poor’s: BB/Stable/B
Moody’s: Ba1/Stable
Fitch: BB/Stable
This article has been translated from the original which first appeared in Prensa Libre