Rating agencies highlight Guatemala’s stability and challenges

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By LatAm Reports Staff Writers

The ratings of the country risk agencies remained stable during the first half of the year, as did the preliminary results of the visit for the Chapter IV evaluation carried out by the International Monetary Fund (IMF), in the context of the arrival of new authorities from the Executive, Congress of the Republic and local governments.

The notes for the Guatemalan economy in 2024 did not vary, except that the Standard and Poor’s agency improved it, indicating that “on April 18, 2024, S&P Global Ratings revised its outlook on its long-term sovereign credit ratings in foreign currency and local currency ‘BB’ of Guatemala to positive from stable. We also affirmed these ratings and our short-term sovereign credit ratings ‘B’. We maintained our transfer and convertibility assessment ‘BBB-‘ unchanged.”

While the Fitch agency maintains the rating at BB/Stable, and just last Thursday, July 11, the Moody’s agency published its report and confirmed the country’s rating at Ba1/Stable.

Delegates from these firms have a database and information, models and statistical analysis to make their results known and they include key points, especially macroeconomic, such as inflation, economic activity, fiscal performance, the public debt gap and compliance with debt service payments.

In conceptual terms, these reports mean that these specialized companies see that, in the next 12 and 18 months, the indicators point to stability and they do not observe disturbances in productive activity or fiscal management.

Guatemala would be calling on international investors shortly, to make a placement of Eurobonds, which would be the first in the administration of President Bernardo Arévalo.

Position in the region

In the first quarter of 2024, the risk rating agencies Fitch, Moody’s and Standard & Poor’s carried out reviews and updates on the sovereign debt ratings and risk outlooks for Costa Rica, Guatemala, Nicaragua and Panama, reported the Central American Monetary Council (Secmca).

For El Salvador, Honduras and the Dominican Republic, no reviews or modifications were made, so they maintain the ratings and outlooks released in 2023.

The report by the Secmca based in San José, Costa Rica, notes that the reviews were carried out taking into account the performance of indicators such as the evolution of economic activity, fiscal deficit, local and external financing needs, analysis of public debt/GDP ratios, debt interest/tax revenues and external indicators.

According to the Council document, in its quarterly report for Guatemala, Fitch indicates that the “BB” rating reflects the trajectory of macroeconomic stability and prudence in fiscal policy, which have resulted in a low level of indebtedness and a robust position of extreme liquidity.

However, challenges remain, such as the low income ratio, governance indicators and human development. “These challenges have been exacerbated by the tensions generated in the last presidential elections. For the agency, the success of the new government administration would be based on its ability to manage the complex and fluid dynamics in Congress,” indicates the Secmca.

“The “BB” rating reflects the trajectory of macroeconomic stability and prudence in fiscal policy, which have resulted in a low level of indebtedness and a robust position of extreme liquidity”

Central American Monetary Council

The quarterly analysis groups positive factors for Guatemala such as:

Strength in the external sector

Low fiscal deficit

Economic resilience

Regarding future considerations for rating reviews for Guatemala, the report indicates:

Upgrade:

If there is a favorable political context and the appropriate measures taken by the government increase investor confidence and generate greater than expected economic growth.

Improvements in tax collection that allow greater fiscal flexibility.

Downgrade:

If economic performance is worse than expected or if unexpected political tensions affect the long-term growth trajectory of Guatemala’s GDP.

An increase in the fiscal deficit as a result of erosion of tax collection or a significant increase in spending.

Route to Investment Grade

Álvaro González Ricci, president of the Bank of Guatemala (Banguat) and the Monetary Board (JM) stressed that by maintaining the Ba1 rating by the Moody’s agency, it is one step away from Investment Grade, with a stable outlook, so it is very positive news.

He stressed that the aforementioned agency is the second largest risk rating agency in the world and “the fact that we are on the investment grade border is the result of a solid macroeconomic history of the country; low levels of public debt, a disciplined monetary policy focused on inflation; a prudent fiscal policy, coordinated with monetary policy; a strong external sector, reflected in high levels of international monetary reserves of the central bank and a surplus in the current account of the balance of payments; in addition, a liquid, profitable and solvent banking system.”

Closing gaps

When asked what the main challenges are, González Ricci stressed that the greatest challenges facing Guatemala are closing two existing gaps:

The first, of an economic nature, which fundamentally involves increasing spending on strategic infrastructure, including ports, airports, highways and rural roads, among others.

The other gap is of a social nature, which mainly involves increasing spending on human capital, including health and education.

He stressed that, across the board, one of the important challenges is to continue generating legal certainty for investment, raising the quality of public institutions and fighting corruption.

“By maintaining the Ba1 rating by the Moody’s agency, we are one step away from Investment Grade, with a stable outlook, so it is very positive news”

Álvaro González Ricci, president of Banguat

He concluded that this favorable result of the Moody’s rating adds to the recent improvement made by Standard and Poor’s to the outlook for Guatemala’s rating, which went from BB stable to BB positive.

Reforms are needed

For Juan Carlos Zapata, executive director of the Foundation for the Development of Guatemala (Fundesa) and member of the Country Risk Committee, Moody’s has maintained its rating for several years at Ba1 Stable, which shows that making changes to generate greater institutional and governmental strength will take time.

“However, there is an opportunity to improve if the country manages to make the institutional changes that allow for increased productivity, especially in how to increase public investment in infrastructure. That is the biggest challenge at the moment.”

In his opinion, there is a process to follow to improve or maintain the ratings in the medium and long term and also improve the critical position that Moody’s highlighted in its recent country report.

“In the short term, it is important to maintain the ratings, while preparing a portfolio of public-private projects that show a change in the way of contracting public works, as well as the possibility of approving laws in the Congress of the Republic that strengthen infrastructure and payment for quality indicators. This will help to improve the rating in the medium term and begin to look for a broader strategy to accelerate foreign direct investment and strengthen the justice institutions that also allow for long-term improvements.”

Regarding the follow-up that the Country Risk table is giving, Guatemala must now be promoted to the main investment funds, as well as continue working with the risk rating agencies, to show that there is a clear roadmap to address emergencies and the country’s governance, strengthen the capacity for public investment and begin to take action on logistics, mobility and social investment, in which communication will be key. “There is an opportunity to improve if the country manages to make the institutional changes that allow for increased productivity, especially in how to increase public investment in infrastructure. That is the biggest challenge at the moment”

Juan Carlos Zapata, executive director of Fundesa

Regarding the attention that potential investors pay to these notes to close deals, Zapata emphasized that it is one of the main reports for those who are looking for countries with lower risk and it is a great incentive to promote greater investment in the country.

“Guatemala has shown that it has the capacity to be Investment Grade. When it issues bonds, the placement rates are very positive for the country, but that feeling of stability and confidence in the macroeconomic area must be transferred to the logistics and bottlenecks must be reduced to be a more competitive country,” he concluded.

This article has been translated after first appearing in Prensa Libre