Private Consumption To Drive Moderately Stronger Growth

BMI View: Well-contained inflation and relatively low interest rates will see private consumption continue to strengthen in Guatemala in the coming months, underpinning our view for an uptick in real GDP growth to 3.4 % and 3.5% in 2013 and 2014 respectively, from 3.0% in 2012. That said, we believe that a weak outlook for the country's export sector, and a poor business environment, which will keep foreign investment limited, will prevent growth from rapidly accelerating over our forecast period.

We believe that strengthening private consumption will see real GDP growth in Guatemala tick up to 3.4% and 3.5% in 2013 and 2014 respectively, from 3.0% in 2012. However, we believe that growth will be capped by a weak outlook for the country's export sector, cooling foreign investment, and tighter fiscal policies. After sluggish real GDP growth of 2.4% year-on-year (y-o-y) in Q113 due to the harmful after-effects of a major earthquake in November 2012, economic activity has showed signs of accelerating in recent months, with low inflation and strong credit growth boosting household consumption. Indeed, Guatemala's seasonally-adjusted economic activity index rose to 4.0% y-o-y in June, the highest reading since October 2011. Although the Banco de Guatemala (Banguat) hiked the benchmark policy rate by 25 basis points (bps) to 5.25% in April 2013, private sector credit growth averaged 15.7% y-o-y expansion from May through July. Given our forecast for Banguat to hold the rate at 5.25% through end-2013 in order to spur the incipient strengthening of domestic demand, we expect credit growth to continue expanding in the coming months ( see 'Growing Upside Risks To Interest Rate View,' July 24).

We also expect that inflation will remain well-contained, allowing for a continued strengthening of consumers' purchasing power. Indeed, while growth in consumer prices has picked up slightly in recent months on the back of base effects and elevated livestock prices, our Agribusiness team believes that price pressures are unlikely to spike to the same extent as seen in 2008 and 2011 due to a regional shift towards consumption of poultry - less affected by higher feed prices - over beef ( see 'Livestock Outlook - Central America Q313,' July 1). As such, we forecast average inflation of 4.8% in both 2013 and 2014.

Growth Solidly Above 3.0%
Guatemala - GDP

Private Consumption To Drive Moderately Stronger Growth

BMI View: Well-contained inflation and relatively low interest rates will see private consumption continue to strengthen in Guatemala in the coming months, underpinning our view for an uptick in real GDP growth to 3.4 % and 3.5% in 2013 and 2014 respectively, from 3.0% in 2012. That said, we believe that a weak outlook for the country's export sector, and a poor business environment, which will keep foreign investment limited, will prevent growth from rapidly accelerating over our forecast period.

We believe that strengthening private consumption will see real GDP growth in Guatemala tick up to 3.4% and 3.5% in 2013 and 2014 respectively, from 3.0% in 2012. However, we believe that growth will be capped by a weak outlook for the country's export sector, cooling foreign investment, and tighter fiscal policies. After sluggish real GDP growth of 2.4% year-on-year (y-o-y) in Q113 due to the harmful after-effects of a major earthquake in November 2012, economic activity has showed signs of accelerating in recent months, with low inflation and strong credit growth boosting household consumption. Indeed, Guatemala's seasonally-adjusted economic activity index rose to 4.0% y-o-y in June, the highest reading since October 2011. Although the Banco de Guatemala (Banguat) hiked the benchmark policy rate by 25 basis points (bps) to 5.25% in April 2013, private sector credit growth averaged 15.7% y-o-y expansion from May through July. Given our forecast for Banguat to hold the rate at 5.25% through end-2013 in order to spur the incipient strengthening of domestic demand, we expect credit growth to continue expanding in the coming months ( see 'Growing Upside Risks To Interest Rate View,' July 24).

Growth Solidly Above 3.0%
Guatemala - GDP

We also expect that inflation will remain well-contained, allowing for a continued strengthening of consumers' purchasing power. Indeed, while growth in consumer prices has picked up slightly in recent months on the back of base effects and elevated livestock prices, our Agribusiness team believes that price pressures are unlikely to spike to the same extent as seen in 2008 and 2011 due to a regional shift towards consumption of poultry - less affected by higher feed prices - over beef ( see 'Livestock Outlook - Central America Q313,' July 1). As such, we forecast average inflation of 4.8% in both 2013 and 2014.

A Stronger Q213
Guatemala - Seasonally-Adjusted Economic Activity Index, % chg y-o-y

Exports, Investment, And Fiscal Policies To Cap Growth

Our forecast for economic growth in Guatemala is tempered by a less sanguine outlook for net exports, which underpins our view that headline growth will remain under 4.0% through 2015. Indeed, our Agribusiness team forecasts that the prices of Guatemala's two key commodity exports - coffee and sugar - will decline in the coming years on account of increased global supply, weighing on critical export revenues ( see 'Coffee Outlook - Central America Q213,' April 8 and 'Sugar To Average USc17.50/lb in 2013,' July 2). We also see falling prices leading to agricultural production in Guatemala moderating, as farmers are discouraged from investing in those crops. Moreover, while strengthening private consumption is likely to have a positive effect on economic growth overall, it also is likely to lead to stronger import growth, which will weigh on net exports. We have revised up our forecast for average annual growth in imports in 2013 and 2014 to 8%, from 3% previously, and have revised down our forecast for average annual growth in exports over the next two years to 4%, from 8% previously.

Low Inflation And Strong Credit Growth To Boost Consumption
Guatemala - Inflation & Private Sector Credit

We also believe that Guatemala's poor business environment will continue to weigh on foreign investment sentiment, capping the country's growt h potential in the medium term. W e point to the recent decision by Guatemala's Constitutional Court to overturn the charges of genocide and crimes against humanity against former leader José Efraín Ríos Montt as a development that will have a highly detrimental impact on international perceptions of the country's political institutions and business environment ( see Ríos Montt Case Threatens Investor Perception ,' June 5) . Growth in inbound foreign direct investment moderated to 17.0% in 2012 from 27.3% in 2011 and 34.3% in 2010, and Guatemala receives a score of 40.9 in our proprietary Business Environment Ratings, placing eighth out of 17 countries in Latin America, and well below Central American peers Panama and Costa Rica.

Given the government's ongoing fiscal consolidation drive, we also do not expect an uptick in government spending to provide an additional boost for economic growth ( see 'Sluggish Revenues Presage Continued Weak Fiscal Position,' June 19 ) . Indeed, projecting total government expenditures year-to-date through end-2013, expenditures are likely to contract in 2013 for the first time since 2001 , and we have revised down our forecast for total government expenditures to GTQ55bn, from GTQ58bn . This will see the nominal fiscal deficit shrink to 1.6% of GDP from 2.4% of GDP in 2012, although we note that political considerations could put the government's continued adherence to fiscal austerity at risk in the coming months.

Falling Prices For Key Commodity Exports Will Drag On Growth
Coffee (LHS) & Sugar (RHS) Prices

Risks To Outlook

Weakening remittance inflows pose downside risks to our forecast for real private consumption to grow by 4.2% this year, from 2.4% in 2012. After rising 9.2% in 2012, remittance inflows have trended down in 2013, with June's 0.3% y-o-y contraction the first negative year-on-year growth reading seen since July 2011. Remittance inflows typically make up between 9-10% of GDP in Guatemala, accounting for an important source of income. However, on the upside, we note that a strengthening recovery in the US housing sector is likely to reverse the trend of falling remittance inflows in the coming months. We also note that an upside risk to our view is the strengthening of demand from Guatemala's main export destinations, Mexico and the US, which could prove a boon for the country's growing textile export industry.

×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.