Fitch Affirms Guatemala at 'BB'; Outlook Stable



NEW YORK--()--Fitch Ratings has affirmed Guatemala's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB'. The Rating Outlook is Stable. The issue ratings on Guatemala's senior unsecured Foreign and Local Currency bonds are also affirmed at 'BB'. The Country Ceiling is affirmed at 'BB+' and the Short-Term Foreign Currency IDR at 'B'.

KEY RATING DRIVERS

Guatemala's ratings affirmation and Stable Outlook reflect the following drivers:

Guatemala's ratings are supported by its track record of macroeconomic stability and disciplined policies, low public debt to GDP and sound external liquidity. These strengths are counterbalanced by a low tax base that undermines public finances, as well as weak governance and human development indicators.

Despite the political turmoil in Guatemala that resulted in the resignation and arrest of several top government officials including the president in 2015, economic growth remained solid at 4.1% in 2015, little changed from the 4.2% in 2014. Real wage gains, strong growth in worker remittances and low oil prices supported private consumption. At the same time, the volume of exports increased as well.

Guatemala's growth potential is estimated at between 3.5%-4.0%, a level insufficient to significantly boost per-capita income and reduce poverty in the context of high population growth (one of the highest rates in Latin America). Low domestic investment and savings rates, a poor security environment, and weaknesses in the country's health and education systems limit the country's potential growth rate. Guatemala ranks 128 out of 188 countries in the UNDP's Human Development Index, only Honduras and Haiti rank lower in the Western Hemisphere.

Annual average inflation hit 2.4% in 2015 and inflation expectations are within the central bank's 4+/-1% target over the next two years. The central bank cut interest rates by a cumulative 225 basis points since September 2013 as inflationary pressures dissipated. Since January 2016, inflation has increased to above the midpoint of the central bank's target largely due to supply shocks, especially on food items.

The current account deficit narrowed significantly in 2015 to 0.3% of GDP in 2015 and is expected to remain at below 1% of GDP in 2016-2017. External financing needs are covered by broad-based foreign direct investment and external borrowing from multilaterals. The country's international reserves rose to $7.8 billion in 2015 from $7.3 billion in 2014, covering over four months of current account payments. Guatemala's external liquidity ratio is one of the strongest in the 'BB' category due to moderate amortisations and short-term external debt, low non-resident participation in the local financial markets and adequate international reserves.

Guatemala's low debt to GDP, at half of the 'BB' median of 42%, and has been broadly stable in recent years. However, fiscal accounts face persistent structural weaknesses. Guatemala has one of the lowest ratios of general government revenues to GDP of all rated sovereigns at below 11%. As a result, Guatemala's government debt to revenues at over 200% is higher than the 'BB' median of 190%. In fact, the government has failed to meet its modest tax revenue targets for four years in a row and is likely to fail to meet its targets again this year. Fitch expects government tax revenues to reach only 9.8% of GDP in 2016, down from 10.2% in 2015.

The low tax take constrains the authorities' ability to address pressing social and infrastructure needs and undertake countercyclical policies. Tight congressional control of borrowing has kept deficits low despite revenue shortfalls, however, requiring drastic spending cuts in 2015. As a result, the fiscal deficit was just 1.4% of GDP. Fitch expects the fiscal deficit to remain stable in 2016 as well. Shortfalls in revenues could lead to government spending cuts again in 2016. One of the government's key priorities is a strengthening of the tax authority to help boost tax revenues. This has begun with a change in leadership and internal measures so far, a more comprehensive reform in discussion would require congressional approval. These measures would only likely begin to have an impact, however, beginning in 2017.

Guatemala's governance indicators trail the 'BB' median in most areas, and pervasive corruption had far-reaching repercussions in the past year. The former president and vice president among other key government officials were arrested and resigned amid allegations of corruption and large scale protests of the population in 2015 and their cases remain pending in the courts. Jimmy Morales, a political outsider, was elected president in 2015 on an anti-corruption platform. He took office in January 2016 along with a new Congress. Since January, the Congress has passed several institutional reforms and is debating others to strengthen the tax authority and campaign finance and electoral laws. The government is also discussing a constitutional reform that seeks to strengthen Guatemala's justice system.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's view that upside and downside risks to the rating are broadly balanced. The main risk factors that, individually or collectively, could trigger a rating action are:

Positive:

--Sustained improvements in tax collection and the budget process that enhance fiscal policy flexibility;

--Higher investment and growth prospects;

--Improvements in governance and human development indicators relative to peers.

Negative:

--Higher fiscal deficits and/or lower economic growth that weaken debt dynamics;

--Political gridlock that constrains government financing flexibility and/or leads to interruptions in external financing;

--Social unrest and governability challenges leading to macroeconomic and policy uncertainty.

KEY ASSUMPTIONS

--Fitch assumes that the corruption investigations and trials of the former key government officials continues to go through institutional channels and that any protests remain peaceful.

--Fitch forecasts that Guatemala's economy and balance of payments will continue to benefit from low oil prices (USD35/bl in 2016 and USD45/bl in 2017) as well as supportive U.S. economic and employment growth rates.

Additional information is available on www.fitchratings.com

Applicable Criteria

Country Ceilings (pub. 20 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869287

Sovereign Rating Criteria (pub. 12 Aug 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754428

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003643

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003643

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

Comentarios