The balance of Guatemala’s public debt rose 6% during the months of January to July, which coincide with the first hundred days of President Bernardo Arévalo’s administration.
With the issuance of US$1.4 billion in Eurobonds placed last Monday, equivalent to about Q10.836 billion, the balance of public debt that includes internal and external loans and bonds, would be increasing 6% with a total of Q235.946 billion.
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This figure is higher by Q13,370 million at the end of 2023, when it totaled Q222,575.3 million, according to the Public Credit Operations report of the Ministry of Finance (Minfin).
As of June 30, already in the new government administration, the balance had risen to Q225,109.95 million, of which Q130,000 million was internal and Q95,109 million, external and includes the issuance of Eurobonds and loans contracted with different international financial organizations.
“The total debt balance remains at manageable levels, but the problem is the composition of this debt, because the proportion of bonds is increasing and the proportion of loans is decreasing”
Érick Coyoy, former deputy minister of finance
The internal public debt quota through the placement of bonds is Q12,775 million, approved by Congress for the fiscal year 2023, but in force this year, according to government agreement 1-2024 published on January 3.
For Érick Coyoy, former Vice Minister of Finance and analyst at the Association for Research in Social Studies (Asies), the total debt balance remains at manageable levels; but the problem is the composition of that debt because the proportion of bonds is increasing and the proportion of loans is decreasing.
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Thus, with loans, a capital instalment is paid each year and the debt is reduced. In contrast, in the case of bonds, with each maturity, new bonds are issued to cover the capital due, so the total balance is not reduced by gradual amortization, but rather accumulates more and more with new issues.
“This means that every year more resources are allocated to paying interest on bonds, the total balance of which never decreases,” he said.
Another breakdown
The Public Credit report as of June 30, specifies that the total bonded debt is Q189,780 million and Q35,329 million in loans. The domestic bonded debt is Q130 billion, which are the securities placed in the domestic market, and the foreign debt is Q59,780.45 million.
Thus, with the collation made by the Minfin last Monday, the indicator of external subsidized debt would rise to around Q70,616 million.
The official report also states that, as of June 30, of the total public debt, 57.7% is domestic and 42.3% is foreign.
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In the composition, 84.3% is subsidized debt and 15.7% are loans. While in the subsidized debt structure, 68.5% is internal and 31.5% is external.
As for the debt of external loans and bonds versus the gross domestic product (GDP), the indicator as of June 30 was 26%. The official report classifies that 21.9% is subsidized debt and 4.1% is loans. Of that account, 15% of the subsidized debt is internal and 6.9% external.
When reviewing the public debt in relation to the GDP of countries in the Central American area, Guatemala has the aforementioned 26%; Nicaragua, 39.2%; Honduras, 44.6%; Panama, 54.1%; Costa Rica, 60.6%; Belize, 62.9%; and El Salvador, 84.4%.
“Placement with a good rate”
On Monday evening, July 29, the Minfin announced a Eurobond issue for US$1.4 billion that will be used to finance programs in the 2024 state budget, an operation that had already been announced by ministerial authorities.
This is the first placement of external debt through Eurobonds by the current Government administration and the operation consists of two placement tranches:
- The first one for US$800 million over a period of 12.5 years, with a coupon rate of 6.55%, for which a demand of US$3,182 million was received.
- The second, through the traditional Eurobond market, which allowed for the raising of US$600 million, for a period of 7 years, with a coupon rate of 6.05%, with a demand of US$2,390 million.
In accordance with the established norm, the Minfin will receive the resources in the next few days and will allocate them to finance different programs that identify the bonifiable debt as a source of financing.
For consultant Irving de la Cruz, the 6% interest rate “is not bad at all” given the current international context of financial markets and the interest that investors have had in acquiring the securities.
Recinos: We must take care of the deficit
Sergio Recinos, former president of the Bank of Guatemala (Banguat) and the Monetary Board (JM), believes that public debt levels are directly related to the fiscal deficit, which should not exceed 2% of GDP. In an interview with Free Press, This is what he replied:
How to analyze the balance of Guatemala’s public debt, which amounts to Q235 billion, with this new issue of Eurobonds?
The balance of public debt is closely linked to the fiscal deficit of an economy. For this reason, it is very important to pay close attention to the deficit that occurs each year in the nation’s income and expenditure budget. The different debt sustainability analyses indicate that in the case of Guatemala, this indicator should not exceed 2% of the gross domestic product (GDP). Deficits above this would make the debt unsustainable.
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At the moment, the debt/GDP ratio is around 28%, which is one of the lowest in Latin America. However, care must be taken with the financing conditions (interest rate, term, grace period, etc.), since their sustainability or not will also depend on this.
In your opinion, what are the main advantages and disadvantages of using subsidizable debt as a source of financing for certain programs?
This will depend on market conditions. There are basically three ways to finance the fiscal deficit: the first, with loans from abroad, mainly multilateral organizations; the second, with Eurobonds (bonds placed abroad, generally in foreign currency); and the third, with bonds on the domestic market that can be in quetzales or dollars.
The advantages and disadvantages will depend on the conditions achieved at different times. For example, if the domestic market is very liquid, it is very likely that domestic conditions may be more favourable in terms of rates and terms. If the opposite occurs, it may be better to place a Eurobond on the international market. However, in general, resources obtained through multilateral organisations such as the IDB, the World Bank or the BCIE are cheaper.
What trend could be expected with public debt under the current government administration?
It will depend on the proposals made by the Executive in the national income and expenditure budget for the next three years and on what Congress approves. I believe that in all cases, the fiscal deficit proposal should not exceed 2% of GDP.
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