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 evaluation of Chapter IV 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 Standard and Poor’s improved it, stating 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 kept our transfer and convertibility assessment ‘BBB-‘ unchanged.”
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Meanwhile, the Fitch agency maintains the country’s 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.
Representatives of these firms have a database and information, models and statistical analysis to make their results known and cover 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 is expected to call on international investors shortly to issue Eurobonds, which would be the first during 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 revisions or modifications were made, so they maintain the ratings and outlooks released in 2023.
The report by Secmca, based in San José, Costa Rica, states 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 (gross domestic product), debt interest/tax revenues and external indicators.
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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 management would be based on its ability to manage the complex and fluid dynamics in Congress,” says Secmca.
“The “BB” rating reflects the track record 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 regarding rating reviews towards Guatemala, the report indicates:
On the rise:
- If there is a favourable political context and appropriate measures are taken by the government, investors’ confidence increases and economic growth is generated that is greater than expected.
- Improvements in tax collection that allow for greater fiscal flexibility.
On the downside:
- 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 revenue 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.
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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 the country’s solid macroeconomic history; 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 to a liquid, profitable and solvent banking system.”
Closing gaps
Asked regarding the main challenges, González Ricci stressed that the biggest challenges facing Guatemala are closing two existing gaps:
- The first, of an economic nature, essentially 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, improving the quality of public institutions and combating corruption.
“By maintaining the Ba1 rating by Moody’s, we are one step away from Investment Grade, with a stable outlook, so it is very positive news”
Alvaro Gonzalez Ricci, president of the Banguat
He concluded that this favorable result of 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 at Ba1 Stable for several years, 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 will allow it to increase productivity, especially in terms of how to increase public investment in infrastructure. That is the biggest challenge at the moment.”
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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 shows a change in the way public works are contracted, 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 justice institutions that will also allow for long-term improvements.”
As for 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 is a great incentive to promote greater investment in the country.
“Guatemala has shown that it has the capacity to achieve Investment Grade. When it issues bonds, the placement rates are very positive for the country, but this feeling of stability and confidence in the macroeconomic sphere must be transferred to the logistics sphere and bottlenecks must be reduced in order to be a more competitive country,” he concluded.
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