IMF'S DARK FORECAST FOR GUATEMALAN ECONOMY

UNCLAS GUATEMALA 000158 SENSITIVE SIPDIS DEPT PLS PASS TO USAID LAC/CAM - SEIFERT DEPT PLS PASS TO TREASURY - SARA SENICH E.O. 12958: N/A TAGS: ECON EFIN PGOV PREL GT SUBJECT: IMF'S DARK FORECAST FOR GUATEMALAN ECONOMY ¶1. (SBU) Summary: During a February 11 meeting with Econoff, Alfred Schipke, the local IMF Representative, noted the Guatemalan economy will likely experience a sharper downturn than currently forecast. Supporting his analysis was a noticeable decrease in remittances, sharply slowing growth in tourism and exports and additional anecdotal evidence. End Summary. ¶2. (SBU) Schipke, who has regional responsibilities for the IMF and close working relationships with Guatemala's economic team, is a valuable resource due to his deep understanding of the regional economy and his willingness to give his unvarnished opinion. During a February 11 meeting with EconOff, Schipke explained that the Guatemalan economy generaly tracks closely with the U.S. economy except fora two to three quarter lag from when a downturn hts the U.S. to when it hits Guatemala. He said the second and third quarters of this year are likely to be the toughest, and Guatemala's recovery is likely to be prolonged, as it will be elsewhere in the world. Schipke said that talk of Guatemala being "well positioned" to weather the storm is policymakers and businessmen not wanting to face reality. Schipke said that Guatemala is just as dependent on the U.S. as in previous downturns. He explained that remittances are now more important than ever (over 12 percent of GDP) and the diversification of exports away from the U.S. will not help because most of the diversification is with other countries in Central America, all of which are also dependent on the U.S. He concluded that talk of internal Central American trade being a motor for continued economic growth is "nonsense". ¶3. (SBU) Schipke believes some of the positive economic news that came out late last year were "one-off events" and should not be interpreted as Guatemala somehow being immune from the global economic situation. For example, Schipke said that the textile industry experienced a slight increase in the fourth quarter of 2008 (despite an overall down year). He explained that this was not due to increased sales or competitiveness, but rather due to importers wanting to purchase inventory with the shortest possible lag time due to uncertainty in the U.S. Since Guatemala can deliver products in only two months versus the six months it takes for Chinese suppliers, there was some shifting to Guatemalan textile producers. Schipke expects this to disappear as demand continues to crumble in the U.S. ¶4. (SBU) According to Schipke, GOG spending plans could be threatened should collections fall short of expectations. The current budget assumes 4.5 percent GDP growth for 2009 and commensurate increases in tax revenues -- a likely scenario. He explained that internally, the Finance Ministry is recalculating based on 3.5 percent growth to see how spending would need to be adjusted. Likely further downward revisions in growth estimates will inevitably impact spending and possibly the budget deficit, currently projected at 2 percent of GDP. He said that in practice, revenue assumptions utilized for the budget purposely underestimate actual collections by about 5 or 10 percent. He concluded that this is a strategy used by the executive to have more spending flexibility for the collections over and above budgeted amounts. This year collection underestimates should cushion a possible budget shortfall if expected growth does not occur. IMF Activities -------------- ¶5. (SBU) Schipke is in discussions with the government about increasing Guatemala's IMF borrowing quota by 300% (to $900 million). He said that although the extra funds are not needed at the moment, if exports and remittances deteriorate over the course of the year, placing pressure on the exchange rate, it would give the Central Bank an extra cushion to resist possible speculative attacks on the Quetzal should traders perceive a vulnerability. (Note: In a recent meeting with the Ambassador, Finance Minister Fuentes said he thought Guatemalan external accounts were solid and the reserve picture was improving due to a rapid decline in imports. End note.) ¶6. (SBU) Schipke said that the IMF wants to open a technical assistance regional office in Guatemala to coordinate regional financial sector development activities. Schipke has already garnered financial support from a number of European countries and would like U.S. support. Schipke believes that it would be good for the U.S., since even with token support, the U.S. would have a seat on the steering committee and access to all the information generated by the office. ¶7. (SBU) Comment: Schipke's remarks track with substantial anecdotal evidence embassy officers have heard of large businesses experience ten and twenty percent sales declines, with sales deterioration accelerating in the second half of the year. In 2009, remittances, tourism and exports, the major drivers of the Guatemalan economy, are either declining or experiencing substantially slowing growth. It seems clear that growth for 2009 will be substantially below current estimates of 3 to 3.5 percent and lower tax collections will likely put significant pressure on spending programs including the government's plans to spend more on the security and police sectors while increasing social spending. End Comment. McFarland