GUATEMALAN ECONOMY SUFFERS THE IMPACT OF THE GLOBAL

UNCLAS GUATEMALA 000265


E.O. 12958: N/A
TAGS: ECON EFIN ETRD EAID SNAR KJUS PGOV GT
SUBJECT: GUATEMALAN ECONOMY SUFFERS THE IMPACT OF THE GLOBAL
FINANCIAL CRISIS


1. SUMMARY: The latest round of economic indicators shows continued
deterioration of the Guatemalan economy as a result of the global
economic crisis. The Central Bank indicated it would revise
downward 2009 economic growth estimates, currently at 3 to 3.5
percent. Remittance flows and international credit lines declined
in January and February and the year-on-year inflation rate declined
for a third consecutive month. The Colom Administration is working
to reorient its budget to implement an economic recovery plan and to
cut public expenditures in accordance with revised downward
projections on tax collections. Budget cuts will disproportionately
impact vulnerable communities dependent on declining remittance
flows and may prevent needed expansion of Guatemala's Conditional
Cash Transfer Program. Important rule of law and security programs
necessary to combat the increasing influence of organized crimes and
narcotics traffickers may also be threatened. END SUMMARY.

Economic growth estimates will be revised downward
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2. Maria Antonieta de Bonilla, President of the Guatemalan Central
Bank (Banguat),signaled to the press that Banguat is revising
downward the growth estimate for 2009 and that it would be below the
lower limit of the 3 - 3.5 % range, the current official GDP growth
projection. (Note: Private economists generally predict the growth
rate will fall somewhere between 1 and 2 percent. End Note.)
Banguat's forthcoming downward revision is being driven by a number
of statistics that confirm mounting anecdotal evidence of a
substantial economic slowdown: Imports of raw materials fell by
38.7% in January 2009 and remittances declined by 9.6% in January
and by 21.7 percent in February compared to the same period of 2008.
Total exports grew by only 1.2% in January. Exports to all of
Guatemala's main trading partners are declining: In January,
exports to the United States declined by 1.3%, to Central America by
7.2%, and Mexico by 6.1%. In addition, the apparel and textile
sector, which is a major employer, reported a 30% decline in
exports, and vehicle importers reported a decline of 41% in their
sales in January. The Guatemalan Chamber of Industry also indicated
in early February that consumption of industrial products had
declined between 15 and 25% in recent months.

Deflation in early 2009
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3. According to Guatemala's National Statistics Institute (INE),the
year-on-year inflation rate slowed from 7.38% in January to 6.5% in
February. For the first two months of the year, Guatemala
experienced deflation of 1.01%. February was the third consecutive
month of deflation in Guatemala. INE attributes declining price
levels in part to reduced demand due to the global economic crisis,
in part to declining international prices for food and oil, and in
part to seasonal variations caused by harvest cycles of some locally
produced goods such as vegetables. Nevertheless, consumers have not
yet enjoyed significant price declines in the cost of basic goods
sold in local markets. While the cost of the basic food basket
declined by 0.5% in February, it is 18% higher than in February
2008, well ahead of the overall annual inflation rate.


4. Some economic analysts argue that deflation is threatening the
economy, and representatives from different sectors have complained
about slackened consumption since the fourth quarter 2008. As a
result, pressure is mounting on Banguat to increase liquidity and
reduce the leading interest rate to reactivate credit to the private
Qreduce the leading interest rate to reactivate credit to the private
sector. The leading interest rate has been reduced 75 basis points
this year, from 7.25% in December to 6.5% at the end of February.
The Monetary Board will analyze a further reduction of the leading
interest rate at the end of March.

Public expenditures will be revised downward
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5. As a result of the sharp slowdown in the economy, budget
revenues are currently running at approximately 7.6 percent below
forecast levels. This is a continuation of a declining trend that
began in 2008. National Tax Authority (SAT) figures show that
monthly tax collections compared to 2007 began declining in November

2008. The 2009 budget assumes an increase in tax revenues of 15%.
However, tax revenue growth was only 5.7% in 2008 and the economic
slowdown makes 15% growth unlikely and budget cuts a near
certainty.


6. The GOG is beginning to acknowledge its growing fiscal deficit.
Vice Minister of Finance Carlos Barreda announced March 9 that the
cabinet has started discussions to on how to cut spending and
reorient expenditures toward the government's National Economic
Recovery Plan. As currently forecast, the GOG will need to cut
overall expenditures by approximately Q4 billion (about $505
million),or 10% of total estimated 2009 expenditures. Continued
deterioration of the economy could make further cuts necessary since
Guatemala possesses little capacity for deficit or other
counter-cyclical spending.


7. According to Barreda, implementation of the National Economic
Recovery plan will cost at least Q6.9 billion (about USD 871
million) and must be funded from existing resources reoriented from
ministry budgets. One component of the Program is to expand
Guatemala's controversial Conditional Cash Transfer program, "Mi
Familia Progresa," which would receive Q1.3 billion (about USD 164
million) to cover the 125 poorest municipalities in the country.


8. While the GOG will reorient spending towards social programs and
Mi Familia Progresa, the budget shortfall may prevent Guatemala from
providing the necessary budget support to expand the program poor
communities most at risk due to rapidly declining remittance income
from the United States. In addition, cuts from already razor-thin
budgets in other ministries to fund Mi Familia Progresa threatens
funding for security-related programs needed to combat significantly
increased violence and increased influence of organized crimes and
narcotics traffickers.



9. COMMENT: Official economic data is beginning to confirm anecdotal
evidence of a deteriorating economy in the first two months of 2009
as a result of the global economic crisis. Overly optimistic
projections on economic growth and tax revenues are now being
revised downward and it is possible that given the current level of
uncertainty those estimates would need to be revised downward again
in the future. Monetary and, if possible, fiscal measures are
urgently needed to mitigate the impact of the crisis. END COMMENT

MCFARLAND