Bond Passage Loosens Fiscal Straightjacket

UNCLAS GUATEMALA 000807

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EAID GT
SUBJECT: Bond Passage Loosens Fiscal Straightjacket


1. SUMMARY: On August 6, the Guatemalan Congress passed a measure
authorizing the issuance of Q3 billion (approximately $375
million)in bonds to help cover the 2009 budget gap created by tax
collections that are running nearly 8 percent below 2008 levels and
nearly 20 percent below 2009 expectations. The measure together
with a Q2.8 billion ($350 million) World Bank budget assistance loan
should help plug the budget shortfall, expected to be approximately
Q7.5 billion ($940 million) by year's end. The Guatemalan Central
Bank (Banguat) recently revised downward its estimate for 2009 GDP
growth from a range of 1 to 2 percent to a range of 0.4 - 1.2
percent. Falling growth explains the deterioration in tax revenues
and the urgency of passing the bond issuance. Members of the
Patriot Party, opponents of First Lady Sandra Torres de Colom's
controversial Conditional Cash Transfer program, mounted an
unsuccessful attempt to block the bond issuance. As it has in the
past, the Colom Government marshaled sufficient support from other
parties' congressional benches to overcome Patriot Party opposition.
As posturing for the 2011 presidential elections gets underway,
economic measures such as this will increasingly be subject to
partisan congressional polemics. END SUMMARY.

Government Bonds to Alleviate Fiscal Pressures
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2. According to data from the Superintendence of Tax
Administration, tax collections declined 7.9 percent during the
first half of 2009 compared to the same period of 2008 and were
running nearly 20 percent below 2009 projections. To cover the tax
revenue gap, which is currently estimated at Q7.5 billion ($940
million),the government announced budget cuts and requested
Congressional approval for the placement of Q3.0 billion ($375
million) in bonds. Congress approved the issuance on August 6.


3. The right-leaning opposition Patriot Party, as well as leftist
Congresswoman Nineth Montenegro of "Encounter for Guatemala,"
requested that Congress approve the bonds issuance only with a
special provision to forbid budget transfers. They and some other
opposition members were concerned that the government would transfer
some of the funds to the First Lady's controversial social welfare
programs, which have inadequate transparency controls. The private
sector had also requested Congress approve transparency controls as
part of the law. The approved law includes the requested budget
"locks."


4. On August 24, the government met with investors and other market
participants in anticipation of the August 25 launch of the bond
issuance. An IMF mission was recently in the country to assess the
fiscal situation and review tax revenue estimates for this year. Per
the approved law, Q1.68 billion ($210 million) will be allotted to
the Ministry of Communications, Q500 million ($63 million) to
service public debt, Q400 ($50 million) to the National Peace Fund,
and Q200 million ($25 million) to the National Registry of Citizens.


Central Bank Lowers Growth Estimates
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5. In late July the Guatemalan Central Bank lowered its estimate of
economic growth from a range of 1 to 2 percent to a range of 0.4 -
1.2 percent. The move follows a pattern over the last year of
Banguat revising downward its growth projections in the wake of
downward revisions by international financial institutions and
private economists. On July 15, the UN Economic Commission for
Latin American and the Caribbean (ECLAC) forecasted a 2009 GDP
contraction of 1 percent for Guatemala. Similarly, Standard and
Qcontraction of 1 percent for Guatemala. Similarly, Standard and
Poor's and Fitch Ratings respectively projected GDP contraction of
0.5 and 0.6 percent for this year. The IMF and World Bank still
project GDP expansion for 2009 at0.4 and 0.6 percent, respectively.
Oscar Monterroso, Banguat's chief economist, refutes pessimistic
predictions of GDP decline, citing Banguat's superior information on
national accounts. (Note: Banguat's estimates of growth in
previous quarters have generally lagged other institutions, but
later fell in line with international estimates. End note.)


6. Banguat's most recent estimate is based on projections that
exports will decline by 8.5 percent in 2009, imports by 16.7
percent, remittances by 9.5 percent and foreign direct investment by
9.3 percent. According to Banguat, the construction sector will be
the most affected by the crisis in 2009, with a contraction of 9.1
percent compared to 2008. Though the new estimates from Banguat
project that agricultural and industrial activities will have
positive growth rates this year, representatives from those chambers
believe the new estimates are unrealistic. Data from the
Superintendence of Tax Administration show that the volume of sales
of industrial products such as cement, non-alcoholic beverages and
tobacco declined by 9.5 percent, 5.8 percent and 6.5 percent
respectively during the first five months of 2009 in relation to the
same period of 2008.

Congress Approves Law on Economic Recovery Program
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7. On August 4, Congress also approved reforms to the law that
authorizes the construction of the Northern Transversal Highway.
The construction of this highway is one of the infrastructure
projects included in the Economic Recovery Program. The approved
reforms ratify the contract that was awarded to the only bidder
(Solel & Boneh) in 2007 and also allows use of a $203 million loan
from the Central American Bank for Economic Integration (CABEI) to
fund the project. The loan from CABEI was approved by Congress on
August 10.


8. COMMENT: Congressional approval for the bonds issuance was
slower than it otherwise might have been because of the increasingly
charged political atmosphere. The governing UNE and the opposition
Patriot Party anticipate that they will be the main two competitors
in the 2011 presidential elections, and have begun posturing.
Nonetheless, the opposition's concerns about inadequate transparency
controls in the First Lady's social welfare programs have some
merit.


9. A small part of the budget is funded through issuance of bonds
each year and Congress approves each issuance separately. The
issuance of bonds approved by Congress on August 6 will be only used
to cover the budget gap in 2009. With revenues and economic growth
continuing to fall, the government may face a larger fiscal deficit
than currently anticipated, and therefore may need to make more
drastic cuts before the end of the year.

MCFARLAND