Economic Analysis - Corruption Allegations To Undermine Investment - OCT 2017


BMI View: Economic activity in Guatemala will decelerate in 2017 as corruption allegations undermine business confidence and halt infrastructure projects. However, robust remittance inflows will underpin pr ivate consumption and support a modest growth acceleration in 2018.

Economic growth in Guatemala will decelerate in 2017 before accelerating modestly in 2018, as private consumption growth is supported by strong remittance inflows. Though the government has moved to increase public spending, these efforts will be undermined by a combination of weak revenues and major delays on numerous infrastructure works ( see ' Public Spending Efforts Undermined By Persistently Weak Tax Compliance ' , July 7). Political risks have become markedly more acute in recent months due to corruption investigations, which will weigh on investor sentiment and undermine fixed capital formation ( see ' Allegations Surrounding Morales Set To Intensify ' , June 14).

Despite real GDP growth of 3.0% in Q117, confidence and high frequency indicators have softened in recent months. As a result, we have downwardly revised our forecasts for economic growth in 2017 to 2.8%, from 3.6% previously ( see ' Growth To Accelerate, Though Risks Have Increased Significantly ' , March 22). In 2018, we expect real growth to accelerate to 3.4%.

Growth Falling As Sentiment Softens
Guatemala - IMAE Economic Activity Index
Source: Banguat, BMI

Remittance Inflows Will Remain Robust, Underpinning Growth

Remittance inflows will support private consumption and underpin growth over the coming quarters. Guatemala is heavily exposed to the US economy, and we expect economic strength and rising wages in the US to support worker's remittances from Guatemala's emigrant community ( see ' Investment To Play More Prominent Role In Near-Term Growth Outlook ' , April 3). Remittance flows have been particularly strong in 2017, averaging 13.5% y-o-y growth through July, which will bolster private consumption growth.

Remiitance Flows To Remain Elevated
Guatemala - Workers' Remittances, USDmn
Source: Banguat, BMI

Sentiment Turning Negative

Heightened political risks and the exit of key administration officials amid corruption allegations, which has seen the suspension of numerous infrastructure projects, will weigh heavily on investor sentiment in the coming quarters. President Jimmy Morales confirmed in July that the government has had trouble tendering projects, as companies do not want to bid on government contracts amid the current anti-corruption crackdown. This has undermined government efforts to boost growth through infrastructure development projects, including new roads and hospitals. In August the government cancelled a USD384mn highway contract with embattled Brazilian builder Odebrecht. Infrastructure Minister Aldo Garcia also reported that 23 of his ministry's 70 infrastructure projects planned for 2017 were on hold due to corruption allegations. In this environment, business confidence has turned negative, with the Economic Activity Confidence Index falling to 46.7 in July, from 58.0 in January.

Business Confidence On The Downswing
Guatemala - Economic Activity Confidence Index
Source: Banguat, BMI

Silver Mine Shutdown Brings Further Downside

The suspension of operations at Tahoe's Escobal silver mine, the third-largest in the world, will further weigh on economic growth in 2017. In July, the Supreme Court ordered the US-based miner to cease operations, alleging the firm had violated indigenous people's right to consultation before license issuance. Additionally, protests by indigenous groups have blocked the road between the Escobal mine and Guatemala City over the last two months. While Tahoe has announced it is appealing the ruling and expects its license to be reinstated in the coming months, a prolonged closure will threaten government revenue, sentiment, and net exports in the coming quarters.