Shaking Off Instability

After a year in office, Guatemalan President Alfonso Portillo has managed to bring macroeconomic stability to his country. It hasn’t been easy. At the end of 1998, Hurricane Mitch ripped through Guatemala’s coastal region wiping out much of the country’s sugar and banana crop. Then in 1999, Guatemala’s currency, the quetzal, plunged15%.

Portillo’s initial priority was to mend a country still suffering from 36 years of civil war, which claimed 200,000 lives before a peace accord was signed in 1996. Guatemala remains largely poor, struggling with a stagnant economy. Economic uncertainty, unemployment and rural poverty are undermining Portillo’s popularity. His standing in the polls has sunk to 30%, feeding rumors that conspirators are plotting a coup d’etat.

Guatemala’s economy is saddled with serious structural problems. The country relies heavily on exports such as coffee, sugar and bananas, which are vulnerable to shifts in world prices. Last year exports accounted for 20% of the country’s GDP.

Guatemalan businesses find it hard borrow from local banks. Even coffee growers, Guatemala’s wealthiest and most influential social group, are suffering. With coffee prices at an eight-year low and scant local lending, growers cannot modernize their farms. Eduardo Weymann, the soft-spoken finance minister, announced in March that the government will issue up to $600 million in 10-year Eurobonds to provide cheaper and longer-term credits to coffee farmers.

Sergio Recinos, head of economic research at Banco de Guatemala, the central bank, says the government is reducing barriers to economic growth. Last year the bank’s benchmark short-term interest rate fell to 8% from a high of 28% in 1999. Still, private sector lending increased last year by a mere 4.9% in 2000.

Guatemala has maintained a floating exchange rate since 1989. The country met International Monetary Fund inflation targets of 5% for last year despite inflationary pressure from its principal trading partners that, with the exception of El Salvador, have inflation rates above 10%. “The fiscal situation is one of Guatemala’s biggest problems,” says Recinos, “We were able to reduce the fiscal deficit to 1.9% in 2000 of GDP from 2.8% of GDP in 1999.” Last March, the government cut spending by 10% and raised the maximum tax rate to 31% on personal income and corporate profits. Moody’s Investors Service classifies Guatemala’s debt burden as moderate since multilateral institutions such as the IMF, the World Bank, and Cabei, the Central American development bank, provide most of Guatemala’s $2.5 billion external financing. The country last issued an international bond in 1997.

Guatamala passed a law after El Salvador adopted the dollar as its official currency that allows financial transactions in foreign currencies. The new law is widely seen as a de facto sanction of dollarization. “The law can be seen as a first step toward dollarization and in my personal opinion, we will get there eventually although right now we’re simply not ready,” says Edgar Barquín, director of technical coordination at Guatemala’s Superintendency of Banks. “We still need to improve our fiscal problems, strengthen our financial system, stabilize economic growth and increase exports.”

The government is advocating regional integration, one of Guatemala’s last lifelines to revitalize its economy. The country is simply too small, too poor and too isolated to advance alone. A revitalized trade pact would give Guatemalan companies access to a market of 18 million consumers in El Salvador, Honduras, Costa Rica and Nicaragua. It would also make the region more attractive to foreign investors. LF