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Rating Action:

Moody's affirms Guatemala's Ba1 rating; stable outlook

11 Jun 2018

New York, June 11, 2018 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Guatemala's Ba1 issuer and Ba1 senior unsecured bond ratings. The outlook remains stable.

The key drivers for the rating affirmation are:

1. A track record of prudent fiscal management and proven economic resiliency to domestic and external shocks

2. Rating constraints stemming from weak institutions and a low wealth levels

Guatemala's long-term foreign currency bond ceiling remains unchanged at Baa3. The foreign-currency deposit ceiling remains at Ba2, while the local-currency bond and deposit ceilings remain at Baa1. The short-term foreign-currency bond ceiling remains at P-3, while the short-term foreign currency deposit ceiling remains unchanged at NP.

RATINGS RATIONALE

RATIONALE FOR AFFIRMATION OF GUATEMALA's Ba1 RATING

FIRST DRIVER: PRUDENT FISCAL MANAGEMENT AND PROVEN RESILIENCY TO SHOCKS

Guatemala has a long track record of maintaining moderate fiscal deficits. Since 2000 the average fiscal deficit has been less than 2% of GDP, and it never breached 3.3% of GDP during that time frame. The low fiscal deficits are mainly the result of containing spending as the government's revenue base is among the lowest in our rated universe. A combination of a large informal sector, tax evasion, and low tax rates resulted in government revenues of between 10% and 11% of GDP over the last ten years.

The low deficits have limited the overall debt burden. The government debt reached 24% of GDP last year, about half the median of all Ba1 rated sovereigns. We expect government debt to remain around 24% this year and next as well. Measured as percentage of revenues Guatemala's government debt is higher than similar-rated peers, due to the low tax intake, but has remained stable over time.

The fiscal results highlight a proven resiliency to multiple domestic and external shocks, including a recovery from a 36-year civil war, the 2008/2009 US financial crisis, and multiple natural disasters. Since 2015 political scandals have led to the resignation of one president and the investigation of another. Yet throughout all those challenges government finances and the country's external position have remained relatively stable, highlighting various different administrations' ability to manage adverse conditions without compromising macroeconomic stability.

SECOND DRIVER: CONSTRAINTS STEMMING FROM WEAK INSTITUTIONS AND LOW WEALTH LEVELS

Constraining the rating are weak institutions and low income per capita. Guatemala ranks lower in the Worldwide Governance Indicators, part of our formal assessment of a sovereign's institutional strength, than most rated peers. Key weaknesses are in the areas of rule of law and overall government effectiveness. An investigation by the United Nations-funded International Commission Against Impunity in Guatemala (CICIG) on campaign finance contributions led last year to accusations against President Jimmy Morales and widespread protests. Yet despite this, positive aspects to highlight include a long track record of prudent fiscal and monetary policies, data transparency, and a solid relationship with the IMF and other multilaterals.

Guatemala's $75 billion economy is the largest in Central America, above the Ba1 median of $58 billion. But the country's per capita GDP (PPP basis) of $8144 in 2017 is less than half that of rated peers. Limited growth potential and weak development indicators continue to be key constraints on Guatemala's sovereign rating.

On June 3 Guatemala's Fuego volcano, located some 25 miles from the capital, erupted resulting in over 100 deaths and many more affected by the widespread ash fallout. The volcano eruption has displaced thousands of people, damaged some crops and briefly closed the country's main airport. Nonetheless, and despite the tragic loss of human lives, Moody's believe that the fiscal and economic impact will be limited since, unlike other environmental disasters affecting other nations, such as earthquakes and hurricanes, the eruption did not destroy any major infrastructure.

Gross investment of 12.1% of GDP in 2017 remains a limiting factor for medium-term growth prospects of the Guatemalan economy. Guatemala has the fifth lowest gross investment to GDP ratio in our rated universe, only higher than Angola, Cuba, Greece and Venezuela. Gross investment averaged 20% of GDP in the five years prior to 2009 but less than 14% of GDP since then. Factors restraining investment in Guatemala include weak social indicators, domestic security challenges and weak rule of law.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects our expectation that moderate medium-term growth prospects and the government's long-standing commitment to prudent fiscal and monetary policies will continue to maintain debt at close to current levels, despite pressures arising from high poverty levels and relatively weak institutions.

WHAT COULD CHANGE THE RATING UP/DOWN

An upgrade to Guatemala's rating is unlikely in the near to medium term. Upward pressure on the rating would require both (i) improvement in economic conditions that lead to higher GDP growth on a sustained basis, and (ii) material improvement of the country's institutional framework in general and its governance indicators in particular.

Conversely, the rating could experience downward pressure if (i) there is an erosion of the country's longstanding commitment to prudent fiscal management, (ii) worse-than-expected economic performance results in persistently higher debt ratios, or (iii) weak social development indicators and domestic security challenges begin to pose a threat to political stability.

GDP per capita (PPP basis, US$): 8,145 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.8% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.7% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -1.3% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 1.5% (2017 Actual) (also known as External Balance)

External debt/GDP: 25.1% (2017 Actual)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 07 June 2018, a rating committee was called to discuss the rating of the Guatemala, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gabriel Torres
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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