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Rating Action:

Moody's changes outlook on Guatemala's sovereign ratings to stable from negative, affirms Ba1 ratings

 The document has been translated in other languages

30 Jun 2016

New York, June 30, 2016 -- Moody's Investors Service has today changed the outlook on Guatemala's ratings to stable from negative and affirmed the Ba1 government bond and issuer ratings.

Today's rating action reflects the following key drivers:

1. Guatemala's credit profile proved resilient to the political crisis of 2015, posting robust growth, a lower fiscal deficit and stable debt metrics.

2. The government's fight against corruption and its effort to improve transparency and accountability will continue to strengthen the country's weak institutions, particularly in tax administration and rule of law.

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 STABLE OUTLOOK

FIRST DRIVER -- MACROECONOMIC AND FISCAL RESILIENCE TO POLITICAL CRISIS

In 2015, the escalation of political risks triggered by corruption scandals led to widespread street demonstrations and eventually to the ousting of President Otto Perez Molina. The uncertainty surrounding the outcome of the political crisis posed a risk to macroeconomic stability and government financial strength. However, government channels were used to pursue corruption allegations and street protests did not lead to violent incidents. President Jimmy Morales, who took office in January 2016, has been responsive to the Guatemalan people's demand to fight corruption. As a result, social and political pressures towards instability have eased, as well as questions surrounding the government's commitment to maintain Guatemala's track record of conservative macroeconomic and fiscal policies.

To date, there has been no evidence of economic or fiscal deterioration as a result of the political crisis. GDP grew 4.1% in 2015 and the central bank expects GDP growth to be in the 3.1% - 3.9% range this year. The economy has benefited from lower oil prices, which has translated into a smaller current account deficit and higher disposable incomes, while stronger remittances have also boosted domestic consumption. Additionally, the exchange rate and foreign exchange reserves have experienced only modest fluctuations. We expect these external forces will continue to positively impact economic growth in 2016-17.

A fiscal deficit of 1.4% of GDP was reported in 2015, down from 1.9% of GDP in 2014, while the central government debt amounted to 24.2% of GDP at the end of 2015. The deficit reduction was the result of an expenditure containment plan that began in October 2014, as a response to the expectation that revenues would be lower than budgeted. At the end, expenditure cuts of 1.1% of GDP in 2015 more than offset a fall in government revenues of 0.7% of GDP, which were due to both corruption in the customs tax administration and lower taxes collected from oil derivatives imports, given the drop in oil prices. For 2016 and 2017, we expect the fiscal deficit to increase slightly, reaching levels closer to its historical average of 2% of GDP.

SECOND DRIVER -- WEAK INSTITUTIONS EXPECTED TO STRENGTHEN IN TAX ADMINISTRATION AND RULE OF LAW

The CICIG (International Commission against Impunity in Guatemala, a UN-run entity) in tandem with the Public Ministry, have led a fight against corruption, uncovering entrenched criminal networks working within the State. As of June 2016, around 300 people had been arrested, with 53 apprehended on a single day last month. The arrests include not only top and middle-management government officials but also members of Congress, the military and two prominent bankers.

The discovery of these corruption networks has shed light on the magnitude of the rule of law challenges in Guatemala. However, there is optimism about the effect the intervention of the CICIG would have on Guatemalan institutions, identifying the permanent criminal structures (not only the temporary ones) and increasing the judicial system's independence and ability to enforce the law. It has already begun to do so by helping Guatemalan authorities follow due process in the most recent cases. The CICIG's mandate has been renewed by President Morales for two more years, scheduled to end September 2019.

Corruption, particularly in the customs agency, affected revenue collection in 2015. Government revenues amounted to only 10.8% of GDP last year, down from 11.5% of GDP in 2014, making Guatemala the sovereign with the third lowest revenue-to-GDP ratio in our rated universe of 131 countries. The President Morales administration has begun to take measures such as renewing the top leadership of the tax administration department (the SAT), which has a new director as of March 9. As of June, two-thirds of the employees in the SAT were new, as well as 70% of the managers. Despite running with a limited staff, the department has been able to stabilize revenue collections. The SAT expects to increase total government revenues by 0.5% of GDP in 2016 compared to 2015.

RATIONALE FOR AFFIRMATION OF GUATEMALA'S Ba1 RATINGS

The Ba1 ratings reflect, on the one hand, moderate medium-term growth prospects and the government's long-standing commitment to prudent fiscal and monetary policies, and, on the other, high poverty levels and relatively weak institutional strength. Strict expenditure controls have led to moderate budget deficits and low debt ratios, despite low government revenues. Alternatively, poor human development indicators, substantial social needs and the weak quality of infrastructure hinder competitiveness, limiting Guatemala's economic strength.

FACTORS THAT COULD LEAD TO AN UPGRADE

The ratings could experience upward pressure if there is (a) substantial improvement in government revenue collection, (b) sustained improvement in factors impacting economic strength, including GDP per capita and the growth outlook for the economy, and (c) stronger institutions, particularly rule of law and control of corruption.

FACTORS THAT COULD LEAD TO A DOWNGRADE

The ratings could experience downward pressure if (a) there is an erosion of the authorities' longstanding commitment to conservative fiscal management, (b) there is a deterioration in economic performance that leads to persistently higher debt ratios, or (c) weak economic and social development indicators and domestic security challenges begin to pose a threat to political stability.

GDP per capita (PPP basis, US$): 7,738 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.1% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.1% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -1.4% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -0.3% (2015 Actual) (also known as External Balance)

External debt/GDP: 27% (2015 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 28 June 2016, 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 has increased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become less susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Ariane Ortiz-Bollin
Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's changes outlook on Guatemala's sovereign ratings to stable from negative, affirms Ba1 ratings
No Related Data.
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