## 1gtmea2021001 - 2021. The staff team comprised Esther Pérez Ruiz (Head), Aleksandra

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### A. The Pre-COVID-19 Landscape
- Macroeconomic performance and structure:
  - Average growth pre-pandemic: 3½ percent.
  - Social spending pre-COVID: 0.1 percent of GDP.
  - Poverty rate close to 60 percent of the population; extreme poverty: one out of five Guatemalans.
  - Basic healthcare coverage: about 50 percent of Guatemalans.
  - Access to safe water and sanitation: 25 percent of the population.
  - Prevalence of stunting in children under 5: 46½ percent (up to 70 percent in some departments).
- Supportive factors:
  - Robust remittances and a strong external position.
  - Soaring investor confidence upon inauguration of Giammattei’s administration (January 2020).
  - Accommodative fiscal and monetary policies; liquid, well capitalized banking system.
- Policy framework:
  - National Innovation and Economic Development Plan (PLANID): modernize public sector; expand health and education; improve competitiveness and employment; enhance accountability and transparency.

### B. The COVID-19 Shock
- Health, containment, and labor-market impacts:
  - Pandemic infections and deaths remained relatively moderate despite early reopening.
  - GDP contracted by 1½ percent in 2020 (versus 7.2 percent on average in CAPDR).
  - Four-month strict lockdown and collapse of external demand hit consumption, investment, and exports.
  - Jobs’ recovery rate: 75 percent as of December 2020.
- Drivers of resilience in 2020:
  - Nominal merchandise exports growth reached 14 percent (y/y) in 4Q2020.
  - Remittances annual growth: 7.9 percent in 2020; remittances account for around 30 percent of households’ income.
  - Private consumption: 85 percent of GDP.
  - Unprecedented fiscal and monetary support (National Emergency and Economic Recovery Plan).
- Fiscal response and financing (preserved exactly):
  - Authorities mobilized around US$1,900 million in domestic bonds, US$1,400 million in direct bond placements with Banguat, US$1,200 million in Eurobonds, and US$535 million in IFI loans.
  - Public debt increased from 26.5 percent of GDP to 31.6 percent.
  - Fiscal impulse of 2.3 percent of GDP; overall fiscal deficit reached 4.9 percent of GDP.
- Social protection measures (selected details preserved exactly):
  - Family Bonus: cash transfers through bank account of US$780 million (1.0% of GDP); beneficiaries: 2.8 million heads of vulnerable households; benefits: 3 payments of up to 130 dollar each.
  - Employment Protection Fund: cash transfers to private-sector workers of US$240 million (0.3% of GDP); beneficiaries: 191,110 furloughed formal employees; benefits: US$10 per day of suspended work.
  - Working Capital Credit Fund: loans at favorable terms of US$300 million (0.4% of GDP); beneficiaries: SMEs; favorable terms: grace periods and below-market interest rates.
  - Food Support Program: delivering food assistance for around US$90 million (0.1% of GDP); beneficiaries: 700,000 households; benefits: baskets with 30-day supplies at around US$90 each.
- Social outcomes and shocks:
  - Job losses and labor income reductions estimated to have increased poverty by 3 percentage points during 2020 (UN-ECLAC).
  - Rising food prices might have increased acute malnutrition sharply by 80 percent, to about 2.8–4.9 (preliminary data suggests 120 children under 5 per 10,000 population).
  - Hurricanes Eta and Iota: growth impact limited (0.2 percentage point at most in 2020); infrastructure damage, foregone income and additional costs estimated at almost 1 percent of GDP; affected livelihoods of 311,000 people.
- Monetary and financial sector response:
  - Banguat lowered the policy rate by 100 basis points to 1¾ percent and provided additional liquidity.
  - Temporary easing of regulations: redefine default from 90 to 180 past-due days, allow accrual accounting for restructured loans.
  - Private credit accelerated to 6.4 percent (y/y) in 2020 from 4.9 percent (y/y) in 2019.
  - 26.2 percent of banks’ credit portfolio (9.7 percent of GDP) restructured under regulatory forbearance; of which 15.7 and 35.4 percent were consumer loans and loans to corporates, respectively.
  - Private sector debt about 38 percent at end-2020.

### C. Outlook and Risks to the Recovery
- Near-term growth and medium-term projection:
  - Staff projects growth of 4½ percent in 2021.
  - Growth expected to stabilize at 3½ percent by 2023 (closing the output gap by 2025).
  - Staff’s estimated GDP loss amounts to about 3½ percent by 2025 relative to pre-COVID levels.
- Inflation and monetary stance:
  - Target band midpoint: 4 ± 1 percent; baseline expects convergence to the mid-point.
  - Temporary inflationary pressures pushed inflation to upper bound of target band for most of 2H2020.
  - Baseline presumes sterilization of excess liquidity from partial monetization of the 2020 fiscal deficit.
- External position and current account:
  - CA balance increased to 5.5 percent of GDP in 2020 (from 2.4 percent in 2019).
  - Medium-term CA expected to deteriorate to -0.6 percent of GDP.
  - REER appreciated by 37 percent cumulatively over the past decade.
  - EBA CA norm: -4.0 percent of GDP in 2020; staff’s revised CA norm at -2 percent of GDP once weak security conditions are accounted for.
  - Debt-stabilizing CA deficit estimated at -0.9 percent; corresponding CA gap of 7.1 percent of GDP implies a REER undervaluation of -69 to -49 percent (compared with -26 to -10 percent at the time of the 2019 AIV).
- Key risks:
  - Downside: slower vaccine rollout, new virus strains, protracted worsening in poverty and malnutrition, further natural disasters, premature withdrawal of financial support.
  - Upside: quick resolution to the pandemic and faster-than-expected business reforms could lift investment and growth.

### Box 1 — Remittances as a Stabilizing Source of Income During the Pandemic (summary facts)
- Historical and 2020 dynamics:
  - Remittances rose from 8 percent of GDP in 2002 to 13.7 percent in 2019.
  - During the pandemic: remittances declined sharply between March and May but rebounded in the second half of 2020, achieving yearly growth of 7.9 percent in 2020.
  - Average amount remitted per transaction remained around US$333.
- Historical elasticities (2001M1–2019M12; all variables in m/m growth rates):
  - 1 percent improvement in U.S. building permits → remittances +0.47 percent.
  - 1 percent worsening of IMAE Agriculture → remittances +0.57 percent.
  - U.S. Hispanic unemployment rate coefficient: 0.96.
  - Remittances (lagged) coefficient: -0.28***.
  - Building permits coefficient: 0.47***.
  - IMAE Agriculture coefficient: -0.57***.
- Outlook for 2021:
  - Remittances expected to normalize in 2021 as temporary support factors wear off.

### Policy priorities (summary of recommendations)
- Near-term:
  - Maintain monetary accommodation and targeted fiscal support; gradually unwind credit support measures.
  - Continue to scale up social protection and public investment where needed.
- Medium-term:
  - Create fiscal space to durably raise social and infrastructure spending.
  - Enhance revenue mobilization and spending efficiency; better manage natural disaster risks and public debt; foster domestic debt market development.

- A. Fiscal policy (key points and recommendations):
  - Working assumptions amid lack of Congress approval of the 2021 Budget:
    - Revenue nominal target for 2020: 9.9 percent of GDP.
    - Envisaged spending envelope: 14 percent of GDP.
    - Implied deficit: 3.4 percent of GDP (deviates by about 1½ percentage points from historical mark of 2 percent).
    - Historical deficit target to be attained gradually by 2026.
  - Financing mix: domestic bonds, Eurobonds, and IFIs loans.
  - Public debt projection: 34 percent of GDP on average during 2021−26 and deemed sustainable (Annex III).
  - Fiscal priorities for 2021:
    - (i) increase cash transfers (education, health, nutrition) using Social Registry of Households and payments digitalization;
    - (ii) enhance provision of education through virtual or in-person learning;
    - (iii) step up public investment to catalyze private investment.
  - If social indicators worsen, use available fiscal space to expand cash transfer coverage.
  - Medium-term strategy: raise overdue social and infrastructure spending while maintaining broadly stable debt-to-GDP ratio.

- Box 2 — Enhancing the Local Currency Bond Market (LCBM) (summary):
  - Public debt composition in 2020:
    - Debt-to-GDP: 32 percent.
    - Domestic bonds: 18.3 percent of GDP.
    - Eurobonds: 7 percent of GDP.
    - External bonds: 6.7 percent of GDP.
  - EMBI spread: 263 in 2020.
  - Empirical effects (6 CADR countries):
    - Increase in financial depth of 1 percent of GDP reduces bond yields by 5 bps.
    - Increase in traded volumes of 1 percent of outstanding public debt reduces yields by 4 bps.
    - Non-bank participation share increase of 1 percent reduces yields by 4 bps.
    - Decrease in banks’ excess reserve balances of 1 percent of total deposits brings down financing costs by 5 bps.
    - Greater investor base diversification and financial depth could save up to 30 and 45 basis points in treasury bond yields, respectively, following a 100 basis point increase in the Fed funds rate.
  - Policy priorities: pass Securities Market Law; publish Medium-Term Debt Strategy/Annual Borrowing Plan; extend maturities; standardize and dematerialize securities; coordinate debt management and monetary policy.

- B. Monetary policy:
  - Recommendation: remain accommodative.
  - Monetary policy rate: 1.75 percent (about 220 basis points lower than neutral stance estimate).
  - Money growth accelerated to 18 percent y/y in December 2020, from 9½ percent on average over 2010−19.
  - Core inflation remained consistently below 3 percent.
  - FX and reserves:
    - Banguat’s net purchases in 2020: US$2,010 million (2019 net purchases: US$1,329 million).
    - Net purchases represent 1.7/2.9 percent of GDP in 2019/2020.
    - Recommendation: allow two-way FX flexibility to stimulate market development and support de-dollarization efforts.
  - Banguat should monitor monetary aggregates and neutralize excess liquidity as warranted.

- C. Financial sector policy:
  - 2020 banking indicators:
    - Capitalization: 16.1 and 10 percent of risk weighted assets (regulatory levels).
    - Liquid assets covered 72½ percent of short-term liabilities in 2020 (71 percent in 2019).
    - NPLs declined to 1.9 percent in 2020 from 2.2 percent in 2019.
    - ROE: declined from 17.9 percent at end-2019 to 16.1 percent at end-2020.
    - Provisioning: 194 percent at end-2020 versus 137.9 percent at end-2019.
  - Phasing out regulatory forbearance:
    - Exit strategy: normalize through September (default period to 90 past-due days from 180 days), gradual recognition through September of accrued but unpaid interest, return to cash basis for interest revenues as of January 2020.
    - Staff stress tests indicate banking sector resilient to severe scenarios; SIB should closely monitor NPLs and engage in early intervention.

### Fiscal transparency and governance (summary)
- PEFA (2018): about two thirds of indicators in line or above basic international good practices; about ¾ highlighted for improvement.
- Areas to improve: single Treasury account expansion; automation of payments; control of budget execution; external scrutiny and auditing; accounting and reporting automation; policy-based budgeting.
- Public procurement: a decade ago over 80 percent of procurement value non-competitive; by 2018 over half conducted competitively.
- Transparency measures: Ministry of Finance fiscal transparency portal; Guatecompras portal; Registro General de Adquisiciones del Estado publishes beneficial owners; Comptroller General supervises Covid-19 contracts.

### Financial stability and integrity; recovery reforms
- Pending legislation:
  - Adoption of bill on banks and financial groups (align with Basel III) and passage of draft AML/CFT law (align with FATF) are priorities.
  - Ensure transparency on ultimate beneficial ownership; maintain corporate registry.
- Structural reforms to lift potential growth:
  - Business and labor market reforms; promote e-commerce and digital services; formal part-time employment regulations; efficient insolvency procedures.
  - New legal framework for road infrastructure management to catalyze private funding and increase legal certainty.
- Disaster risk management and climate change:
  - Guatemala vulnerable to climate risks; average cost of 1.7 percent of GDP per event over the past four decades.
  - Agriculture: almost 24 percent of GDP and employs 72 percent of population in extreme poverty.
  - Emission reduction targets by 2030: between 11.2 and 22.6 percent (unconditional and conditional).
  - Infrastructure adaptation financing gap: 1.2 billion dollars over 12 years (or 1½ percent of GDP per annum, UNDP 2018).
  - Suggested measures: carbon-proportional fuel tax; vehicle taxation with ad valorem component; pricing schemes for hazardous products and solid waste.

### Authorities’ views (summary)
- Authorities broadly concurred with staff’s outlook; emphasized 2020 policy response improved private sector expectations and investment prospects in 2021.
- Authorities see risks primarily tilted to the upside but note immunization delays and new variants as downside risks.
- Ministry of Finance priorities: sustain recovery; strengthen social programs; budget reshuffling to redirect resources to health, education, and public investment; strengthen tax revenue collection; curb tax evasion and contraband; procurement and civil service reforms.
- Monetary authorities: maintain accommodative stance if inflation expectations anchored; monitor financial stability as credit support measures are phased out; vigilance to avoid unintended consequences from monetization.
- Other governance efforts: fiscal transparency portals; e-government strategy 2020−24; Administrative Simplification Law; increased financing for Office of the Public Prosecutor.

### Staff appraisal, projections, and policy recommendations (summary)
- Near-term:
  - Growth expected to peak at 4½ percent in 2021, converge to 3½ percent by 2023.
  - Inflation expected to reach the mid-point of the target band as supply shocks abate.
  - External position stronger than medium-term fundamentals imply; gap expected to narrow by 2026.
  - Near-term policy: fiscal and monetary support while recovery fragile; scale up social and infrastructure spending as stimulus is withdrawn; continue accommodative monetary conditions if inflation expectations remain well-anchored; SIB to monitor NPLs.
- Medium-term priorities:
  - Raise social and infrastructure spending to boost potential growth.
  - Enhance revenue mobilization and spending efficiency.
  - SAT to strengthen tax controls and fight contraband.
  - Expedite authorities’ reform agenda (Economic Recovery Plan) and enhance disaster risk management and emission reduction program implementation.

### Recommendation
- Next Article IV consultation with Guatemala recommended on the standard 12-month cycle.

### Selected recent data and projections (series as reported)
- Real GDP (annual percent change): 2016: 2.7; 2017: 3.1; 2018: 3.3; 2019: 3.9; 2020: -1.5; 2021 (projection): 4.5; 2022–2026 (projections): 4.0, 3.5, 3.5, 3.5, 3.5.
- Consumer prices (end of period): 2016: 4.2; 2017: 5.7; 2018: 2.3; 2019: 3.4; 2020: 4.8; 2021: 4.5; 2022–2026: 3.6, 3.7, 3.8, 3.9, 4.0.
- Output gap (% of GDP) 2016–2026: 0.2, -0.1, -0.2, 0.2, -2.1, -0.9, -0.4, -0.3, -0.3, -0.2, -0.1.
- Central government (percent of GDP) — Revenues 2016–2026: 11.4, 11.4, 11.3, 11.2, 10.7, 10.6, 11.0, 11.3, 11.4, 11.4, 11.5; Expenditures 12.6, 12.8, 13.2, 13.5, 15.6, 14.0, 13.8, 13.6, 13.5, 13.5, 13.5; Overall balance -1.1, -1.4, -1.9, -2.2, -4.9, -3.4, -2.8, -2.4, -2.2, -2.0, -2.0.
- Central Government Debt (percent of GDP): 25.0, 25.1, 26.5, 26.5, 31.5, 32.4, 33.4, 34.0, 34.2, 34.2, 34.0.
- Current account balance (percent of GDP): 1.0, 1.1, 0.9, 2.3, 5.5, 2.3, 1.7, 1.1, 0.6, -0.1, -0.6.
- Remittances (percent of GDP): 10.8, 11.4, 12.7, 13.6, 14.6, 14.6, 14.8, 14.7, 14.4, 14.1, 13.8.
- Net International Reserves (NIR) stock in months of next-year NFGS imports: 2016: 5.1; 2017: 6.0; 2018: 6.5; 2019: 8.6; 2020: 9.2; 2021–2026: 8.8, 8.5, 8.1, 7.7, 7.3, 7.3.
- NIR (millions of U.S. dollars) selected: 2016: 8,321; 2017: 10,578; 2018: 11,617; 2019: 13,769; 2020: 17,285; 2021–2026: 17,285 (each year).
- M2 (percent change, memo): 6.6, 8.4, 9.4, 9.6, 18.9, 7.8, 6.3, 6.6, 6.7, 6.7, 6.8.
- Credit to the private sector (percent change, memo): 5.9, 3.8, 7.0, 4.9, 6.4, 6.8, 7.3, 7.2, 7.2, 7.2, 7.2.
- Key social indicators (memoranda): Population 2020 (millions): 17; Percentage indigenous (2018): 44; Life expectancy at birth (2018): 74; Gini index (2014): 48; Population below poverty line (2014): 59; Adult illiteracy rate (2014): 19; UNDP rank (2019, of 189): 127; GDP per capita (US$, 2020): 4,603.

### Annex I — External Sector Assessment (selected)
- CA surplus broadened to 5.5 percent of GDP in 2020 from 2.3 percent in 2019.
- REER cumulative appreciation over last decade: 37 percent.
- NIIP: -15.8 percent of GDP in 2019 and -10.3 percent in 2020.
- EBA conclusion for 2020: external position "[substantially stronger] than the level consistent with fundamentals and desirable medium-term policies."
- CA norm (EBA): -4 percent of GDP in 2020; staff adjusted CA norm: -2 percent of GDP.
- EBA table highlights (percent of GDP except REER Gap):
  - Adjusted CA (D) 2020: 5.1.
  - CA Norm (E) 2020: -4.0 +/- 1.2.
  - Adjusted CA norm (G) 2020: -2.0 +/- 1.2.
  - CA gap (H) 2020: 7.1 +/- 1.2.
  - REER Gap (K = H / J) 2020: [-69, -49].

- Reserve adequacy (2020):
  - Reserves at 165 percent of the IMF ARA metric for stabilized exchange rate countries.
  - Reserves cover more than 9 months of next year’s imports.
  - Reserves equal 39 percent of broad money.
  - Reserves equal 343 percent of short-term external debt.
  - End-of-year NIR: around US$17.3 billion (increase of US$3.5 billion in 2020).

### Public Debt and Stress Tests (selected)
- Baseline nominal gross public debt (percent of GDP): 24.9 (2019); 26.5 (2020); 31.5 (2021); 32.4 (2022); 33.4 (2023); 34.0 (2024); 34.2 (2025); 34.2 (2026).
- Public gross financing needs (percent of GDP) sample series: 3.3, 3.5, 6.4, 4.7, 4.1, 3.4, 3.7, 3.3, 3.8.
- Sensitivity tests considered: shocks to primary balance, real GDP growth, real interest rate, real exchange rate, and combined shock.
- Combined shock assumptions: Real GDP growth shock (growth drops to 2 and 1½ percent in 2022 and 2023), Primary Surplus Shock (0.6 percent of GDP), Interest Rate Shock (+200 basis points), Real Exchange Rate Shock (10 percent nominal depreciation).
- Stress-test outcomes (banking sector; December 2020 aggregate/system metrics):
  - CAR pre-shock: 15.6 (system).
  - Combined solvency shock: CAR falls by 2.9 percentage points to 12.7 percent; four banks would fall short of minimum regulatory CAR; identified capital shortfalls amount to 0.2 percent of GDP.
  - Reverse stress test thresholds:
    - System-wide CAR < 10 percent requires NPLs to rise to 13.1 percent.
    - CAR of nine banks < 10 percent requires NPLs to rise to 23.5 percent.
    - CAR for 50 percent of market share < 10 percent requires NPLs to rise to 7.8 percent.
  - Liquidity stress test (10%/day demand and 3%/day time-deposit runoff): all banks remain liquid after 5 days; no outside liquidity support needed.

- Banking system vulnerabilities and indicators (December 2020):
  - Over 80 percent of total assets concentrated in largest five banks (out of 17); top two banks ~50 percent market share.
  - CAR: 15.6 percent.
  - NPLs: 1.9 percent.
  - Provisions / NPLs: 191.8.
  - FX Loans / Total Loans: 36.8 percent.
  - Deposits / Total Liabilities: 90.7 percent.
  - Deposits / Total Loans: 174.0 percent.
  - ROA: 1.5; ROE: 16.1.
  - Liquid Assets / Total Assets: 34.3 percent; Liquid Assets / ST Liabilities: 72.5 percent.
  - Net FX Exposure / Capital: 15.7.

- External debt metrics (Annex IV selected):
  - External debt (percent of GDP) baseline: 35.3 (2016); 34.9 (2017); 33.4 (2018); 32.7 (2019); 30.1 (2020); 33.8 (2021); 34.0 (2022); 33.8 (2023); 33.0 (2024); 32.3 (2025); 31.2 (2026).
  - Gross external financing need (billions of US dollars): 4.5, 4.6, 5.3, 4.2, 2.1, 3.2, 5.1, 5.3, 6.3, 7.1, 8.8 (2016–2026).

### Statement by the Executive Director (June 9, 2021) — Selected points
- Guatemala had steady growth of 3.5 percent between 1999-2019; inflation average 4.2 percent between 2010-2020; fiscal deficit average 2.0 percent of GDP between 1999-2019.
- Pandemic response and outcomes:
  - Fiscal impulse raised deficit to 4.9 percent of GDP in 2020.
  - Countercyclical fiscal measures (percent of GDP): Family bonus 1.0; Employment protection fund 0.3; Working capital fund 0.4; Food support program 0.1.
  - Banguat estimate: contraction could have been 2.5 percentage points higher without fiscal measures.
- Authorities’ outlook and priorities:
  - 2020 GDP contraction: 1.5 percent.
  - 2021 GDP expectations: above 3 percent with central scenario of 4 percent; could improve to 5 percent with vaccination acceleration.
  - Vaccination status up to Jun 1st, 2021: around 3.3 doses per 100 habitants.
  - Debt-to-GDP: 2019: 26.5 percent; 2020: 31.6 percent; expected to stabilize around 34 percent in medium term.
  - Monetary policy: policy rate at 1.75 percent (historic low); inflation target 4.0% +/- 1 percentage point; average inflation April 2021: 5.6 percent.
  - Banking system solvency: 2020: 16.1 percent; April 2021: 16.4 percent; regulatory requirement: 10 percent.
  - Family remittances growth: 2020: 7.2 percent; May 2021: 43.1 percent.

*IMF staff report excerpt (Box 1 concluded); IMF staff estimates and projections; Bank of Guatemala; Ministry of Finance.*

### 2021. The staff team comprised Esther Pérez Ruiz (Head), Aleksandra

### 1gtmea2021001 - 2021. The staff team comprised Esther Pérez Ruiz (Head), Aleksandra

### A. The Pre-COVID-19 Landscape
- Guatemala displayed macroeconomic stability and firming growth pre-pandemic with an average growth of 3½ percent.
- Key supportive factors pre-COVID:
  - Robust remittances.
  - Soaring investor confidence upon the inauguration of Giammattei’s administration (January 2020).
  - Accommodative fiscal and monetary policies that kept inflation expectations firmly anchored.
  - A strong external position and a liquid, well capitalized banking system.
- Social challenges before COVID-19:
  - Social spending at 0.1 percent of GDP.
  - Poverty rate close to 60 percent of the population; one out of five Guatemalans lived in extreme poverty.
  - Basic healthcare coverage about 50 percent of Guatemalans.
  - Only 25 percent of the population had access to safe water and sanitation.
  - Prevalence of stunting in children under 5 at 46½ percent (up to 70 percent in some departments).
- Policy framework aiming to address these issues:
  - The National Innovation and Economic Development Plan (PLANID) focused on modernizing the public sector, expanding health and education provision, improving competitiveness and employment, and enhancing accountability and transparency.

### B. The COVID-19 Shock
- Health and containment:
  - Pandemic infections and deaths remained relatively moderate despite an early reopening.
  - A swift State of Calamity, curfew, border closures, and suspension of non-essential activities provided early containment.
  - Early reopening with strict biosecurity protocols, effective mask use, and low incidence of megacities supported recovery while stabilizing infections.
- Output and labor:
  - GDP contracted by 1½ percent in 2020, versus 7.2 percent on average in CAPDR.
  - A 4-month strict lockdown and collapse of external demand weighed on private consumption, investment, and exports.
  - Recovery turned around in June and accelerated during the summer; jobs’ recovery rate of 75 percent as of December 2020.
- Drivers of resilience in 2020:
  - Production and exports mix tilted towards essential agriculture, food and chemical activities; growth in nominal merchandise exports reached 14 percent (y/y) in 4Q2020.
  - Remittances: annual growth of 7.9 percent in 2020; remittances account for around 30 percent of households’ income; private consumption at 85 percent of GDP.
  - Unprecedented fiscal and monetary support (National Emergency and Economic Recovery Plan).
- Fiscal response and financing:
  - Authorities mobilized around US$1,900 million in domestic bonds, US$1,400 million in direct bond placements with Banguat, US$1,200 million in Eurobonds, and US$535 million in IFI loans.
  - Public debt increased from 26.5 percent of GDP to 31.6 percent.
  - Fiscal impulse of 2.3 percent of GDP due to relief spending and revenue shortfall; overall fiscal deficit reached 4.9 percent of GDP.
- Social protection measures (selected details preserved exactly):
  - Family Bonus: cash transfers through bank account of US$780 million (1.0% of GDP); beneficiaries: 2.8 million heads of vulnerable households; benefits: 3 payments of up to 130 dollar each.
  - Employment Protection Fund: cash transfers to private-sector workers of US$240 million (0.3% of GDP); beneficiaries: 191,110 furloughed formal employees; benefits: US$10 per day of suspended work.
  - Working Capital Credit Fund: loans at favorable terms of US$300 million (0.4% of GDP); beneficiaries: SMEs; favorable terms: grace periods and below-market interest rates.
  - Food Support Program: delivering food assistance for around US$90 million (0.1% of GDP); beneficiaries: 700,000 households; benefits: baskets with 30-day supplies at around US$90 each.
- Social outcomes and shocks:
  - Job losses and labor income reductions estimated to have increased poverty by 3 percentage points during 2020 (UN-ECLAC).
  - Rising food prices might have increased acute malnutrition sharply by 80 percent, to about 2.8–4.9 (preliminary data suggests 120 children under 5 per 10,000 population).
  - Hurricanes Eta and Iota: growth impact limited (0.2 percentage point at most in 2020); infrastructure damage, foregone income and additional costs estimated at almost 1 percent of GDP; affected livelihoods of 311,000 people.
- Monetary and financial sector response:
  - Banguat lowered the policy rate by 100 basis points (to a historic low of 1¾ percent) and provided additional liquidity.
  - Temporary easing of regulations to facilitate renegotiation of past-due loans, redefine default from 90 to 180 past-due days, and allow banks to record interest from restructured loans on an accrual basis.
  - Private credit accelerated to 6.4 percent (y/y) in 2020 from 4.9 percent (y/y) in 2019.
  - 26.2 percent of banks’ credit portfolio (9.7 percent of GDP) were restructured under regulatory forbearance; of which 15.7 and 35.4 percent were consumer loans and loans to corporates, respectively.
  - Private sector debt about 38 percent at end-2020, with firms and households contributing in about equal proportions.

### C. Outlook and Risks to the Recovery
- Near-term growth projection:
  - Staff projects growth of 4½ percent in 2021.
  - Recovery supported by commerce, manufacturing, and construction; slower recovery in hospitality (accounting for just 3 percent of GDP).
  - External support from U.S. recovery and the American Rescue Plan, and planned vaccination coverage of about 60 percent of the population in 2021.
- Medium-term prospects:
  - Growth is expected to stabilize at its pre-COVID potential rate of 3½ percent by 2023 (closing the output gap by 2025).
  - Staff’s estimated GDP loss amounts to about 3½ percent by 2025 relative to pre-COVID levels.
  - Need to raise potential growth via greater provision of public health and education and pro-business reforms to spur foreign and domestic investment—both declining as a share of GDP over the past decade.
- Inflation outlook:
  - Temporary inflationary pressures from local supply constraints, hoarding, higher transportation fares, and logistic disruptions pushed inflation to the upper bound of the target band for most of 2H2020.
  - Inflation expectations remained well anchored; near-term inflation is set to converge to the mid-point of the target band (4 ± 1 percent).
  - Baseline scenario presumes sterilization of any excess liquidity stemming from the partial monetization of the 2020 fiscal deficit.
- External position and current account (CA):
  - CA balance increased to 5.5 percent of GDP in 2020 (from 2.4 percent in 2019) reflecting resilient remittances and a lower trade deficit.
  - Over the medium term, the CA is expected to deteriorate to -0.6 percent of GDP due to lower exports growth, improving imports, and an increase in the FDI payout.
  - REER has appreciated by 37 percent cumulatively over the past decade.
  - EBA CA methodology suggests a CA norm of -4.0 percent of GDP in 2020; staff estimates a CA norm at -2 percent of GDP once weak security conditions are accounted for (Annex I).
  - The debt stabilizing CA deficit estimated at -0.9 percent; corresponding CA gap of 7.1 percent of GDP implies a REER undervaluation of -69 to -49 percent (compared with -26 to -10 percent at the time of the 2019 AIV).
  - Structural and fiscal reforms are essential to attract investment, decrease migration and remittance inflows, and support closure of the CA gap over the medium term.

### Box 1 — Remittances as a Stabilizing Source of Income During the Pandemic (summary facts)
- Remittances rose from 8 percent of GDP in 2002 to 13.7 percent in 2019.
- Pre-COVID: remittances overweighted the trade deficit and expanded the CA surplus; remittance impact on growth muted once REER appreciation and declining trade openness accounted for.
- Remittance growth driven predominantly by a boost in number of transactions; average amount remitted per transaction remained around US$333.
- During the pandemic: remittances declined sharply between March and May but rebounded in the second half of 2020, achieving yearly growth of 7.9 percent in 2020; rebound supported by a higher number of transactions while average amount remitted remained below 2019 level.

*Sources: National authorities and IMF staff calculations.*

### Box 1. Remittances as a Stabilizing Source  of Income  During the Pandemic (concluded)

### Box 1. Remittances as a Stabilizing Source of Income During the Pandemic (concluded)

### Remittances resilience and drivers
- Remittances’ resilience reflects differing economic conditions in the U.S. and Guatemala and strengthened migrants’ solidarity.
- Historical elasticities (all variables measured in m/m growth rates; data 2001M1–2019M12):
  - A 1 percent improvement in U.S. building permits is associated with an increase in remittances by 0.47 percent.
  - A 1 percent worsening of agricultural activity in Guatemala (IMAE Agriculture) is associated with an increase in remittances flows by 0.57 percent.
  - U.S. Hispanic unemployment rate coefficient: 0.96.
  - Remittances (lagged) coefficient: -0.28***.
  - Building permits coefficient: 0.47***.
  - IMAE Agriculture coefficient: -0.57***.
- Remittances developments in 2020 are broadly consistent with the model.
- Contributing factors to remittances strength during COVID-19:
  - U.S. income relief measures under the CARES Act.
  - Heightened solidarity of Guatemalan migrants supporting family livelihoods.
  - Temporary factors in 2020 also included transfers of migrants’ savings to home countries due to fear of repatriation.

### Outlook for remittances in 2021
- Remittances are expected to normalize in 2021 as temporary support factors in 2020 wear off.
- Temporary support factors in 2020 listed:
  - (i) the official U.S. pandemic support,
  - (ii) higher transfers of funds to migrants’ families as economic and health conditions deteriorate in Guatemala,
  - (iii) transfers of migrants’ savings to home countries due to the fear of repatriation.

### Risks to the outlook
- Risks are tilted to the downside, including:
  - Slower vaccine rollout and/or new virus strains could draw out the global and domestic recovery.
  - Protracted worsening in poverty and malnutrition could trigger social discontent.
  - Further natural disasters could weigh on the recovery and Guatemalans’ livelihoods.
  - A premature withdrawal of financial sector support measures might curtail banks’ profitability and credit flow to the recovery.
- Upside scenario:
  - A quick resolution to the pandemic, alongside faster-than-expected progress with business reforms, could further lift investment and growth (RAM Annex II).

### Policy priorities (summary of recommendations)
- Maintain monetary accommodation and targeted fiscal support to tackle increased poverty and malnutrition, while gradually unwinding credit support measures.
- Over the medium term, create fiscal space to durably raise social and infrastructure spending.

A. Fiscal policy (key points and recommendations)
- Authorities are envisaging a gradual withdrawal of fiscal stimulus.
- Working assumptions amid lack of Congress approval of the 2021 Budget:
  - Revenue nominal target for 2020: 9.9 percent of GDP.
  - Envisaged spending envelope: 14 percent of GDP.
  - Implied deficit: 3.4 percent of GDP (deviates by about 1½ percentage points from historical mark of 2 percent).
  - Historical deficit target to be attained gradually by 2026.
- Financing needs expected to be met primarily with a mix of domestic bonds, Eurobonds, and IFIs loans.
- Public debt projection: 34 percent of GDP on average during 2021−26 and deemed sustainable (Annex III).
- Fiscal priorities for 2021:
  - (i) increase cash transfers (education, health, nutrition) commensurate with deterioration in social indicators, using Social Registry of Households and payments digitalization to enhance targeting and transparency;
  - (ii) enhance provision of education through virtual or in-person learning to prevent human capital losses;
  - (iii) step up public investment to catalyze private investment amid prevailing uncertainties and low interest rate environment.
- If social indicators worsen, use available fiscal space to expand coverage of cash transfer programs (Annex III).
- Medium-term strategy:
  - Raise overdue social and infrastructure spending while maintaining a broadly stable debt-to-GDP ratio.
  - Essential measures: enhance revenue mobilization and spending efficiency; better manage natural disaster risks and public debt; foster development of the domestic debt market.

Box 2 — Enhancing the Local Currency Bond Market (LCBM) (summary)
- Guatemala’s public debt composition in 2020:
  - Debt-to-GDP reached 32 percent.
  - Domestic bonds: 18.3 percent of GDP.
  - Eurobonds: 7 percent of GDP.
  - External bonds: 6.7 percent of GDP.
- External financing on average 250 basis points cheaper than domestic financing; Guatemala issued 10- to 30-year instruments (EMBI spread of 263 in 2020).
- Ministry of Finance domestic market reforms underway: extend maturities to 20-year treasury bonds, standardize and dematerialize securities, regular auctions, coordinate with Banguat.
- Empirical panel estimates (6 CADR countries) on LCBM effects:
  - Increase in financial depth of 1 percent of GDP reduces bond yields by 5 bps.
  - Increase in traded volumes in secondary market of 1 percent of outstanding public debt reduces bond yields by 4 bps.
  - Non-bank participation share increase of 1 percent reduces bond yields by 4 bps.
  - Decrease in banks’ excess reserve balances of 1 percent of total deposits brings down financing costs by 5 bps.
  - Greater investor base diversification and financial depth could save up to 30 and 45 basis points in treasury bond yields, respectively, following a 100 basis point increase in the Fed funds rate.
- Policy priorities to develop LCBM:
  - (i) pass the new Securities Market Law;
  - (ii) publish a Medium-Term Debt Strategy/Annual Borrowing Plan;
  - (iii) place instruments on a wide maturity spectrum and use liability management to mitigate refinancing risks;
  - (iv) enhance coordination between debt management and monetary policy to reduce market segmentation and increase treasury bond liquidity and secondary market trading.

B. Monetary policy
- Recommendation: remain accommodative to guard against downside risks from the pandemic.
- Monetary policy rate: 1.75 percent (about 220 basis points lower than what a neutral stance would imply).
- Inflation expectations: remain anchored; baseline expects inflation to ease as pandemic-related shocks wane (¶12), overweighing inflationary pressures from normalization of oil prices and the output gap.
- Inflationary risks are tilted to the downside given prevailing uncertainties about the recovery.
- FX and reserves:
  - Banguat’s net purchases in 2020: US$2,010 million (sizable acceleration May–August 2020; decline toward year end).
  - 2019 net purchases: US$1,329 million.
  - Net purchases represent 1.7/2.9 percent of GDP in 2019/2020.
  - Quetzal more stable than other CAPDR currencies in 2020, reflecting Banguat’s intervention policy.
  - Recommendation: allow two-way FX flexibility to stimulate market finance development and support de-dollarization efforts.
- Monetization and liquidity:
  - Money growth accelerated to 18 percent y/y in December 2020, from 9½ percent on average over 2010−19.
  - Core inflation remained consistently below 3 percent.
  - Banguat should continue to closely watch monetary aggregates and neutralize any excess liquidity as warranted.

C. Financial sector policy
- Banking sector indicators (2020):
  - Capitalization: 16.1 and 10 percent of risk weighted assets (regulatory levels).
  - Liquid assets covered 72½ percent of short-term liabilities in 2020 (71 percent in 2019).
  - Over ¼ of banks’ loan portfolio under credit moratoria.
  - NPLs declined to 1.9 percent in 2020 from 2.2 percent in 2019 (partly due to moratoria and accrual-to-cash shifts).
  - ROE: declined from 17.9 percent at end-2019 to 16.1 percent at end-2020.
  - Provisioning: 194 percent at end-2020 versus 137.9 percent at end-2019.
- Phasing out regulatory forbearance:
  - Exit strategy foresees normalization through September (default period to 90 past-due days from 180 days), gradual recognition through September of all interests accrued but not paid, and return to cash basis for interest revenues as of January 2020.
  - As exceptional measures phased out in 1Q2021, NPLs remained broadly stable; capital positions and profitability healthy.
  - Staff stress tests (Annex V) indicate banking sector resilient to severe scenarios and could withstand significant shocks as normalization unfolds.
  - Recommendation: SIB should closely monitor NPLs, engage with banks to ensure early intervention, and maintain financial stability.

### Fiscal transparency and governance (Box 3 summary)
- PEFA (2018) assessment: about two thirds of indicators in line or above basic international good practices; about ¾ of indicators highlighted for improvement.
- Areas for improvement:
  - Management of assets and liabilities (expand single Treasury account to decentralized institutions; automation of payments).
  - Control of budget execution.
  - External scrutiny and auditing.
  - Accounting and reporting (automation).
  - Policy-based budgeting (financial programming and forecasting).
- Public procurement progress and needs:
  - A decade ago over 80 percent of procurement value was non-competitive; by 2018 over half of total procurement conducted competitively.
  - Reforms included reverse auction, centralized web-based registry, Vice Ministry for Transparency, national procurement platform improvements.
  - Need to enhance processing of complaints and appeals related to public procurement (PEFA).
- Transparency measures taken:
  - Ministry of Finance publishes overall expenditures in a fiscal transparency portal and open data.
  - State Procurement System administered through Guatecompras portal with details on purchases and awards.
  - Registro General de Adquisiciones del Estado publishes beneficial owners of awarded companies.
  - Comptroller General supervises negotiations and implementation of Covid-19 contracts.

*Source: IMF staff report excerpt (Box 1 concluded).*

### 26.      The adoption of FSAP recommendations would help enhance financial stability and

### 1gtmea2021001 - 26.      The adoption of FSAP recommendations would help enhance financial stability and

### Financial stability and integrity
- Adoption of the bill on banks and financial groups (currently in Congress) would align national legislation with Basel III standards for capital requirements and the bank resolution framework.
- Passage of the draft AML/CFT law (also in Congress) would align with FATF standards, notably:
  - adoption of a risk-based approach;
  - a sound sanctioning regime for noncompliance;
  - greater protection for supervisors.
- Ensuring transparency on ultimate beneficial ownership of corporate vehicles is needed; example measures include keeping the corporate registry up-to-date and facilitating its access to tackle money laundering and corruption.
- Authorities intend to pass the banking law and the revised AML/CFT law to enhance financial stability and integrity.

### Unlocking potential growth and building resilience
- Undertaking business and labor market reforms during the recovery would lift potential growth.
- Authorities’ Economic Recovery Plan priorities:
  - improve the business environment and labor market flexibility;
  - promote e-commerce and digital services;
  - introduce regulations to facilitate formal part-time employment;
  - enable firms’ reorganization through efficient insolvency procedures.
- A new legal framework for road infrastructure management is recommended to:
  - catalyze private funding for connectivity and logistics;
  - increase legal certainty for large-scale projects;
  - stimulate domestic and foreign investment.

### Disaster risk management and climate change (Box 4)
- Guatemala is highly vulnerable to climate risks and geophysical hazards (positioned at the conjuncture of three tectonic plates and the inter-tropical convergence zone).
- Natural disasters are macro-critical and disproportionately affect the most vulnerable.
- Historical impacts and vulnerabilities:
  - Average cost of 1.7 percent of GDP per event over the past four decades.
  - Agriculture accounts for almost 24 percent of GDP and employs 72 percent of the population in extreme poverty, increasing sensitivity to climate change.
  - Tropical storm Agatha reduced households’ per capita consumption by 5½ percent and increased poverty and child labor force participation by 18 percent and 3.1 percentage points, respectively.
- Mitigation and adaptation measures and targets:
  - Guatemala foresees emission reductions of between 11.2 and 22.6 percent (unconditional and conditional, respectively) by 2030, relative to a no-policy-change scenario.
  - Key actions: promote renewable energy (National Energy Plan); reduce emissions from deforestation and forest degradation; implement the Low Emission Development Strategy; facilitate certification of emission reduction.
  - Suggested fiscal/environmental measures: consider a tax proportional to the carbon content of domestically consumed fossil fuels; vehicle taxation including an ad valorem component and a sliding scale of taxes/subsidies for relatively high/low emission rate vehicles; pricing schemes to reduce hazardous products and manage solid waste volume.
- Enhancing past adaptation efforts:
  - Fiscal resilience: the new DRM law (pending Congress approval) aims to improve financial resilience and transparency; authorities are encouraged to supplement risk retention instruments with larger risk transfer instruments (to date the Caribbean Catastrophe Risk Insurance Facility solely).
  - Infrastructure resilience: estimated annual financing gap to meet adaptation targets reaches 1.2 billion dollars over a 12-year period (or 1½ percent of GDP per annum, UNDP 2018). Recommendations: prioritize investments with strongest externalities and highest potential for cost recovery; devise a prudent financing strategy jointly with development partners and the private sector.

### Authorities’ views
- Authorities broadly concurred with staff’s outlook and emphasized the 2020 policy response improved private sector expectations and investment prospects in 2021.
- Risks: authorities see risks primarily tilted to the upside but identify delays in immunization and new virus variants as important downside risks.
- External position and FX views:
  - Authorities agree current account in 2020 was stronger than level implied by fundamentals and desirable policies but do not see REER misalignment once temporary factors are accounted for; unlike EBA, they expect the REER to depreciate as temporary strong remittance inflows and terms of trade deteriorate.
  - They noted excessive FX inflows could not be smoothly absorbed by a small FX market and could significantly impact the real sector, justifying participation in the FX market; they reiterated desire to gradually allow more exchange rate flexibility.
- Ministry of Finance priorities:
  - sustain the recovery and strengthen social programs;
  - ongoing budget reshuffling to redirect resources to health, education, and public investment while placing transparency at the heart of fiscal strategy;
  - strengthen tax revenues and continue efforts to curb tax evasion and contraband;
  - undertake comprehensive reforms to public procurement and the civil service.
- Monetary authorities:
  - agree there is room for monetary policy to maintain accommodative stance to support recovery, provided inflation expectations remain well anchored;
  - as extraordinary credit support measures are phased out, they will monitor financial stability risks;
  - Banguat intends vigilance to avoid unintended consequences from last year’s monetization.
- Other governance efforts:
  - launched fiscal transparency portals and an e-government strategy under the General Government Policy 2020−24;
  - passed the Administrative Simplification Law initiative;
  - increased financing for the Office of the Public Prosecutor and efforts to expand territorial presence and investigative/prosecutorial competences.

### Staff appraisal, projections, and policy recommendations
- Near-term outlook and projections:
  - Growth is expected peak at 4½ percent in 2021, then to converge to its potential rate of 3½ percent by 2023.
  - Inflation is set to reach the mid-point of the target band as supply shocks abate.
  - The external position remains stronger than the level implied by medium-term fundamentals and desirable policies, but the gap is expected to narrow by 2026.
- Policy recommendations while recovery is fragile:
  - Fiscal and monetary policies should remain supportive in the near term until the recovery takes hold.
  - As fiscal stimulus is gradually withdrawn, scale up social and infrastructure spending while increasing efficiency.
  - Accommodative monetary conditions should continue provided inflation expectations remain well-anchored.
  - Banguat should remain vigilant to avoid unintended consequences from monetization.
  - The SIB should closely monitor NPLs and any potential risks to financial stability.
- Medium-term fiscal and structural priorities:
  - Raise overdue social and infrastructure spending to raise potential growth and improve social cohesion as recovery firms up.
  - Enhance revenue mobilization and spending efficiency to expand fiscal space.
  - SAT should continue strengthening tax controls and redouble efforts against contraband.
  - Spending efficiency reforms should increase transparency and governance and bolster procurement cost-effectiveness and quality of public services.
- Commendation and further action:
  - Authorities’ reform agenda (Economic Recovery Plan) to lift potential growth and build resilience is commendable and should be expedited.
  - For high natural disaster risk, past climate mitigation and adaptation efforts should be complemented with an enhanced disaster risk management strategy and effective implementation of emission reduction programs.

*IMF staff report content.*

### 38.      It is recommended that the next Article IV consultation with Guatemala be held on the

### 1gtmea2021001 - 38.      It is recommended that the next Article IV consultation with Guatemala be held on the

### Recommendation
- It is recommended that the next Article IV consultation with Guatemala be held on the standard 12-month cycle.

### Recent economic developments
- Despite the COVID-19 outbreak hitting hard Guatemala since early May 2020, the economy proved resilient, supported by swift policy response, favorable export mix and remittances.
- Confidence improved with the reopening of the economy, enabling a substantial recovery since June 2020.
- Job creation gained traction in late Q3 2020.
- Pandemic-related supply shocks lifted inflation.
- Real GDP (annual percent change):
  - 2016: 2.7
  - 2017: 3.1
  - 2018: 3.3
  - 2019: 3.9
  - 2020: -1.5
  - 2021 (projection): 4.5
  - 2022–2026 (projections): 4.0, 3.5, 3.5, 3.5, 3.5
- Consumer prices (end of period):
  - 2016: 4.2
  - 2017: 5.7
  - 2018: 2.3
  - 2019: 3.4
  - 2020: 4.8
  - 2021: 4.5
  - 2022–2026: 3.6, 3.7, 3.8, 3.9, 4.0
- Output gap (% of GDP) 2016–2026: 0.2, -0.1, -0.2, 0.2, -2.1, -0.9, -0.4, -0.3, -0.3, -0.2, -0.1

### Fiscal sector developments
- Fiscal impulse shored up aggregate demand, increasing the fiscal deficit above historic levels.
- Spending provided lifelines to households and firms while containment measures weakened tax revenues.
- Central government (in percent of GDP):
  - Revenues: 2016–2026: 11.4, 11.4, 11.3, 11.2, 10.7, 10.6, 11.0, 11.3, 11.4, 11.4, 11.5
  - Expenditures: 12.6, 12.8, 13.2, 13.5, 15.6, 14.0, 13.8, 13.6, 13.5, 13.5, 13.5
  - Overall balance: -1.1, -1.4, -1.9, -2.2, -4.9, -3.4, -2.8, -2.4, -2.2, -2.0, -2.0
  - Primary balance: 0.4, 0.1, -0.3, -0.6, -3.2, -1.5, -0.9, -0.5, -0.3, 0.0, 0.0
- Central Government Debt (percent of GDP): 25.0, 25.1, 26.5, 26.5, 31.5, 32.4, 33.4, 34.0, 34.2, 34.2, 34.0
- Financing: Net incurrence of liabilities (percent of GDP) 2016–2026: 1.6, 1.6, 1.8, 2.0, 5.1, 2.9, 2.8, 2.5, 2.3, 2.1, 2.1

### External sector and reserves
- Current account balance (percent of GDP): 1.0, 1.1, 0.9, 2.3, 5.5, 2.3, 1.7, 1.1, 0.6, -0.1, -0.6
- Trade balance (goods) (percent of GDP): -9.2, -9.5, -10.9, -10.3, -7.6, -9.9, -10.4, -10.6, -10.7, -10.8, -10.8
- Remittances (percent of GDP): 10.8, 11.4, 12.7, 13.6, 14.6, 14.6, 14.8, 14.7, 14.4, 14.1, 13.8
- Net International Reserves (NIR) stock in months of next-year NFGS imports:
  - 2016: 5.1
  - 2017: 6.0
  - 2018: 6.5
  - 2019: 8.6
  - 2020: 9.2
  - 2021–2026: 8.8, 8.5, 8.1, 7.7, 7.3, 7.3
- NIR (in millions of U.S. dollars) 2016–2026 (selected): 8,321; 10,578; 11,617; 13,769; 17,285; 17,285; 17,285; 17,285; 17,285; 17,285; 17,285
- Financial account balance (percent of GDP): 0.6, 0.6, 0.4, 1.3, 4.4, 2.3, 1.7, 1.1, 0.6, -0.1, -0.6
- Foreign direct investment (percent of GDP): -1.5, -1.3, -1.1, -1.0, -0.9, -1.4, -1.4, -1.4, -1.4, -1.4, -1.4

### Monetary sector and liquidity
- Banguat lowered the monetary policy rate pre-emptively to a historic low of 1.75 percent and provided additional liquidity to meet increased precautionary demand for cash.
- Currency in circulation (millions of quetzales): 2019: 56,243; 2020: 60,501; 2021: 64,117; projections increase through 2026 reaching 82,150, 77,156, 72,533 etc. (full series in Table 4).
- Loans under regulatory forbearance spiked in June to over 1/3 of total loans but have moderated thereafter.
- Loans under regulatory forbearance composition: Half of the loans under regulatory forbearance are consumption and mortgage loans.
- M2 (percent change, memo): 6.6, 8.4, 9.4, 9.6, 18.9, 7.8, 6.3, 6.6, 6.7, 6.7, 6.8
- Credit to the private sector (percent change, memo): 5.9, 3.8, 7.0, 4.9, 6.4, 6.8, 7.3, 7.2, 7.2, 7.2, 7.2

### Financial sector developments and soundness
- Banks’ capital adequacy ratio increased in 2020.
- Amidst credit moratoria, non-performing loans declined, precautionary provisions rose, and ROA profitability fell.
- Regulatory capital to risk-weighted assets (on-shore banks): 15.2 (2010), 15.3 (2011), 14.7 (2012), 14.8 (2013), 14.6 (2014), 14.1 (2015), 13.8 (2016), 14.7 (2017), 14.8 (2018), 15.5 (2019), 16.1 (2020)
- Nonperforming loans to total gross loans (on-shore banks): 2.1 (2010), 1.6 (2011), 1.3 (2012), 1.2 (2013), 1.3 (2014), 1.4 (2015), 2.1 (2016), 2.3 (2017), 2.2 (2018), 2.2 (2019), 1.8 (2020)
- Provisions to non-performing loans (on-shore banks): 115.3, 126.2, 143.4, 157.6, 151.9, 138.4, 120.4, 119.6, 123.4, 135.9, 197.4 (2010–2020 series)
- Foreign currency–denominated loans to total loans (on-shore banks): 30.2, 34.0, 35.2, 36.7, 38.5, 39.9, 39.0, 38.6, 39.2, 36.8, 36.1
- Deposit-to-loan ratio (heat map): reached 149.5 (2020Q3–Q4, latest)
- Banks’ exposure to FX remains positive though ratio of dollarization continued declining.

### Key social and demographic indicators (memoranda)
- Population 2020 (millions): 17
- Percentage of indigenous population (2018): 44
- Life expectancy at birth (2018): 74
- Gini index (2014): 48
- Population below the poverty line (Percent, 2014): 59
- Adult illiteracy rate (2014): 19
- Rank in UNDP development index (2019; of 189): 127
- GDP per capita (US$, 2020): 4,603

### Projections and medium-term outlook (selected)
- Real GDP projected: 2021: 4.5; 2022: 4.0; 2023–2026: 3.5, 3.5, 3.5, 3.5
- Consumer prices projected (end of period): 2021: 4.5; 2022–2026: 3.6, 3.7, 3.8, 3.9, 4.0
- Central government overall balance projected (percent of GDP) 2021–2026: -3.4, -2.8, -2.4, -2.2, -2.0, -2.0
- Central government debt projected (percent of GDP) 2021–2026: 32.4, 33.4, 34.0, 34.2, 34.2, 34.0
- Current account (percent of GDP) projected 2021–2026: 2.3, 1.7, 1.1, 0.6, -0.1, -0.6
- Net International Reserves projected to remain well above the benchmark of 3 months of imports (NIR months series above).

*Source: Bank of Guatemala; Ministry of Finance; and Fund staff estimates and projections.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Recent Developments

- The current account (CA) surplus broadened to 5.5 percent of GDP in 2020 from 2.3 percent in 2019.
- Drivers of the CA surplus in 2020:
  - Decline in the trade deficit due to significant imports compression, including lower fuel prices.
  - Resilient remittances with annual growth of 7.9 percent in 2020, reaching 14.6 percent of GDP (up from 13.7 percent in 2019).
  - Exports contracted due to weak external demand for tourism and travel services, but were tempered by a favorable export mix of agro-industrial products (cardamom, vegetable oils, among others) and pandemic-related manufacturing products (chemical supplies and disinfectants).
- Short-run outlook: The CA surplus as a share of GDP is expected to decrease on the back of recovery of imports (including due to rising fuel prices) and of nominal GDP.
- Exchange rate and REER:
  - The REER experienced a steady appreciation over the last decade by 37 percent cumulatively.
  - In 2020, the real effective exchange rate appreciated by 1.3 percent and the nominal effective exchange rate appreciated by 1.8 percent.
  - The quetzal depreciated by 1.2 percent relative to the US dollar in 2020.
- Capital flows:
  - FDI inflows declined from 2.9 percent of GDP in 2013 to 1.5 percent in 2019.
  - FDI inflow is estimated to have shrunk to 1 percent of GDP in 2020 due to the pandemic shock.
  - A Eurobond issuance of US$1.2 billion in April 2020 increased projected portfolio inflows.
  - Medium-term expectation: FDI is expected to remain stable around 2019 level and finance CA deficit.
- External position and liabilities:
  - Net international investment position (NIIP) declined to -15.8 percent of GDP in 2019 and further to -10.3 percent in 2020.
  - NIIP remains stronger than the Central America average of -69 percent of GDP.
  - External liabilities composition in 2020: 43 percent FDI, 19 percent portfolio investment, 38 percent other investment.
  - Public external debt comprised around 16 percent of external liabilities in 2020 or around 13.5 percent of GDP.

### External Sector Assessment (EBA results and implications)

- EBA conclusion for 2020: The external position was "[substantially stronger] than the level consistent with fundamentals and desirable medium-term policies."
- EBA model features for 2020:
  - Includes adjustors capturing temporary impacts of COVID-19 via decline in tourist flows and oil prices.
  - Includes an adjustor for remittances’ resilience (as a share of GDP).
- CA norm and staff revision:
  - CA norm estimated at -4 percent of GDP.
  - Staff revised the CA norm up to -2 percent of GDP to account for relatively poor security conditions negatively impacting investment that are not captured by the ICRG index.
- EBA CA methodology table (selected figures; percent of GDP except for REER Gap):
  - CA — Actual (A): 2018 = 0.8; 2020 = 5.5
  - Cyclical contributions (B): 2018 = 0.1; 2020 = -0.3
  - COVID-19 Adjustments (C): 2018 = 0.7; 2020 = (blank)
    - of which: Oil adjustor 0.9; Tourism adjustor -0.4; Remittances adjustor 0.2
  - Adjusted CA (D = A - B - C): 2018 = 0.7; 2020 = 5.1
  - CA Norm (E): 2018 = -4.2 +/- 1.3; 2020 = -4.0 +/- 1.2
  - Adjustments to the norm (F): 2018 = -2.0; 2020 = -2.0
  - Adjusted CA norm (G = E - F): 2018 = -2.2 +/- 1.3; 2020 = -2.0 +/- 1.2
  - CA gap (H = D - G): 2018 = 2.9 +/- 1.3; 2020 = 7.1 +/- 1.2
  - Contribution of identified policy gaps: 2018 = 0.8; 2020 = 2.0
    - Of which, 1.7 percent owes to lower fiscal deficit and 0.5 percent owes to lower health spending than desirable policies.
  - Elasticity (J): 2018 = 0.16; 2020 = 0.12
  - REER Gap (percent) (K = H / J): 2018 = [-26, -10]; 2020 = [-69, -49]
  - Note: The standard error of the CA norm is 1.2 percent of GDP for Guatemala in 2020.
- Estimated CA gap and REER implication:
  - The estimated CA gap in 2020 is large at 5.9 to 8.3 percent of GDP once estimation uncertainty is accounted for (table shows CA gap 7.1 +/- 1.2).
  - Under the assumption that the CA gap will be closed by an adjustment in the trade balance, the EBA model implies REER undervaluation in the range of -69 to -49 percent once uncertainty around estimates is considered.
- Policy gaps:
  - Policy gaps account for about 30 percent of the CA gap and reflect lower fiscal deficit and health spending than desirable.
- Outlook and reforms:
  - Short-run: CA gap expected to decrease as CA surplus weakens following recovery of imports and nominal GDP.
  - Medium-term: Business climate reforms and spending on infrastructure, including those envisaged under the government’s Plan for Economic Recovery, should facilitate investment, improve labor conditions, and abate migration and remittances—hence mitigating the scale of REER appreciation needed to close the CA gap.

### Reserve Adequacy Assessment

- End-of-year net international reserves (NIR) under the IMF definition increased by US$3.5 billion and reached around US$17.3 billion in 2020.
- Reserve adequacy metrics (2020):
  - Reserves at 165 percent of the IMF’s metric for Assessing Reserve Adequacy (ARA metric) for countries with stabilized exchange rates.
  - Reserves cover more than 9 months of next year’s imports.
  - Reserves equal 39 percent of broad money.
  - Reserves equal 343 percent of short-term external debt.

*IMF staff estimates based on the EBA CA methodology and IMF reserve metrics.*

### 6.      The sensitivity analysis suggests that Guatemala’s debt burden indicators are resilient

### 6.      The sensitivity analysis suggests that Guatemala’s debt burden indicators are resilient

### Sensitivity tests and shock assumptions
- Five sensitivity tests considered: shocks to the primary balance, the real GDP growth, the real interest rate, the real exchange rate, and a combined shock.
- Shock sizes based on historical standard deviations of corresponding variables.
- Real GDP Growth Shock:
  - GDP growth rate reduced by 1 standard deviation for 2 consecutive years.
  - Growth drops to 2 and 1½ percent in 2022 and 2023, respectively.
  - Decline in growth leads to lower inflation: "0.25 percentage points per 1 percentage point decrease in GDP growth".
- Primary Surplus Shock:
  - Shock equivalent to 0.6 percent of GDP (half of the 10-year historical standard deviation).
  - Triggers an increase in interest rates of 25 basis points for every percentage point of GDP worsening in the primary balance.
- Interest Rate Shock:
  - Interest rate increases by 200 basis points relative to the baseline.
- Real Exchange Rate Shock:
  - Translates to a nominal exchange rate depreciation of 10 percent.
  - Pass-through elasticity to inflation of 0.25.
- Combined shock: simultaneous application of the above shocks (parameters above).

### Baseline debt dynamics and key indicators (selected)
- Nominal gross public debt: 24.9 (2019), 26.5 (2020), 31.5 (2021), 32.4 (2022), 33.4 (2023), 34.0 (2024), 34.2 (2025), 34.2 (2026) (In percent of GDP).
- Public gross financing needs: 3.3, 3.5, 6.4, 4.7, 4.1, 3.4, 3.7, 3.3, 3.8 (In percent of GDP) (annual series shown in table).
- Real GDP growth (in percent): 3.5 (2019), 3.9 (2020), -1.5 (2021), 4.5 (2022), 4.0 (2023), 3.5 (2024), 3.5 (2025), 3.5 (2026).
- Inflation (GDP deflator, in percent): 3.3, 3.7, 2.6, 3.2, 2.2, 3.1, 3.1, 3.1 (annual series shown in table).
- Nominal GDP growth (in percent): 6.9, 7.7, 1.1, 7.9, 6.3, 6.7, 6.7, 6.7 (annual series shown in table).
- Effective interest rate (in percent): 6.7, 6.6, 6.6, 6.5, 6.2, 6.2, 6.2, 6.2 (annual series shown in table).
- Primary deficit (identified debt-creating flow): 0.5, 0.6, 3.2, 1.5, 0.9, 0.5, 0.3, 0.0 (In percent of GDP) (annual series shown in table).
- Primary (noninterest) revenue and grants: 11.5, 11.2, 10.7, 10.6, 11.0, 11.3, 11.4, 11.4, 11.5 (In percent of GDP cumulative noted as 67.2).
- Primary (noninterest) expenditure: 12.1, 11.8, 13.9, 12.1, 11.9, 11.7, 11.6, 11.5, 11.5 (In percent of GDP cumulative noted as 70.3).
- Automatic debt dynamics contribution (example entries): -0.2, -0.3, 1.6, -0.4, 0.0, -0.1, -0.2, -0.1 (derived as formula in footnote).
- Debt change projections (cumulative): 0.4, 0.0, 5.0, 0.9, 1.0, 0.6, 0.2, 0.0 (In percent of GDP; projection and historical series shown).

### Alternative scenarios (select assumptions and outcomes)
- Baseline underlying assumptions (selected):
  - Real GDP growth: 4.5 (2021), 4.0 (2022), 3.5 (2023–2026).
  - Inflation: 3.2 (2021), 2.2 (2022), 3.1 (2023–2026).
  - Primary Balance: -1.5 (2021), -0.9 (2022), -0.5 (2023), -0.3 (2024), 0.0 (2025–2026).
  - Effective interest rate: 6.5 (2021), 6.2 (2022–2024), 6.3 (2026).
- Historical Scenario:
  - Real GDP growth: 4.5 (2021), 3.3 (2022–2026).
  - Primary Balance: -1.5 (2021), -0.8 (2022–2026).
  - Effective interest rate: 6.5, 6.2, 6.2, 6.3, 6.4, 6.5 (2021–2026).
- Constant Primary Balance Scenario:
  - Primary Balance fixed at -1.5 (2021–2026).
  - Effective interest rate: 6.5 (2021), 6.2 (2022–2024), 6.3–6.5 (2025–2026).
- Contingent Liability Shock:
  - Primary Balance: -1.5 (2021), -5.8 (2022), then -0.5 (2023), -0.3 (2024), 0.0 (2025–2026).
  - Effective interest rate: 6.5, 7.2, 6.7, 6.6, 6.7, 6.7 (2021–2026 as shown).

### Stress test results (public DSA stress tests)
- Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, and Combined Shock are modeled with specific parameter changes as in the assumptions section and Figure III.3.
- Selected projection highlights under stress:
  - Under Real Interest Rate Shock, effective interest rate path example: 6.5, 6.3, 6.5, 6.7, 7.0, 7.2 (2021–2026) shown in combined shock row.
  - Under Combined Shock, Real GDP growth path shown: 4.5 (2021), 2.0 (2022), 1.5 (2023), 3.5 (2024–2026).
- Graphical results (summary points from stress-test figures):
  - Gross nominal public debt and public gross financing needs remain monitored across baseline and stress scenarios; charts show increases under adverse shocks but the numerical series in tables indicate resilience in baseline and most adverse tests.

### External debt sustainability (Annex IV – selected metrics)
- Baseline: External debt: 35.3 (2016), 34.9 (2017), 33.4 (2018), 32.7 (2019), 30.1 (2020), 33.8 (2021), 34.0 (2022), 33.8 (2023), 33.0 (2024), 32.3 (2025), 31.2 (2026) (In percent of GDP).
- Change in external debt: -0.4, -0.4, -1.5, -0.8, -2.6, 3.7, 0.2, -0.2, -0.8, -0.7, -1.1 (2016–2026).
- Identified external debt-creating flows: -4.5, -5.2, -2.6, -5.0, -5.8, -4.6, -4.0, -3.3, -2.7, -2.1, -1.5 (2016–2026).
- Current account deficit, excluding interest payments: -2.1, -2.3, -2.1, -3.7, -6.3, -3.5, -2.9, -2.3, -1.6, -1.0, -0.4 (2016–2026).
- External debt-to-exports ratio: 188.4, 188.5, 183.2, 184.6, 179.7, 203.2, 211.5, 216.9, 219.8, 223.5, 224.2 (2016–2026).
- Gross external financing need (in billions of US dollars): 4.5, 4.6, 5.3, 4.2, 2.1, 3.2, 5.1, 5.3, 6.3, 7.1, 8.8 (2016–2026).
- Key macro assumptions (selected):
  - Real GDP growth series: 2.7, 3.0, 3.2, 3.8, -1.5, 3.1, 1.7, 4.5, 4.0, 3.5, 3.5, 3.5 (table entries).
  - Nominal external interest rate (in percent): 3.4, 3.6, 3.8, 4.0, 4.0, 3.5, 0.3, 4.3, 3.7, 3.6, 3.5, 3.4, 3.3 (as presented).

### Banking system vulnerabilities and stress-test results (Annex V – selected)
- System structure and indicators (December 2020):
  - Over 80 percent of total assets concentrated in the largest five banks (out of 17); top two banks account for nearly 50 percent of market share.
  - Capital Adequacy Ratio (CAR): 15.6 percent.
  - Non-Performing Loans / Total Loans: 1.9 percent.
  - Provisions / NPLs: 191.8.
  - FX Loans / Total Loans: 36.8 percent.
  - Deposits / Total Liabilities: 90.7 percent.
  - Deposits / Total Loans: 174.0 percent.
  - ROA: 1.5.
  - ROE: 16.1.
  - Liquid Assets / Total Assets: 34.3 percent.
  - Liquid Assets / ST Liabilities: 72.5 percent.
  - Net FX Exposure / Capital: 15.7.
- Main vulnerabilities:
  - High concentration of assets in a few banks.
  - Potential understatement of NPLs due to regulatory forbearance; forbearance phased out through September 2021.
  - Dollarization: nearly 37 percent of bank loans denominated in foreign currency; 39 percent of those extended to un-hedged borrowers.
- Solvency stress-test design:
  - Covers credit risk (aggregate NPL shock and sectoral shocks), market risk (interest and exchange rate), contagion (interbank exposures), and reverse tests.
  - Liquidity stress test models a liquidity drain proportional to each bank’s liquidity holdings.
- Solvency stress-test outcomes (selected):
  - Credit risk shock (aggregate NPLs to 3.3 percent; sectoral shocks of 10 percent in manufacturing, trade and non-bank financial sectors representing almost two fifths of loans):
    - System CAR falls by 1.4 and 1.6 percent (to 14.2 and 14.0 percent) under proportional and sectoral scenarios, respectively.
    - Two banks would decline slightly below the 10 percent minimum in the former case; one bank’s CAR would fall below 9 percent in the latter.
  - Forbearance unwind scenarios (1/8, 1/4, 3/8 of forbearance loans fall into arrears): in all cases post-shock CARs remain above the 10-percent regulatory minimum.
  - Interest rate shock (increase of 150 basis points):
    - Marginal gain in interest income but valuation losses on sovereign bond holdings reduce system-wide CAR by four fifths of a percentage point.
    - CAR of one bank falls slightly below 10 percent.
  - FX risk shock (20 percent nominal depreciation vs. US dollar; 39 percent of FX loans to un-hedged borrowers):
    - CAR for the system declines by four fifths of a percentage point to 14.8 percent.
    - One bank’s CAR falls below the regulatory minimum.

*Source: IMF staff.*

### 8.      A combined solvency shock would require recapitalization of some banks, although

### 8.      A combined solvency shock would require recapitalization of some banks, although

### Combined solvency shock: main findings
- The combined shock includes effects from: (i) credit risk following the proportional increase in NPLs; (ii) interest rate risk; and (iii) FX risk.
- This combined shock represents a very extreme scenario with a low probability of materialization.
- System-wide results under the combined shock:
  - CAR would fall by 2.9 percentage points to 12.7 percent, thereby still complying with the 10 percent regulatory minimum.
  - Four individual banks would fall short of the minimum regulatory CAR and would require recapitalization.
  - Identified capital shortfalls would amount to just 0.2 percent of GDP.

### Contagion and interbank exposures
- Contagion risks stemming from domestic interbank exposures are limited.
- There is no second-round effect following the combined macro-shock.
- Method: assessed using a matrix of interbank exposures containing, for each bank, the net credit to every other bank in the system.
- Reason: interbank lending in Guatemala is very narrow, so there is no contagion stemming from domestic interbank exposures through second-round effects.

### Reverse stress test (NPL increases required to breach regulatory minimums)
- The reverse test identifies the NPL increase necessary for:
  - the system-wide CAR to fall below the regulatory minimum of 10 percent;
  - the CAR of at least nine banks (half of total) to fall below 10 percent;
  - the CAR for 50 percent of the total market share to fall below 10 percent.
- Required NPL increases:
  - System-wide CAR to fall below 10 percent: NPL increase to 13.1 percent.
  - CAR of nine banks to fall below 10 percent: NPLs would need to increase to 23.5 percent of currently performing loans.
  - CAR for 50 percent of total market share to fall below 10 percent: NPLs would need to increase to 7.8 percent of currently performing loans.

### Liquidity stress test
- Assumptions: a widespread liquidity drain of 10 and 3 percent per day of demand and time deposits respectively, affecting all banks in the system proportionally, without liquidity contagion.
- Results:
  - Although the share of liquid assets would tumble, all banks would remain liquid after 5 days.
  - No need for outside liquidity support (from other banks or the central bank).
  - Main reason: maturing assets being rolled off and converted into new cash inflows.

### Key stress-test statistics (December 2020) — CAR pre-shock and post-shock outcomes
- Capital Adequacy Ratio (CAR) pre-shock: 15.6
- Credit Risk 1/
  - 1. System-wide proportional increase in NPLs: Post-Shock CAR (percent) 14.2; CAR change (percentage points) -1.4
  - 2. Sectoral Shock: Post-Shock CAR (percent) 14.0; CAR change (percentage points) -1.6
  - 3. Sectoral Shock: Proportional to their share in loans under regulatory forbearance 2/
    - Low: Post-Shock CAR (percent) 15.2; CAR change (percentage points) -0.4
    - Medium: Post-Shock CAR (percent) 14.5; CAR change (percentage points) -1.1
    - High: Post-Shock CAR (percent) 13.3; CAR change (percentage points) -2.2
- Interest rate Risk 3/
  - 1. Net Interest Income (NII) impact: Post-Shock CAR (percent) 15.7; CAR change (percentage points) 0.1
  - 2. Repricing impact: Post-Shock CAR (percent) 14.8; CAR change (percentage points) -0.8
  - Overall change in CAR (NII and repricing): -0.8
- FX Risk 4/
  - 1. Direct FX impact: Post-Shock CAR (percent) 15.5; CAR change (percentage points) -0.1

*GUATEMALA  INTERNATIONAL  MONETARY  FUND*

### 2. Indirect FX impact (through credit risk)14.8-0.6

### 2. Indirect FX impact (through credit risk)14.8-0.6

### Stress test outcomes (capital adequacy and shocks)
- Overall change in CAR (direct and indirect): -0.7
- Combined Shock: 5/12.7-2.9
- CAR after macro-shocks: 12.7-2.9
- CAR after contagion: 12.7-2.9
- System CAR < 10: 13.1
- 9 banks with CAR < 10: 23.5
- 1/2 market share with CAR < 10: 7.8

### Reverse Stress Test (implied increase in NPLs)
- Reverse Stress Test (implied increase in NPLs, percent of total loans): (figure shown; context indicates implied increases corresponding to current and simulated system CAR thresholds)
- Current simulated System CAR less than 10: shown in chart (values in figure)

### Liquidity metrics (ratios in percent, except for the last one)
- Post-shock liquid assets / total assets: 13.4
- Post shock liquid assets / short-term liabilities: 39.0
- Number of liquid banks after five days: 17

### Scenario components and definitions (as reported)
- 1/ Assumes NPLs of 3.3 percent of total loans in the system-wide shock and of 10 percent in the sectoral shock to the manufacturing, trade, and non-bank financial sectors.
- 2/ Assumes that a fraction of the loans granted during regulatory forbearance (26.2 percent of total loans on end-2020) become non-performing. The fractions used to define low, medium and high impact scenarios were 1/8th, 1/4th, and 3/8th, respectively. Sectoral shocks are propotional to their share in loans granted under regulatory finance.
- 3/ Assumes a 150 basis points increase in nominal interest rates.
- 4/ Assumes a 20 percent depreciation of the bilateral USD exchange rate.
- 5/ Combines the system-wide credit shock, the interest rate, and the FX shocks.
- 6/ Assumes a 10 and 3 percent per day withdrawal of demand and time deposits, respectively.

### Chart and figure notes (as presented)
- Credit risk: Pre-Shock, System-Wide, Sectoral (Capital Adequacy Ratio, Percent of Risk-Weighted Assets) depicted across 6–16 percent scale.
- Interest Rate Risk (NII Repricing): Pre-Shock and Post-Shock shown across 6–16 percent CAR scale with a 150 basis points interest rate scenario.
- Exchange Rate Risk: Direct and Indirect effects shown, with a 20 percent bilateral USD depreciation scenario.
- Combined Shock: Pre-Shock, Post-Shock, Post-Contagion CAR series (Capital Adequacy Ratio, Percent of Risk-Weighted Assets).
- Liquidity Shock: Liquid Assets/Total Assets and Liquid Assets/Short-Term Liabilities shown for Pre-Shock and Post-Shock (percent), with assumed deposit runoffs of 10 percent per day for demand deposits and 3 percent per day for time deposits.
- Reverse Stress Test visualization: Current and Simulated System CAR, counts of banks with CAR less than 10, and market share metrics.

### Source metadata excerpt (selected figures and institutional context)
- Source: SIB; and IMF staff estimates.
- Context: Figures appear in "Figure V.1. Guatemala: Stress Tests 1/" in the STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (May 19, 2021). Chart annotations repeat the scenario assumptions and visualization scales.

*Source: SIB; and IMF staff estimates.*

### appendix of Budgets 2017  and 2018;  and working on a national publication of consolidated nonfinancial public sector (o

### Statement by Mr. Moreno, Executive Director and Mr. Cartagena Guardado, Advisor to the Executive Director on Guatemala — June 9, 2021

### Background information
- Guatemala had a steady economic growth of 3.5 percent between 1999-2019.
- Inflation: 4.2 percent average between 2010-2020.
- Fiscal deficit: 2.0 percent of GDP, average between 1999-2019.
- Public debt: remained among the lowest shares of GDP in the Latin American region.
- Sovereign spreads (Averages): December 2019: 182 basis points; December 2020: 184 bp; May 2020: 184 bp (according to the IMF’s Sovereign Spread Monitor Report).
- Structural challenges noted: fostering inclusion, reducing poverty, addressing informality of labor markets.
- Pandemic tightened those longstanding vulnerabilities.

### The policy response to the pandemic
- Fiscal impulse raised the fiscal deficit to 4.9 percent of GDP in 2020.
- Countercyclical fiscal measures (percent of GDP):
  - Family bonus for vulnerable households: 1.0 percent of GDP.
  - Employment protection fund: 0.3 percent of GDP.
  - Working capital fund: 0.4 percent of GDP.
  - Food support program: 0.1 percent of GDP.
- Banguat estimate: economic contraction could have been 2.5 percentage points higher without these fiscal measures.
- Monetary and financial sector measures:
  - Banguat monetized part of the fiscal deficit in April 2020 following Congress’ approval and invoking Article 133 of the Constitution.
  - Banguat sterilized monetary surpluses to avoid pressure on main macroeconomic prices.
  - Additional liquidity measures in the financial sector included flexibilization of liquidity requirements for banks and easing of credit conditions to preserve payment system functioning.

### Outlook and policy priorities
- 2020 GDP contraction: 1.5 percent (first negative GDP growth since 1983); described as the second lowest contraction among Latin American countries (according to last April’s WEO).
- 2021 authorities’ GDP expectations:
  - Above 3 percent, with a central scenario of 4 percent.
  - Could improve up to 5 percent depending on vaccination acceleration and realization of other upside risks.
- Short-term indicators supporting recovery: Monthly Index of Economic Activity, Confidence Index Economic Activity, high growth of family remittances, higher external demand, increase in imports.
- Vaccination status and risks:
  - Around 3.3 doses per 100 habitants up to Jun 1st, 2021.
  - Scarcity of supply cited as main reason for low vaccination rate.
  - Authorities stress need for more equitable global vaccine distribution.
- Debt and fiscal sustainability:
  - Debt-to-GDP ratio: 2019: 26.5 percent; 2020: 31.6 percent (increase of 5 percentage points in 2020 caused by the pandemic).
  - Staff’s debt analysis: medium-term sustainability confirmed; debt-to-GDP expected to stabilize in the medium term at around 34 percent.
  - Authorities expect fiscal deficit to start reducing from 2021, moving toward historical average of 2 percent of GDP in following years.
  - Authorities emphasize need for progress on the revenue side: strengthen tax administration capacity and gradually broaden the tax base.
  - Current efforts: double-digit increase in revenues attributed to economic recovery and tax administration improvements.

### Monetary policy and exchange rate policy
- Monetary policy stance:
  - Policy interest rate reduced to a historic low of 1.75 percent in June 2020 and kept at this level according to the last revision from May 26th.
  - Policy rate described as negative in real terms and well-below Guatemala’s neutral interest rate.
  - Inflation target: 4.0% +/- 1 percentage point.
  - Average inflation for this year (April 2021): 5.6 percent, reflecting base effects and supply shocks in transportation and food.
  - Monetary authorities will closely monitor inflation expectations and balance of inflation risks from external and domestic conditions.
- Exchange rate management:
  - Temporary international reserve accumulation mechanism used to keep exchange rate expectations stable and to avoid abrupt capital outflows or reductions of external foreign currency financing.
  - Authorities favor gradual greater exchange rate flexibility to foster a competitive and transparent foreign exchange market.
  - Current account surplus boosted by net current transfers—mainly family remittances—which more than compensated for the deficit in the goods and services balance.
  - Authorities expect the real exchange rate to depreciate as temporary strong remittance inflows normalize and terms of trade deteriorate.

### Financial system and banking sector
- Credit to the private sector:
  - 2020: 6.1 percent.
  - May 20th, 2021: 5.0 percent.
- Customer deposits:
  - 2020: 15.4 percent.
  - April 2021: 16.2 percent.
- Family remittances growth:
  - 2020: 7.2 percent.
  - May 2021: 43.1 percent.
- Banking system solvency and profitability:
  - Solvency rates: 2020: 16.1 percent; April 2021: 16.4 percent; regulatory requirement: 10 percent.
  - ROA April 2021: 1.6 percent.
  - ROE April 2021: 16.6 percent.
- The banking system described as sound, liquid, and resilient, continuing to finance the economic recovery.

### Structural and governance priorities
- Authorities committed to strengthening fiscal transparency and governance with Fund technical assistance.
- Ongoing assessments of policies to improve the business climate, address labor market informality, and strengthen resilience to climate change.

*Statement by Mr. Moreno, Executive Director and Mr. Cartagena Guardado, Advisor to the Executive Director on Guatemala — June 9, 2021*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1gtmea2021001.pdf_