## _cr09143

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---

### I. Background
- Macroeconomic stability supported by structural reforms, prudent policies, favorable external environment.
- Fiscal: deficits broadly at debt-stabilizing levels; progress on tax administration; improved public debt management with longer maturities and declining debt dollarization.
- Inflation: mostly single digits until mid-2007; rapid increase since mid-2007 due to global commodities shock; reversal of commodity prices brought down inflation sharply.
- External vulnerabilities:
  - Linkages mainly to the U.S. through trade, remittances, and capital flows.
  - Public sector external financing requirements: "2.4 percent of GDP".
  - Gross external financing need for 2009: "16¼ percent of GDP".
  - Net international reserves (NIR) buffer: "90 percent of short-term external debt on remaining maturity basis" and "34 percent of M2 at end-2008".
- Banking sector:
  - Consolidation after failures in 2006–2007 (two banks ~10 percent of system failed and were resolved).
  - Capital to risk weighted assets ratio averaging "13.5 percent".
  - System-wide liquidity at "40 percent of deposits at end-December 2008".
  - Risks: loan dollarization, credit concentration, low levels of provisions, pockets of illiquidity, linkages to offshore banks.
- Social outcomes: "51 percent" of the population below the poverty line in 2006; low tax ratio constrains social and infrastructure spending; high crime deters private investment.

### II. Recent Developments
- Growth:
  - Real GDP growth: "4 percent in 2008" (down from "6.3 percent in 2007"); projected "1 percent in 2009".
- Inflation:
  - Peak "14 percent in mid-2008"; "9.4 percent by year-end 2008"; "5 percent in March 2009".
- Balance of payments and external sector:
  - Current account: "4¾ percent of GDP in 2008".
  - Remittances declined by close to "10 percent in the first two months of 2009".
  - By January 2009: annual export growth "1 percent"; imports declined by "20 percent".
  - NIR: increased to "US$4.8 billion by end-March 2009".
- Fiscal:
  - Central government deficit "1.7 percent of GDP" in 2008 despite a real decline in tax revenue.
  - 40 percent of tax collections come from imports.
- Financial sector:
  - Banks rebalancing toward liquid assets; credit to private sector increased "11 percent in 2008" (compared with "26 percent in 2007").
  - Domestic interest rates have risen about "100 bps since the beginning of 2008".
  - No signs yet of significant deterioration in bank portfolios as of available data.
- Key banking aggregates (US$, millions):
  - On-shore private sector credit: "8,899" (2006), "10,919" (2007), "11,679" (2008).
  - On-shore deposits: "9,799" (2006), "10,605" (2007), "11,689" (2008).
  - On-shore total assets: "13,918" (2006), "15,552" (2007), "16,857" (2008).
  - Off-shore private sector credit: "1,724" (2006), "1,833" (2007), "1,996" (2008).
  - Off-shore deposits: "2,146" (2006), "2,176" (2007), "2,361" (2008).
  - Off-shore total assets: "2,628" (2006), "2,605" (2007), "2,720" (2008).

### III. Authorities’ Program — Objectives and Strategy
- Strategy components:
  - Moderate fiscal stimulus financed largely with external multilateral resources.
  - Monetary policy focused on consolidating the decline in inflation and maintaining a flexible exchange rate.
  - Strengthening financial sector policies to increase resilience, enhance the banking sector safety net, and improve resolution procedures.
  - Refocusing public expenditures toward social spending and labor-intensive public works.
- External liquidity cushion: build higher external liquidity; Fund support as contingent financing under the proposed SBA.
- Additional contingent financing for the banking sector under discussion with IDB.
- Public sector financing policy aims at prefinancing operations to preserve liquidity buffers (deposits at the central bank).

### IV. Macroeconomic Framework and Scenarios (Baseline)
- Real GDP growth (percent): "5.4" (2006), "6.3" (2007), "4.0" (2008), "1.0" (2009), "1.8" (2010).
- Inflation (percent, end of period): "5.8" (2006), "8.7" (2007), "9.4" (2008), "5.5" (2009), "4.7" (2010).
- Central government balance (percent of GDP): "-1.9" (2006), "-1.8" (2007), "-1.7" (2008), "-2.8" (2009), "-2.6" (2010).
- Public sector debt, gross (percent of GDP): "21.8" (2006), "21.7" (2007), "20.2" (2008), "22.5" (2009), "24.2" (2010).
- External current account balance (percent of GDP): "-5.0" (2006), "-5.2" (2007), "-4.8" (2008), "-4.0" (2009), "-4.9" (2010).
- Exports (percent of GDP): "16.6" (2006), "17.7" (2007), "17.9" (2008), "16.2" (2009), "16.6" (2010).
- Imports (percent of GDP): "32.6" (2006), "33.8" (2007), "32.1" (2008), "28.1" (2009), "29.4" (2010).
  - o/w oil: "5.8" (2006), "6.7" (2007), "6.8" (2008), "4.2" (2009), "4.9" (2010).
- Remittances (percent of GDP): "12.1" (2006), "12.3" (2007), "11.3" (2008), "9.9" (2009), "9.9" (2010).
- Capital account balance (percent of GDP): "4.5" (2006), "4.7" (2007), "4.3" (2008), "2.7" (2009), "3.6" (2010).
- NIR (US$, millions): "3,878" (2006), "4,098" (2007), "4,421" (2008), "4,416" (2009), "4,409" (2010).
- Risks highlighted: further remittance declines, global risk aversion, commodity price volatility, exchange-rate pass-through.

### V. Fiscal Policy — Measures, Financing, and Risks
- 2009 central government deficit projected: "2.8 percent of GDP".
- Expenditure increase: "0.4 percent of GDP to 14.1 percent of GDP"; social spending to grow by about "0.6 percent of GDP".
- Tax revenue ratio expected to fall by "0.8 percent of GDP" including declines from VAT ("0.5 percent") and oil royalties ("0.3 percent").
- Financing:
  - Multi-year external loan package of about "$1 billion" approved by Congress in January 2009.
  - Additional financing package planned: new external multilateral financing (about "$160 million") and greater domestic bond issuance.
  - Footnote: additional loans "$100 million from the World Bank and about $60 million from CABEI and bilateral sources."
- Debt outlook:
  - Deficit expected to decline to "2 percent of GDP over the medium term".
  - Nonfinancial public sector debt expected slightly above "25 percent of GDP by 2014".
- Revenue measures:
  - Solidarity tax (permanent) yielding about "1 percent of GDP".
  - Indirect revenue measures expected to yield "0.2 percent of GDP" (expected end-2009).
  - SAT medium-term anti-evasion plan (MEFP paragraph 11).
- Contingency planning: identify nonessential programs to cut if tax ratio falls further; discuss structural revenue losses before 2010 budget.

### VI. Monetary and Exchange Rate Policy
- Policy rate: Monetary board reduced policy rate "100 bps since end-2008 to 6.25 percent".
- 2009 inflation target: "5½ percent, with a tolerance margin of +/- 1 percent".
- Medium-term inflation target: "4 percent with a tolerance margin of +/- 1 percent".
- Foreign-exchange intervention rule:
  - Symmetric intervention up to "US$24 million daily" when exchange rate deviates by "0.75 percent" from its 5-day moving average (previously "0.5 percent").
  - Since September 2008 exchange rate depreciated "8¼ percent"; limited intervention of "$88 million, or 2% of NIR" over the last 5 months.
- Policy risks: continued external deterioration could require tighter monetary stance and/or more foreign-exchange intervention.

### VII. Financial Sector Policy and Vulnerabilities
- Low direct exposure to global financial crisis drivers: foreign bank participation "8 percent of deposits"; no investments in high-risk U.S. mortgage-related instruments.
- Offshore banking sector supervisory concerns; offshore operations decreasing in relative size.
- Measures since 2008:
  - Continuous on-site supervision since mid-2008; regular dialogue with banks’ Boards of Directors.
  - Liquidity support: flexibilized reserve requirements; reverse repos in foreign currency (system limit US$290 million; average assistance < US$100 million); central bank stands ready to redeem central bank paper before maturity and purchase public bonds from banks.
  - Provisioning: gradual increase to full provisioning of NPLs by mid-2011; current provisioning ratio "70 percent of NPLs".
  - CHN received cash capital injection of Q$200 million to meet minimum capital ratio.
- Regulatory strengthening (structural benchmarks):
  - Superintendency to require liquidity gap computation at different maturities and internalize foreign-currency loan risks (MEFP paragraph 19 and Table 3).
  - Consolidated supervision of financial conglomerates with enhanced coordination with foreign supervisors.
  - Submission of amendments to banking laws by June 2009 (MEFP paragraph 20 and Table 3) to:
    - Limit retail operations of offshore banks, eliminate obligation of offshore’s domestic partner to cover capital deficiencies, cooperate with home supervisors.
    - Limit aggregate exposure to connected parties.
    - Enhance enforcement powers of the superintendency.
    - Strengthen the banking sector safety net and improve resolution procedures.
- Downside banking risk: severe downturn with currency depreciation and capital outflows could increase NPLs and reduce liquidity, affecting smaller banks.

### VIII. External Financing, Gross External Financing Needs, and Adverse Scenario
- External financing requirements:
  - Current account deficit plus total debt amortization estimated at "16.2 percent of GDP in 2009".
  - Large financing gap (around "2.5 percent of GDP") under adverse scenario (remittances decline further 5 percent vs baseline, FDI to 2005 levels, decline in rollover rates).
- Gross External Financing Requirements (US$, millions and percent of GDP):
  - 2008e: "6,910 (17.7 percent of GDP)"
  - 2009p: "6,183 (16.2 percent of GDP)"
  - 2009 alt: "6,359 (16.7 percent of GDP)"
  - Current Account Deficit: "2008e 1,861; 2009p 1,512; 2009 alt 1,688"
  - Public Sector: "260; 242; 242"
  - Private Sector: "4,789; 4,429; 4,429"
  - Short-term debt on original maturity: "4,077; 3,536; 3,536"
    - Banks: "940; 857; 857"
    - Non-bank private sector (commercial credits): "3,137; 2,680; 2,680"
  - Short-term debt on remaining maturity (amortizations due): "712; 893; 893"
- Sources of Financing (US$, millions):
  - Total: "6,896 (2008e); 6,183 (2009p); 5,420 (2009 alt)"
  - Net FDI inflows: "815; 553; 508"
  - Gross medium- and long-term borrowing (public sector): "382; 860; 860"
  - Roll-over of ST debt: "4,789; 4,429; 3,817"
  - New Borrowing: "754; -156; -262"
  - Other capital flows1/: "489; 496; 496"
  - Change in gross reserves (decrease = +): "-333; 0; 0"
  - Financing Gap (US$, millions): "0; 0; 939"
  - Financing Gap (percent of GDP): "......; ......; 2.5"
- Assumption on rollover of short-term debt (excl. commercial credit): "100%; 100%; 65%"
- Note 1/: Includes errors and omissions.

### IX. Program Design, SBA Access, Conditionality, and Capacity to Repay
- Proposed 18-month SBA:
  - Total access proposed at "300 percent of quota (SDR 630.6 million equivalent to $951 million or 2.5 percent of GDP)".
  - First purchase on approval of "200 percent of quota", leading to access of "260 percent of quota during the first year".
  - Guatemala’s quota about "US$320 million".
- Criteria for exceptional access: Guatemala meets four criteria in the Fund’s framework (Box 1).
- Conditionality and monitoring:
  - Quarterly reviews with test dates in March, June, September, and December; first test date in June 2009; first review in September 2009.
  - Quantitative performance criteria include:
    - Floor on central government fiscal balance for 2009—equivalent to deficit of "2.8 percent of GDP" with adjuster up to "0.2 percent of GDP".
    - Floor on NIR.
    - Continuous performance criterion on nonaccumulation of external arrears.
  - Indicative floor on central government deposits at the central bank.
  - Inflation consultation clause: deviation triggers consultations at specified thresholds (more than "2 percentage points" deviation triggers staff consultation; more than "3 percentage points" above estimated rate triggers Executive Board consultation).
  - Structural Benchmarks (MEFP Table 3): submission of amendments to banking law by June 2009; draft regulations on liquidity management and foreign-currency credit risk by end-December 2009.
- Performance criteria and indicative targets (selected, millions):
  - Overall balance of central government (floor, Q):
    - end-June 2009: "-3,075"
    - end-Sept 2009: "-6,946"
    - end-Dec 2009: "-8,720"
    - end-Dec 2010: "-8,742"
  - Net International Reserves (floor, US$ millions):
    - end-June 2009: "4,400"
    - end-Sept 2009: "4,200"
    - end-Dec 2009: "4,000"
    - end-Dec 2010: "4,000"
  - Central Government Deposits at Central Bank (indicative floor, Q):
    - end-June 2009: "10,899"
    - end-Sept 2009: "7,695"
    - end-Dec 2009: "7,642"
    - end-Dec 2010: "6,290"
  - Consultation clause inflation bands (percent):
    - Outer band, upper limit: end-June 2009 "7.5"; end-Sept 2009 "7.5"; end-Dec 2009 "8.5"; end-Dec 2010 "8.0".
    - Inner band, upper limit: end-June 2009 "6.5"; end-Sept 2009 "6.5"; end-Dec 2009 "7.5"; end-Dec 2010 "7.0".
    - Inner band, lower limit: end-June 2009 "2.5"; end-Sept 2009 "2.5"; end-Dec 2009 "3.5"; end-Dec 2010 "3.0".
    - Outer band, lower limit: end-June 2009 "1.5"; end-Sept 2009 "1.5"; end-Dec 2009 "2.5"; end-Dec 2010 "2.0".
- Capacity to repay:
  - Guatemala has no debt outstanding to the Fund; proposed access will not significantly affect total external debt level ("36 percent") nor sustainability over the medium term.
  - Recent GRA lending reform marginally increases commitment fees but decreases interest charges on potential drawings by up to "US$3.2 million annually".
  - A safeguards assessment to be completed by first review (September 2009); last assessment completed on "August 9, 2002".

### X. Staff Appraisal — Key Conclusions and Recommendations
- Context:
  - Solid recent performance but affected by global recession: falling remittances, lower export prices and demand, and lower capital inflows.
  - Downside risks considerable given ties with the region and the U.S.
- Policy recommendations:
  - Preserve macroeconomic and financial stability, mitigate crisis effects, strengthen social protection.
  - Use room for a moderate fiscal stimulus focused on labor-intensive public works and social safety net.
  - Monetary policy: anchor inflation at low levels; staff supports recent easing and recommends gradual further easing while preventing negative short-term real interest rates.
  - Promote development of secondary markets to improve monetary policy transmission.
  - Maintain exchange-rate flexibility with occasional discretionary intervention to avoid sudden movements.
  - Prevent erosion of revenue base; prioritize spending if tax revenue risks materialize; reverse fiscal deterioration in 2009–2010 once tax revenue rebounds.
  - Expand social spending: "Mi familia progresa" expected to reach "500,000 families in 2009".
  - Medium-term: pursue revenue-enhancing tax reform, improve expenditure efficiency and targeting, increase public goods provision to raise productivity and growth.
  - Strengthen financial sector policies: implement regulatory reforms and improve stress-test methodologies; strengthen safety net and resolution procedures.
  - Promote investment in human capital and infrastructure; encourage private sector participation via public-private partnerships.
- Fund support:
  - Access under proposed arrangement provides additional liquidity cushion while keeping Fund exposure manageable.
  - Guatemala would be in a strong position to repay the Fund if it were to make all purchases under the proposed SBA.
  - Staff supports the authorities’ request for a SBA for "SDR 630.6 million".

*Source: IMF staff report — _cr09143 (Selected Economic and Social Indicators; Starting in 2008, the authorities have addressed the most pressing financial risks)._

### 1. Selected Economic and Social Indicators............................................................................ 2

### 1. Selected Economic and Social Indicators

### I. Background
- Guatemala has a strong track-record of macroeconomic stability driven by structural reforms, prudent policies, and a favorable external environment.
- Fiscal policy: deficits broadly at debt-stabilizing levels; progress on tax administration; improved public debt management with longer maturities and declining debt dollarization.
- Inflation: mostly in single digits until mid-2007; rapid increase since mid-2007 largely due to the global commodities shock; subsequent reversal of commodity prices helped bring down inflation sharply.
- External vulnerabilities:
  - Linkages mainly to the U.S. through trade, remittances, and capital flows.
  - Public sector external financing requirements are low: "2.4 percent of GDP".
  - Gross external financing need (current account deficit plus total debt amortization) for 2009: "16¼ percent of GDP".
  - Large NIR stock as a buffer: "90 percent of short-term external debt on remaining maturity basis" and "34 percent of M2 at end-2008".
- Banking sector:
  - Consolidation after failures in 2006–2007 (two banks ~10 percent of system failed and were resolved).
  - Capital to risk weighted assets ratio averaging "13.5 percent".
  - System-wide liquidity at "40 percent of deposits at end-December 2008".
  - Risks: loan dollarization, credit concentration, low levels of provisions, pockets of illiquidity, linkages to offshore banks.
- Credit and currency risk: Rapid credit growth in 2006–2007 increased foreign-currency lending, including to borrowers in nontradable sectors.
- Social outcomes: 51 percent of the population living below the poverty line in 2006; low tax ratio constrained social and infrastructure spending; high crime deters private investment.

### II. Recent Developments (Signs of deceleration and financial tightening)
- Growth:
  - Real GDP growth estimated at "4 percent in 2008", down from "6.3 percent in 2007".
  - Projected to decelerate to "1 percent in 2009" with important downside risks.
- Inflation:
  - Peak of "14 percent in mid-2008".
  - Declined to "9.4 percent by year-end" 2008 and further to "5 percent in March 2009".
  - Core inflation measures and services/nontradables inflation moderated; inflation expectations declining.
- Balance of payments:
  - Current account narrowed to "4¾ percent of GDP in 2008".
  - Remittances decelerating rapidly; declined by close to "10 percent in the first two months of 2009".
  - By January 2009: annual export growth slowed to "1 percent"; imports declined by "20 percent".
  - Net international reserves: increased to "US$4.8 billion by end-March 2009" due to recent public external financing disbursements.
- Fiscal sector:
  - Central government deficit declined to "1.7 percent of GDP" in 2008 despite a real decline in tax revenue.
  - Drop in revenue intensified in early 2009; 40 percent of tax collections come from imports.
  - Structural changes include lower VAT productivity due to earlier excessive withholding and some increase in informality; collapse of oil royalties associated with declining production and prices.
- Financial sector:
  - Banks rebalancing toward liquid assets; credit to private sector increased "11 percent in 2008" (compared with "26 percent in 2007").
  - Domestic interest rates have risen about "100 bps since the beginning of 2008".
  - No signs yet of significant deterioration in bank portfolios as of available data.

Key banking system aggregates (selected, in millions of US$):
- On-shore private sector credit: "8,899" (2006), "10,919" (2007), "11,679" (2008).
- On-shore deposits: "9,799" (2006), "10,605" (2007), "11,689" (2008).
- On-shore total assets: "13,918" (2006), "15,552" (2007), "16,857" (2008).
- Off-shore private sector credit: "1,724" (2006), "1,833" (2007), "1,996" (2008).
- Off-shore deposits: "2,146" (2006), "2,176" (2007), "2,361" (2008).
- Off-shore total assets: "2,628" (2006), "2,605" (2007), "2,720" (2008).

### III. The Authorities’ Program — Objectives and Strategy
- Strategy components:
  - Moderate fiscal stimulus to support domestic demand, financed largely with external multilateral resources to minimize crowding out.
  - Monetary policy focused on consolidating the decline in inflation and maintaining a flexible exchange rate.
  - Strengthening financial sector policies to increase resilience, enhance the banking sector safety net, and improve resolution procedures.
  - Refocusing public expenditures toward social spending and labor-intensive public works.
- External liquidity cushion: build higher external liquidity to reduce risks from sudden changes in current and capital accounts; Fund support as contingent financing under the proposed SBA and endorsement to help maintain investor confidence.
- Additional contingent financing for the banking sector under discussion with IDB.
- Public sector financing policy aims at prefinancing government operations to preserve liquidity buffers (deposits at the central bank).

### IV. Macroeconomic Framework and Scenarios
- Program expectations:
  - Gradual economic recovery with declining inflation and improvements in the current account, but lower private capital inflows.
  - Global conditions expected to improve in the first half of 2010 per WEO projections, but with important downside risks on size and duration.
  - 2009 likely marked by declining remittances and lower capital inflows, partially offset by sharp decline in oil prices improving the current account.
  - Risks: further remittance declines from U.S. employment weakness; global risk aversion triggering capital outflows; commodity price volatility affecting inflation projections and pass-through from currency movements.

Key Macroeconomic Indicators Under Baseline Scenario (Prel./Proj.; in percent of GDP unless otherwise indicated)
- Real GDP growth (in percent): "5.4" (2006), "6.3" (2007), "4.0" (2008), "1.0" (2009), "1.8" (2010).
- Inflation (percent, end of period): "5.8" (2006), "8.7" (2007), "9.4" (2008), "5.5" (2009), "4.7" (2010).
- Central government balance: "-1.9" (2006), "-1.8" (2007), "-1.7" (2008), "-2.8" (2009), "-2.6" (2010).
- Public sector debt (gross): "21.8" (2006), "21.7" (2007), "20.2" (2008), "22.5" (2009), "24.2" (2010).
- External current account balance: "-5.0" (2006), "-5.2" (2007), "-4.8" (2008), "-4.0" (2009), "-4.9" (2010).
- Exports: "16.6" (2006), "17.7" (2007), "17.9" (2008), "16.2" (2009), "16.6" (2010).
- Imports: "32.6" (2006), "33.8" (2007), "32.1" (2008), "28.1" (2009), "29.4" (2010).
  - o/w oil: "5.8" (2006), "6.7" (2007), "6.8" (2008), "4.2" (2009), "4.9" (2010).
- Remittances: "12.1" (2006), "12.3" (2007), "11.3" (2008), "9.9" (2009), "9.9" (2010).
- Capital account balance: "4.5" (2006), "4.7" (2007), "4.3" (2008), "2.7" (2009), "3.6" (2010).
- NIR (in US$ millions): "3,878" (2006), "4,098" (2007), "4,421" (2008), "4,416" (2009), "4,409" (2010).

### V. Fiscal Policy — Measures, Financing, and Risks
- 2009 central government deficit projected to increase to "2.8 percent of GDP" driven by weaker revenues and moderately higher spending.
- Expenditure envisaged to increase by "0.4 percent of GDP to 14.1 percent of GDP", with social spending growing by about "0.6 percent of GDP".
- Tax revenue ratio expected to fall by "0.8 percent of GDP" including declines from VAT ("0.5 percent") and oil royalties ("0.3 percent").
- Financing:
  - Authorities shifted budget deficit financing toward external multilaterals.
  - A multi-year external loan package of about "$1 billion" approved by Congress in January 2009.
  - Authorities plan an additional financing package including new external multilateral financing (about "$160 million") and greater domestic bond issuance.
  - Footnote details indicate additional loans for "$100 million from the World Bank and about $60 million from CABEI and bilateral sources."
- Debt outlook:
  - Projected reversal of fiscal deterioration as economy recovers; deficit expected to decline to "2 percent of GDP over the medium term".
  - Nonfinancial public sector debt expected to remain low, slightly above "25 percent of GDP by 2014", and on a sustainable path.
- Revenue measures and administration:
  - Congress made permanent a temporary tax on net assets yielding about "1 percent of GDP".
  - A package of indirect revenue measures expected to yield "0.2 percent of GDP", under discussion and expected to be approved before end-2009 (MEFP paragraph 10).
  - SAT implementing a medium-term plan to achieve a consistent decline in tax evasion rates (MEFP paragraph 11).
- Contingency planning: authorities identifying nonessential spending programs to cut if the tax ratio falls further; staff to discuss structural revenue losses before the 2010 budget (MEFP, paragraph 9).

### VI. Monetary and Exchange Rate Policy
- Monetary easing:
  - Monetary board reduced the policy rate "100 bps since end-2008 to 6.25 percent".
  - 2009 inflation target: "5½ percent, with a tolerance margin of +/- 1 percent".
  - Monetary Board to set policy rate changes based on current developments and forward-looking variables (MEFP paragraphs 13 and 14).
- Medium-term inflation framework:
  - Authorities set a medium-term target of "4 percent with a tolerance margin of +/- 1 percent".
  - Steps to promote development of secondary markets for public debt supported by IMF technical assistance (MEFP paragraph 15).
- Foreign-exchange intervention rule:
  - Central bank intervenes symmetrically up to "US$24 million daily" when the exchange rate deviates from its 5-day moving average by "0.75 percent" (previously "0.5 percent").
  - Since September 2008 the exchange rate has depreciated "8¼ percent", with limited intervention of "$88 million, or 2% of NIR" over the last 5 months.
- Policy risks:
  - Continued external deterioration could require a tighter monetary stance and/or more foreign-exchange intervention.
  - Authorities proceeding with gradual monetary easing and reserve the right to discretionary intervention to avoid sudden exchange rate movements.

### VII. Financial Sector Policy and Vulnerabilities
- Low direct exposure to global financial crisis drivers: foreign bank participation small ("8 percent of deposits"); no investments in high-risk U.S. mortgage-related instruments.
- System consolidation has absorbed weaker institutions into more solid ones.
- Offshore banking sector remains a concern due to supervisory challenges; offshore operations are gradually decreasing in relative size.
- Tightening financial conditions and slowing activity could increase nonperforming loans and reduce liquidity.
- Authorities' priorities include increasing banking sector resilience, improving the safety net, and strengthening resolution procedures.

*Source: IMF staff report — Selected Economic and Social Indicators, Guatemala.*

### 24.      Starting in 2008, the authorities have addressed the most pressing financial risks

### _cr09143 - 24.      Starting in 2008, the authorities have addressed the most pressing financial risks

### Financial sector actions since 2008
- Enhancing banking supervision:
  - Continuous on-site supervision since mid-2008.
  - Regular dialogue with banks’ Boards of Directors to detect risks earlier and discuss contingency plans.
- Ensuring adequate bank liquidity:
  - Central bank introduced temporary measures to provide liquidity in domestic and foreign currency by flexibilizing reserve requirements and introducing reverse repos in foreign currency (MEFP, paragraph 18).
  - Overall assistance via reverse repos has been below the established limits for the system as a whole (US$290 million), averaging less than US$100 million.
  - These short-term measures would be rolled over, if needed, within the limits necessary to avoid disequilibrium in the money market.
  - The central bank has also made explicit that it stands ready to redeem central bank paper before maturity and purchase public bonds from banks to reduce perceived liquidity risks and avoid further shortening of maturities in central bank paper placements.
- Bolstering banks’ solvency:
  - Provisioning requirements changed to require a gradual increase to ensure full-provisioning of NPLs by mid-2011.
  - Current provisioning ratio stands at 70 percent of NPLs.
  - CHN (the state-owned mortgage bank) received a cash capital injection of Q$200 million by the government to meet the minimum capital ratio.

### Further regulatory and supervisory strengthening (program objectives)
- Strengthen regulation and supervision and enhance the banking sector safety net and resolution procedures.
- Superintendency of banks to change liquidity and credit risk management regulations to:
  - Induce banks to compute liquidity gaps at different maturities.
  - Internalize risks in the dollar-denominated loan portfolio from lending to borrowers without foreign-currency earnings (structural benchmarks, MEFP paragraph 19 and Table 3).
- Consolidated supervision of financial conglomerates with regional operations to be strengthened through enhanced coordination with foreign supervisors.
- Structural benchmark: submission of amendments to the banking laws by June 2009 (MEFP paragraph 20 and Table 3). Key provisions include:
  - Reduce risks from offshore operations by limiting retail operations, eliminating the obligation of the offshore’s domestic partner to cover capital deficiencies, and cooperating closely with home supervisors to ensure corrective action of solvency concerns.
  - Reduce connected lending by setting a limit to the aggregate exposure with connected parties.
  - Enhance enforcement powers of the superintendency (e.g., request corrective action such as limits to dividend distribution when bank solvency is threatened).
  - Strengthen instruments and size of the banking sector safety net, including giving the central bank larger room for lender-of-last-resort functions and increasing the deposit insurance premium.
  - Improve resolution procedures: propose additional options for transfer of assets of failed banks, quick licensing of top-rated foreign institutions to participate in resolution, and possibly allow the bank recapitalization fund to supplement capitalization of banks by the private sector if needed.
- With approval of the amendments to the banking law, Guatemala would make important progress toward the adoption of FSAP recommendations.

### Social protection and growth policy measures
- Social spending:
  - Increase from 4.4 percent of GDP in 2008 to 5.0 percent of GDP in 2009.
  - Conditional cash transfer program "Mi familia progresa" initiated in 2008 to be expanded to reach 500,000 families and 0.3 percent of GDP in 2009 (MEFP paragraph 22).
- Policies to enhance productivity and raise investment:
  - Address constraints: high crime rates, energy costs, low labor force productivity.
  - Policies: develop infrastructure, improve access to credit, deepen economic integration (FTAs with Colombia and Panama to take effect in 2009; congress considering ratification of a FTA with Chile), and improve corporate restructuring framework (MEFP, paragraph 24).

### Risks to the outlook and external financing
- Main risk: possible sharper-than-expected deterioration of the external current or capital accounts.
- Guatemala’s external financing requirements:
  - Current account deficit plus total debt amortization estimated at 16.2 percent of GDP in 2009.
  - A large financing gap (around 2.5 percent of GDP) could arise under an adverse scenario (remittances decline a further 5 percent relative to baseline, FDI inflows return to 2005 levels, and a decline in rollover rates on the stock of short-term external private sector debt).
- Gross External Financing Requirements table (US$, millions and percent of GDP):
  - 2008e: 6,910 (17.7 percent of GDP)
  - 2009p: 6,183 (16.2 percent of GDP)
  - 2009 alt: 6,359 (16.7 percent of GDP)
  - Current Account Deficit: 2008e 1,861; 2009p 1,512; 2009 alt 1,688
  - Public Sector: 260; 242; 242
  - Private Sector: 4,789; 4,429; 4,429
  - Short-term debt on original maturity: 4,077; 3,536; 3,536
    - Banks: 940; 857; 857
    - Non-bank private sector (commercial credits): 3,137; 2,680; 2,680
  - Short-term debt on remaining maturity (amortizations due): 712; 893; 893
- Sources of Financing (in US$ millions):
  - Total: 6,896 (2008e); 6,183 (2009p); 5,420 (2009 alt)
  - Net FDI inflows: 815; 553; 508
  - Gross medium- and long-term borrowing (public sector): 382; 860; 860
  - Roll-over of ST debt: 4,789; 4,429; 3,817
  - New Borrowing: 754; -156; -262
  - Other capital flows 1/: 489; 496; 496
  - Change in gross reserves (decrease = +): -333; 0; 0
  - Financing Gap (in US$ millions): 0; 0; 939
  - Financing Gap (in percent of GDP): ......; ......; 2.5
- Assumptions:
  - Rollover of short-term debt (excl. commercial credit): 100%; 100%; 65%
  - 1/ Includes errors and omissions.
- Downside banking risk: in a more severe downturn, especially with currency depreciation and capital outflows, solvency and liquidity of the banking sector may be reduced as NPLs increase and liquidity outflows could affect smaller banks.

### Program design to mitigate risks
- Resources under the SBA intended to deter speculative portfolio shifts and a sharp depreciation of the currency.
- Structural measures focused on strengthening the banking sector.

### Program access, conditionality, and capacity to repay
- Proposed 18-month SBA involves exceptional access and upfront phasing.
  - Total access proposed at 300 percent of quota (SDR 630.6 million equivalent to $951 million or 2.5 percent of GDP).
  - First purchase on program approval of 200 percent of quota, leading to access of 260 percent of quota during the first year of the program.
  - Guatemala’s quota about US$320 million.
- Guatemala meets the four criteria of the exceptional access framework:
  - Potential risks in current and capital accounts.
  - Low debt and sustainable debt dynamics.
  - Terms of access to private capital markets worsened but access not curtailed; staff expects normal access to resume during program period.
  - Authorities’ policy program is strong with a track record of macroeconomic stability.
- Conditionality and monitoring:
  - Quarterly reviews with test dates in March, June, September, and December; first test date in June 2009 and first review in September 2009.
  - Quantitative performance criteria (MEFP Table 2) initially set for end-June and end-September 2009 (indicative for end-December 2009), including:
    - Floor on the central government fiscal balance for 2009—equivalent to a deficit of 2.8 percent of GDP—with an adjuster for up to 0.2 percent of GDP if additional external financing is identified.
    - Floor on NIR.
    - Continuous performance criterion on the nonaccumulation of external arrears.
  - Indicative floor on central government deposits at the central bank.
  - Consultation clause on inflation:
    - A path for expected annual inflation rate at end of each quarter has been set.
    - If annual inflation at test dates deviates from the estimated inflation rate by more than 2 percentage points, up or down, a consultation with staff will be triggered.
    - If inflation is more than 3 percentage points above the estimated rate at the test dates, a consultation with the Executive Board will be triggered prior to resuming purchases.
  - Structural Benchmarks (MEFP Table 3): Submission to Congress of amendments to the banking law and central bank charter by June 2009, and elaboration of draft regulations on liquidity management and credit risk in foreign-currency loans by end-December 2009.
- Capacity to repay:
  - Guatemala has no debt outstanding to the Fund and proposed access will not affect significantly the level of total external debt (36 percent) nor its sustainability over the medium term.
  - Recent GRA lending reform marginally increases Guatemala's commitment fees but decreases its interest charges on potential drawings by up to US$3.2 million annually.
  - A safeguards assessment should be completed by the time of the first review (September 2009). The last safeguards assessment was completed on August 9, 2002.

### Staff appraisal — key conclusions and recommendations
- Economic context:
  - Guatemala’s economic performance has been solid in recent years but is now affected by the global recession: aggregate demand growth slowing due to falling remittances, lower export prices and demand, and lower capital inflows.
  - Downside risks are considerable given ties with the region and the United States.
- Policy stance and recommendations:
  - Preserve macroeconomic and financial stability, mitigate crisis effects, and strengthen social protection.
  - Use room for a moderate fiscal stimulus focused on labor-intensive public works and strengthening the social safety net.
  - Monetary policy should focus on anchoring inflation at low levels; staff supports recent easing but recommends gradual further easing and prevention of negative short-term real interest rates.
  - Promote deepening of secondary markets to develop a yield curve and improve monetary policy signals.
  - Continue commitment to exchange-rate flexibility; support occasional discretionary intervention to avoid sudden movements.
  - Prevent erosion of the revenue base; be prepared to prioritize spending if tax revenue risks materialize; reverse the deterioration of the fiscal position in 2009–2010 in subsequent years once tax revenue rebounds.
  - Expand social spending to protect the neediest; "Mi familia progresa" expected to reach 500,000 families in 2009.
  - Medium-term: pursue revenue-enhancing tax reform, improve public expenditure efficiency and targeting, and increase provision of public goods (infrastructure, security, health, education) to raise productivity and growth.
  - Strengthen financial sector policies: implement planned regulatory reforms and improve stress-test methodologies in the superintendency of banks.
  - Continue strengthening the financial sector safety net and resolution procedures to facilitate faster transfer of assets and liabilities of problem banks.
  - Promote investment in human capital and infrastructure and seek benefits from increased international integration; encourage private sector involvement in infrastructure through public-private partnerships.
- Fund support:
  - The level of access under the proposed arrangement will provide an additional liquidity cushion while keeping Fund exposure manageable.
  - Guatemala would be in a strong position to repay the Fund if it were to make all purchases under the proposed SBA.
  - Staff supports the authorities’ request for a SBA for SDR 630.6 million.

*Source: _cr09143 - 24.      Starting in 2008, the authorities have addressed the most pressing financial risks — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09143.pdf*

### Box 1. Exceptional Access Criteria

### Box 1. Exceptional Access Criteria

### Exceptional access policy framework
- Fund policy allows access in excess of normal limits (i.e., exceptional access) provided that the following four criteria are met:
  - (i) The member is experiencing or has the potential to experience exceptional balance of payments pressures on the current account or the capital account, resulting in a need for Fund financing that cannot be met within the normal limits;
  - (ii) a rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term;
  - (iii) the member has prospects of gaining or regaining access to private capital markets within the timeframe when Fund resources are outstanding; and
  - (iv) the policy program of the member provides a reasonably strong prospect of success, including not only the member’s adjustment plans, but also its institutional and political capacity to deliver that adjustment.

### Staff assessment: Guatemala meets all four criteria
- Criterion 1 — Actual or potential exceptional balance of payments pressures
  - Guatemala has followed a strategy to offset the expected decline in private capital inflows with a substantial increase in flows from multilaterals (about $1 billion over 2009-2010).
  - Risks remain: Guatemala has large rollover requirements in the near term (about 12 percent of GDP), and a further decline in remittances, lower capital inflows, and lower rollover rates could create exceptional balance of payments pressures.

- Criterion 2 — Sustainable public debt position
  - Guatemala’s public debt stock is low (21 percent of GDP), and its dynamics are sustainable under a range of plausible shocks, including a severe exchange rate shock, given efforts over the past couple of years to reduce dollar-denominated debt.
  - Guatemala has a strong track record of conservative fiscal policy, and, currently, there are no indications of any potential contingent liabilities of the government that could arise from private external indebtedness.

- Criterion 3 — Access to private capital markets
  - Terms of access to private capital markets have worsened since September 2008 (at least 150 basis points increase in the cost of external credit lines, a widening of 250 bps in sovereign spreads), but access has not been curtailed.
  - Staff expects that Guatemala’s terms of access will become more favorable once global conditions improve.

- Criterion 4 — Strength of the policy program and capacity to deliver
  - Guatemala has a track-record of macroeconomic stability and the authorities have been proactive in responding to the effects of the global crisis.
  - The authorities have delivered on measures to bolster bank solvency, strengthen supervision, increase the flexibility of the exchange rate regime, reduce inflation, and prevent an erosion of the tax base by making permanent a previously temporary tax on net assets.

*Source: IMF staff assessment as presented in Box 1. Exceptional Access Criteria*

### 1.      Guatemala’s economy has performed well in recent years. Sound macroeconomic

### _cr09143 - 1.      Guatemala’s economy has performed well in recent years. Sound macroeconomic

### Overview and Program Request
- Recent outcomes:
  - Average growth of 4¾ percent in 2005–08.
  - Public debt at 21 percent of GDP.
- Risks and shocks:
  - Global financial turmoil and global recession tightening external financing conditions.
  - Channels of impact: lower external demand and export prices; decline in remittances; slowdown of private capital inflows.
- IMF request and intent:
  - Guatemala requests a Stand-By Arrangement (SBA) totaling SDR 630.6 million (300 percent of quota), covering the period through October 21, 2010.
  - Intention to treat the arrangement as precautionary.
- Program monitoring:
  - Quarterly reviews: first review on or after September 15, 2009; second review on or after December 15, 2009.

### Program Objectives and Strategy
- Macroeconomic targets:
  - Maintain growth in a range between 1 and 2 percent in 2009 and 1.7–2.7 percent in 2010.
- Strategic pillars:
  - (i) Moderate countercyclical fiscal policy to support domestic demand, financed largely through external resources to minimize crowding out.
  - (ii) Monetary policy focused on reducing inflation and a flexible exchange rate to facilitate adjustment.
  - (iii) Financial sector policies to strengthen bank regulation and supervision, and enhance the banking sector safety net and bank resolution procedures.
- Complementary measures:
  - Refocusing public expenditures to expand the social safety net and undertake labor-intensive public works.
  - Commitment to increased economic integration over the medium term.

### Macrofinancial Policies — Fiscal Policy
- Fiscal stance and targets:
  - Central government deficit averaged 1.8 percent of GDP in 2004–08.
  - Public expenditure to increase by 0.4 percent of GDP with respect to 2008, to 14.1 percent of GDP.
  - Tax collections expected to decrease by about 0.8 percent of GDP with respect to 2008.
  - Central government fiscal deficit could increase to 2.8 percent of GDP in 2009 and decline to 2.6 percent of GDP in 2010.
  - Consolidated public sector deficit could reach 2.4 percent of GDP in 2009 and 2.2 percent in 2010.
  - Domestic financing strategy: net domestic debt placements of 1 percent of GDP in 2009 and of 0.6 percent of GDP in 2010.
  - Drawdown of Central Bank deposits: 0.1 percent of GDP in 2009 and 0.4 percent of GDP in 2010.
  - New loans secured for almost US$1 billion from the World Bank and the IDB.
- Contingency and prioritization:
  - If tax collections come in lower than projected, up to 0.2 percent of GDP may be financed with additional external financing to avoid compressing expenditures in 2009.
  - Priority on protecting social spending and labor-intensive public works when adjusting fiscal policy.
- Revenue measures:
  - Solidarity tax replaces temporary IETAAP as a minimum tax on income of individuals and corporations.
  - Proposed indirect taxation reform expected to yield 0.2 percent of GDP annually once approved.
  - SAT anti-evasion measures expected to have an impact of 0.2 percent of GDP in 2009 and 2010; measures include:
    - Stricter control of VAT tax exemptions (ExenIVA) and workers’ income tax withholdings (RetenISR).
    - Intensive crosscheck of VAT and income tax returns data.
    - Stricter control of VAT credit reimbursements to exporters.
    - Effective control of activities like sports clubs, cattle owners, transport, and exporters.
    - Intensified actions against smuggling via the Inter-institutional Commission for Smuggling and Customs Fraud Prevention and Fight.
    - Technological improvements for container transit control through compulsory use of GPSAT.
    - Control of vehicle circulation taxes.
- Transparency and public expenditure management:
  - Creation of the Vice-ministry for Fiscal Transparency and Evaluation at the Ministry of Finance.
  - Stricter conditions for use of trust funds and reporting requirements by decentralized units before budgetary transfers.
  - Reduced exemptions from GUATECOMPRAS and augmented information requirements.
  - Improved coordination among Ministry of Finance, Planning Secretary, and Ministry of Communications, Infrastructure, and Housing for capital expenditure budget and monitoring.
  - Preparation of above-the-line consolidated general government accounts with IMF technical assistance.

### Macrofinancial Policies — Monetary and Exchange Rate
- Inflation framework:
  - Medium-term inflation target of 4 percent with a tolerance margin of +/- 1 percent.
  - For 2009, Monetary Board target: decline of inflation to 5½ percent, with a tolerance margin of +/- 1 percent.
  - Monetary easing cycle initiated in light of downside risks; policy rate to be managed to meet inflation target.
  - If inflation deviates beyond established band in the program (+/- 2 percent), policy response to be discussed with the IMF.
- Market development and operations:
  - Continued development of secondary markets for central bank and government paper: dematerialization, standardization of maturities, reduction in number of weekly auctions, increased number of market participants.
  - Technical assistance from IMF and U.S. Treasury supporting further measures.
- Exchange rate policy:
  - Greater exchange rate flexibility with amended foreign-exchange intervention rule to set symmetric and limited intervention.
  - Central bank ready to prevent excessive and disruptive volatility.
  - Program sets a floor on net international reserves to maintain external liquidity cushion.

### Macrofinancial Policies — Financial Sector
- System resilience and recent reforms:
  - Limited foreign bank participation; no investments in high-risk U.S. mortgage-related instruments.
  - Consolidation after two bank failures in late 2006 and early 2007; banking system better capitalized, adequate liquidity, maintained profitability.
- Preemptive measures introduced:
  - Continuous and enhanced on-site supervision since June 2008.
  - Temporary and limited liquidity measures: allowed limited use of liquid assets (other than central bank deposits) to meet reserve requirements until March 2009, relaxing reserve requirements from 14 percent to about 13 percent.
  - Central bank introduced reverse repos in dollars; overall assistance limited to $290 million (about 15 percent of the stock of external credit lines) in place until May 30, 2009.
  - Provisioning requirements revamped to ensure by mid-2011 all nonperforming loans are fully provisioned.
  - Capital injection to Banco de Crédito Hipotecario Nacional to restore capital adequacy.
- Strengthening regulation and supervision:
  - Regulatory changes to improve liquidity management and internalize credit risk from borrowers’ foreign-currency exposures through higher provisions or capital requirements (timing to be set at first program review).
  - Improve consolidated supervision of regional financial groups and coordination with foreign supervisors.
  - Further development of stress-testing methodologies.
- Banking legislation and resolution framework:
  - Amendments to banking legislation planned in the first half of 2009 to reduce connected lending, reduce risks from offshore operations, and strengthen enforcement powers of the Superintendency of Banks.
  - Reforms to improve bank resolution framework, expand central bank’s lender-of-last-resort function, and raise deposit insurance premia.
- Asset recovery and AML:
  - Assets under recovery after Bancafe failure sufficient to cover liabilities assumed by private banks in its resolution; FOPA has started to recover part of its contribution.
  - Plan to accelerate asset disposal in coming months.
  - Anti-money laundering strengthened by enlarging the Financial Intelligence Unit and increasing controls on cash transactions, large remittances, gaming, and soon real estate.

### Protecting the Poor and Encouraging Medium-Term Growth
- Policy commitments:
  - Continue reforms to ensure sustainable medium-term growth, continued progress in reducing poverty, and protection of the neediest.
  - Refocus public expenditures to expand social safety nets and labor-intensive public works to maximize impact on aggregate demand.
- Medium-term fiscal sustainability:
  - Envisaged gradual recovery of tax collections and maintenance of expenditure-to-GDP ratio projected to yield sustainable debt dynamics and anchor public debt at a safe level.

*Source: Attachment II. Memorandum of Economic and Financial Policies for 2009–2010.*

### 22.      Our social protection policy aims at enhancing current programs to offset the

### _cr09143 - 22.      Our social protection policy aims at enhancing current programs to offset the

### Social protection policy and programs
- Objective: Enhance current programs to offset the effect of the crisis on the neediest and safeguard individuals’ access to economic opportunities, ensuring minimum requirements for human development (nutrition, health, basic education).
- Social expenditure:
  - Expected to reach 5 percent of GDP in 2009, up from 4.7 percent of GDP on average in 2005–2008.
- Conditional cash transfer program:
  - Name: Mi familia progresa.
  - Aim: Secure that poor children attend school and visit health centers regularly.
  - Coverage: Initiated in 2008, covers 281,000 families.
  - 2009 expansion target: Reach 500,000 families.
  - 2009 budget expected: about US$150 million.
- Other social programs and 2009 budget:
  - Bolsa solidaria; Escuelas abiertas; Comedores Solidarios.
  - Combined budget of around US$7 million in 2009.

### Poverty, growth, and productivity concerns
- Recent outcomes:
  - Long-term growth described as low and insufficient to reduce poverty.
  - Poverty level remains high at 51 percent.
- Policy implication: Sustained growth and significant poverty reduction require enhancing productivity and raising investment.

### Policies to raise productivity and investment (ongoing and planned)
- Identified constraints: Need to improve health and education, combat crime, and reduce cost of energy; continue strategy to increase openness and reduce cost of doing business.
- Main policy actions:
  - Deepening Economic Integration:
    - Progress in implementation of a Central American Customs Union, beginning with El Salvador.
    - Advance negotiation of an association agreement with the European Union.
    - Expectation that free trade agreements with Colombia and Panama will take effect in 2009.
    - Expect Congress to consider ratification of Free Trade Agreements with Chile (already signed).
  - Developing infrastructure:
    - Work with Congress to enact a law on public-private partnerships (Alianzas para el Desarrollo) to overcome capacity constraints while ensuring sound management of fiscal contingencies.
  - Improving access to finance:
    - Implemented the new law on movable collateral, with opening of the public registry of loans with such guarantees.
  - Combating crime:
    - Coordinated effort required by various ministries, SAT, and the Superintendency of Banks to fight fraud, money laundering, and contraband.
  - Improving framework for creditors’ rights and insolvency proceedings:
    - Current mechanisms are long and inefficient.
    - Plan to set up a high-level commission with participation of private sector and legal experts to explore solutions.
    - Expect support of multilateral institutions.

### Safeguards assessment
- Commitment: Complete an updated safeguards assessment of the central bank of Guatemala before the first review of the Stand-By Arrangement.
- Measures to facilitate assessment:
  - Authorized the central bank’s external auditors to provide IMF staff with all necessary information and to hold discussions directly with IMF staff.
  - Commit to receiving a safeguards mission and providing that mission with all necessary information without delay.

### Program monitoring and financing schedule (Stand-By Arrangement)
- Monitoring: Quarterly through quantitative performance criteria and indicative targets, an inflation consultation clause, and structural benchmarks. Program conditionality specified in the TMU.
- Purchase schedule and terms (Table 1):
  - April 22, 2009 — Board approval of the SBA: 420.40 Million SDR / 634.27 Million US$ / 200.00 Percent of Quota / 66.67 Percent of Total Access
  - September 15, 2009 — First review, based on end-June 2009 performance criteria: 42.04 Million SDR / 63.43 Million US$ / 20.00 Percent of Quota / 6.67 Percent of Total Access
  - December 15, 2009 — Second review, based on end-September 2009 performance criteria: 42.04 Million SDR / 63.43 Million US$ / 20.00 Percent of Quota / 6.67 Percent of Total Access
  - March 15, 2010 — Third review, based on end-December 2009 performance criteria: 42.04 Million SDR / 63.43 Million US$ / 20.00 Percent of Quota / 6.67 Percent of Total Access
  - June 15, 2010 — Fourth review, based on end-March 2010 performance criteria: 42.04 Million SDR / 63.43 Million US$ / 20.00 Percent of Quota / 6.67 Percent of Total Access
  - September 15, 2010 — Fifth review, based on end-June 2010 performance criteria: 42.04 Million SDR / 63.43 Million US$ / 20.00 Percent of Quota / 6.67 Percent of Total Access
  - Total: 630.60 Million SDR / 951.40 Million US$ / 300.00 Percent of Quota / 100.00 Percent of Total Access
  - Note: US$/SDR exchange rate of 0.662813 as of March 26, 2009.

### Quantitative performance criteria, indicative targets, and inflation consultation clause (Table 2)
- Performance criteria (end-period floors and criteria; where noted cumulative from end of preceding year):
  - Overall balance of the central government, floor (millions of Q)1/:
    - end-June 2009: -3,075
    - end-Sept 2009: -6,946
    - end-Dec 2009: -8,720
    - end-Dec 2010: -8,742
  - Net International Reserves, floor (millions of US$):
    - end-June 2009: 4,400
    - end-Sept 2009: 4,200
    - end-Dec 2009: 4,000
    - end-Dec 2010: 4,000
  - Accumulation of external arrears2/: 0 (continuous performance criterion for all dates)
- Indicative targets:
  - Central Government Deposits at Central Bank, floor (millions of Q):
    - end-June 2009: 10,899
    - end-Sept 2009: 7,695
    - end-Dec 2009: 7,642
    - end-Dec 2010: 6,290
- Consultation Clause on inflation3/ (bands around projected 12-month inflation point):
  - Outer band, upper limit4/:
    - end-June 2009: 7.5
    - end-Sept 2009: 7.5
    - end-Dec 2009: 8.5
    - end-Dec 2010: 8.0
  - Inner band, upper limit5/:
    - end-June 2009: 6.5
    - end-Sept 2009: 6.5
    - end-Dec 2009: 7.5
    - end-Dec 2010: 7.0
  - Inner band, lower limit5/:
    - end-June 2009: 2.5
    - end-Sept 2009: 2.5
    - end-Dec 2009: 3.5
    - end-Dec 2010: 3.0
  - Outer band, lower limit4/:
    - end-June 2009: 1.5
    - end-Sept 2009: 1.5
    - end-Dec 2009: 2.5
    - end-Dec 2010: 2.0
  - Notes:
    - 1/ Cumulative from end of preceding year.
    - 2/ Continuous performance criterion.
    - 3/ Deviations outside the inner and outer bands' limits for inflation will trigger consultations with the Fund, as set out in the TMU.
    - 4/ Band of +/- 3 percent around central inflation point.
    - 5/ Band of +/- 2 percent around central inflation point.

### Structural benchmarks (Table 3)
- Submission of amendments to Banking Law to Congress — test date: end-June 2009.
- Elaboration of draft regulations on bank's liquidity management — test date: end-December 2009.
- Elaboration of draft regulations on bank's foreign currency credit risk — test date: end-December 2009.

### Technical Memorandum of Understanding (TMU) — key definitions and adjusters
- Overall balance of the central government:
  - Measured on an accrual basis from above the line; defined as difference in total revenue and total expenditure as per Guatemala’s Budget Law. Data from SICOIN.
  - Reconciliation process at reviews between above-the-line and below-the-line measurements.
  - Below-the-line deficit definition: net external financing plus net domestic financing (detailed components provided in text).
  - Adjuster for 2009: Floor calculated assuming net external financing totaling US$637 million (Q5093 million at exchange rate of Q8 per dollar). If net external financing exceeds that level, the floor will be adjusted downwards by up to US$100 million (Q 800 million).
- Net International Reserves (NIR) definition:
  - Stock of NIR = U.S. dollar value of gross liquid foreign assets minus short-term foreign liabilities (definitions consistent with the Data Template on International Reserves and Foreign Currency Liquidity and BPM5).
  - Gross reserve assets include: monetary gold, holdings of SDRs, any reserve position in the Fund, holdings of foreign exchange in convertible currencies.
  - Exclusions from gross reserve assets: capital participation in IFIs, assets in nonconvertible currencies, holdings of precious metals other than monetary gold, encumbered reserve assets, reserve assets pledged as collateral for foreign loans, reserve assets pledged through forward contracts, and illiquid assets.
  - Short-term foreign liabilities of the central bank include (i) foreign currency-denominated liabilities with original maturity ≤ one year; (ii) liabilities to the Fund; (iii) foreign currency liabilities to residents, including financial institutions; (iv) any short-term liability converted into a medium-term liability during the program period.
  - As per definitions, on March 23, 2009:
    - Gross foreign assets of the central bank stood at US$5046 million.
    - NIR stood at US$4781 million.
- Non accumulation of external arrears:
  - Continuous performance criterion: External debt payment arrear defined as payment by the central government not made within seven days after falling due under the contractual agreement, unless specified otherwise.

### Reporting requirements (frequency and content)
- Daily (lag no more than 2 working days):
  - Level of gross international reserves and net international reserves, including short-term foreign currency liabilities.
  - Stock of currency issued.
  - Deposits of the central government and the rest of the nonfinancial public sector in the Bank of Guatemala.
  - Exchange rate of the quetzal vis-à-vis the U.S. dollar.
  - Amount of the central bank intervention in the FOREX market.
  - Principal accounts of the balance sheet of the central bank.
- Weekly (lag no more than one week):
  - Daily buying and selling exchange rates in the interbank foreign exchange markets.
  - Placements and amortization of certificates of open market operations by maturity, interest rate and holder (nonfinancial private sector, financial sector, nonfinancial public sector).
  - Commercial banks’ average deposit and loan interest rates in domestic and foreign currencies.
  - Foreign currency cash flow of the central bank.
  - Daily liquidity information (excess and required reserves) in foreign and local currency, by bank (2 week lag).
- Monthly (lag no more than 4 weeks):
  - Main monthly accounts of the commercial and development banks, including their offshore operations.
  - Monthly accounts of the central bank.
  - Monthly consumer price index (2 week lag).
  - Analysis of inflationary developments.
  - Updated inflation projections by the Bank of Guatemala.
  - Main economic and financial laws, and related monetary board regulations.
- Monthly submissions by the Ministry of Finance:
  - Total central government revenue (cash basis), detailed by tax and nontax revenue, transfers and grants; tax revenue subdivided into direct and indirect taxes (finalized revenues sent with a lag of no more than 3 weeks).
  - Total government expenditure measured on both accrual and cash bases; current and capital expenditure breakdowns; subdivisions for wages and salaries, goods and services, external and internal debt interest payments, transfers; capital expenditure subdivisions.
  - Total government social expenditure (education, science and culture; health care and social assistance; housing), including information on key social programs such as Mi Familia Progresa.
  - External financing of the central government: disbursements and amortizations of external loans and bonded debt placed with nonresidents, and any variation of external arrears.
  - Domestic financing of the central government: variation of National Treasury deposits in the Bank of Guatemala and commercial banks, bonded debt placed with residents, and any variation of arrears with domestic debt holders.
- Additional: Authorities to provide timely information on economic and financial measures, changes in legislation and regulations by the Central Bank of Guatemala, Ministry of Finance, superintendency of banks, SAT, and other key agencies.

### IMF assessment of risks and Stand-By Arrangement access (prepared note)
- Arrangement requested: 18-month SBA with access of SDR 630.6 million (300 percent of quota).
- Front-loading and phasing:
  - First purchase upon approval: SDR 420.4 million (200 percent of quota).
  - Followed by five purchases each of SDR 42.04 million (20 percent of quota).
  - Access during the first year would reach 260 percent of quota.
  - Last purchase available in September 2010.
- Treatment: Authorities intend to treat the arrangement as precautionary.
- Table summarizing proposed SBA—Access and Phasing (condensed):
  - April 2009 (approval): 420.40 SDR mn purchase; Cumulative purchase 200.0 percent of quota.
  - September 2009: 42.04 SDR mn purchase; Cumulative 220.0 percent of quota.
  - December 2009: 42.04 SDR mn purchase; Cumulative 240.0 percent of quota.
  - March 2010: 42.04 SDR mn purchase; Cumulative 260.0 percent of quota.
  - June 2010: 42.04 SDR mn purchase; Cumulative 280.0 percent of quota.
  - September 2010: 42.04 SDR mn purchase; Cumulative 300.0 percent of quota.
  - Total: 630.60 SDR mn; Cumulative 300.0 percent of quota.

*Source: IMF staff and authorities as presented in the IMF document _cr09143.*

### 3.      Guatemala’s external debt is moderate, but the substantial share of short-term

### 3.      Guatemala’s external debt is moderate, but the substantial share of short-term

### External debt composition and levels
- At end-2008, total external debt was estimated at 35 percent of GDP.
- Two-thirds of total external debt was owed by the private sector.
- Private sector external debt:
  - 24 percent of GDP (end-2008).
  - Mainly owed to non-monetary institutions.
  - About half of private sector debt is short-term.
- Public sector external debt:
  - 11 percent of GDP (end-2008).
  - Owed mainly to multilateral institutions.
- Table 3 highlights (end-of-year unless otherwise indicated; in millions of US dollars and in percent of GDP):
  - Total external debt (2008): 13,748 (35.3 percent of GDP).
  - Total external debt (2009 staff projection): 14,478 (38.0 percent of GDP).
  - Public external debt (2008): 4,384 (11.3 percent of GDP).
  - Private loans (2008): 9,364 (24.0 percent of GDP).
- Composition of total external debt (end-2008, in percent):
  - Private Non-Monetary Institutions, 55%
  - Private Monetary Institutions, 13%
  - Other Multilateral, 16%
  - Bonds, 7%
  - IBRD/IDA, 6%
  - Bilateral, 4%

### Public debt and comparisons with exceptional access cases
- Total public debt stable in the 20-22 percent of GDP range over the past four years; estimated at about 22 percent of GDP at end-2008.
- External debt ratios for both total- and public-sector debt compare favorably with corresponding ratios for most of the exceptional access cases since 2003.
- Guatemala’s external medium- and long-term debt service ratio to exports of goods and services is low vis-à-vis other exceptional access cases.

### The new Stand-By Arrangement (SBA) — projected access and Fund exposure
- Authorities intend the proposed arrangement to be precautionary.
- Projected outstanding use of GRA resources if all purchases made as scheduled:
  - Rise to 200 percent of quota upon approval.
  - Rise to 260 percent of quota during the first year of the arrangement.
  - Rise to 300 percent of quota in September 2010–June 2012.
- In SDRs and GRA credit:
  - Projected peak GRA exposure of SDR 630.6 million.
  - GRA credit to Guatemala (Table 4, Exposure and Repayments in SDR millions):
    - May-09: 420.4
    - 2009: 504.5
    - 2010: 630.6
    - 2011: 630.6
    - 2012: 520.3
    - 2013: 236.5
    - 2014: 31.5
    - 2015: 0.0
  - In percent of quota (Table 4):
    - 2009: (200.0)
    - 2010: (240.0)
    - 2011: (300.0)
    - 2012: (300.0)
    - 2013: (247.5)
    - 2014: (112.5)
    - 2015: (15.0)
    - 2016: (0.0)
- If the SBA is fully disbursed:
  - GRA credit outstanding would be equivalent to 2.4 percent of GDP by end-2010.
  - GRA credit would equal 17 percent of gross international reserves (end-2010 projection).
  - In terms of SDRs, projected peak GRA exposure of SDR 630.6 million would be nearly four times higher than Guatemala’s previous peak Fund credit outstanding reached in 1984–85, yet among the lowest in recent exceptional access cases.

### Debt service implications and peaks
- By end-2010 (projected, if SBA fully drawn):
  - Total external debt would rise to 40 percent of GDP.
  - Public external debt would reach 17 percent of GDP.
  - Outstanding use of GRA resources would represent:
    - 2.4 percent of GDP,
    - 6 percent of total external debt,
    - 15 percent of public external debt.
- Debt service peaks (Table 4 and narrative):
  - Projected debt service to the Fund would peak at about SDR 290.2 million in 2013.
    - Equivalent to over one-quarter of total external debt service and over half of public external debt service in that year.
  - External debt service to exports of goods and services:
    - Total external debt service peaks at 15.2 percent (2013).
    - Public external debt service peaks at 7.7 percent (2013).
    - Debt service due on GRA credit peaks at 4.2 percent (2013).

### Impact on the Fund’s liquidity position and risk exposure
- The proposed arrangement’s impact on Fund liquidity and credit risk exposure is relatively small in nominal terms:
  - One-year Forward Commitment Capacity (FCC) (as of 03/31/2009): 96,092.2 (in millions of SDRs).
  - Guatemala's impact on FCC: (630.6).
  - Commitments would reduce the FCC by about SDR 0.6 billion.
- Fund exposure and concentration:
  - After the first purchase, Fund credit to Guatemala would represent 2.1 percent of total GRA Fund credit outstanding.
  - The share of the top five users of Fund resources of total outstanding credit would decrease by about two percentage points to 84.0 percent.
- Prudential and burden-sharing effects (Table 5, as of 03/31/2009):
  - Fund GRA credit outstanding to Guatemala (percent of current precautionary balances): 6.1
  - Guatemala's annual GRA charges (percent of Fund's residual burden sharing capacity): 30.1
  - Fund's precautionary balances (in millions of SDRs): 6,938.6
  - Fund's residual burden sharing capacity (in millions of SDRs): 20.0
  - Fund GRA credit outstanding to five largest debtors (percent of total GRA credit outstanding): 84.0

### Assessment and downside scenarios
- Authorities request the SBA as an additional liquidity cushion to:
  - Preserve macroeconomic and financial stability,
  - Mitigate effects of the global crisis on economic activity,
  - Strengthen social protections.
- Financial risk for the Fund would arise if significant balance of payments pressures materialize and the authorities draw on available resources.
- Risks to Guatemala’s outlook are significant:
  - Large external financing requirements estimated at just over 16 percent of GDP in 2009 could result in a large financing gap even under a relatively benign scenario (further decline in remittances and FDI, and marginal declines in private external debt rollover rates).
  - In a significantly worse global scenario, a more severe downturn could increase financial sector vulnerabilities via sharp currency depreciation and capital outflows, adversely affecting the banking sector.

*Source: IMF staff report content (chapter titled "3. Guatemala’s external debt is moderate, but the substantial share of short-term").*

### 10.      The realization of significant downside risks could adversely affect Guatemala’s

### _cr09143 - 10.      The realization of significant downside risks could adversely affect Guatemala’s

### Downside risks and Fund exposure
- The realization of significant downside risks could adversely affect Guatemala’s capacity to repay the Fund.
- The impact on the Fund’s finances would be modest given the relatively low absolute access level.
- Authorities’ commitment to strong program implementation and prompt response to deviations from the program baseline are essential to mitigate risks and safeguard Fund resources.
- The authorities’ policy program and track record of prudent and sustainable macroeconomic policies provide confidence in program implementation.

### IMF approval and program framing
- IMF Executive Board approved on April 22 an 18-month Stand-By Arrangement: SDR 630.6 million (about US$935 million, or 300 percent of quota).
- The Guatemalan authorities intend to treat the arrangement as precautionary and do not intend to draw on Fund resources unless need arises.
- Program purpose: part of a preventive strategy to strengthen the country’s liquidity cushion, enhance investor confidence, and provide insurance against significant downside risks.

### Statement summary (Deputy Managing Director / Acting Chair)
- Strategy elements highlighted:
  - Moderate fiscal expansion.
  - Anchor inflation at low levels within the inflation-targeting framework.
  - Flexible exchange rate regime.
  - Strengthening the financial sector.
  - Mobilization of substantial external financing, including from the World Bank and the Inter-American Development Bank.
- Monetary stance: Bank of Guatemala cautiously easing monetary policy after controlling inflationary pressures; medium-term inflation target of 4 percent (+/- 1%).
- Financial sector measures: adequate liquidity-provision arrangements by the central bank, gradual increase in provisioning requirements, continuous on-site supervision, enhanced supervision and regulation, and strengthening bank resolution framework.

### Recent economic developments (annex)
- Real GDP growth: estimated slowdown to 4 percent in 2008, from 6.3 percent in 2007.
- Annual inflation: peaked at 14 percent in mid-2008; declined to 9.4 percent by year-end 2008; further declined to 5 percent in March 2009.
- External current account: narrowed to 4¾ percent of GDP in 2008.
- International reserves: increased to US$5 billion by end-March 2009 due to recent disbursements of public external financing.
- Fiscal position: central government deficit declined to 1.7 percent of GDP in 2008 despite a real decline in tax revenue; revenue drop intensified in early 2009.

### Program summary — strategy and instruments
- Four key elements of the authorities’ strategy:
  - A moderate fiscal stimulus to support domestic demand, financed with substantial external resources from multilaterals to minimize crowding out the private sector.
  - A monetary policy focused on consolidating the decline in inflation within a flexible exchange-rate regime to facilitate economic adjustment.
  - Strengthening financial sector policies to increase resilience of banks and enhance the banking sector safety net and resolution procedures.
  - Refocusing public expenditures toward strengthening social spending and labor-intensive public works.
- Fund support role:
  - Build a higher external liquidity cushion.
  - Provide contingent financing under the proposed SBA and endorsement to help maintain investor confidence.

### Social protection and fiscal details
- Social spending: increase from 4.4 percent of GDP in 2008 to 5.0 percent of GDP in 2009.
- Conditional cash transfer program (Mi familia progresa):
  - Expansion target: reach 500,000 families in 2009.
  - Cost: 0.4 percent of GDP (also described as a total budget of US$150 million in a related statement).
- Fiscal impulse and financing:
  - Public expenditure will increase 0.4 percent with respect to 2008.
  - Tax collections expected to decline by about 0.8 percent of GDP from 2008 levels.
  - Central government deficit could increase to 2.8 percent and then decline to 2.6 percent in 2010.
  - Deficits to be mainly financed by a package of almost $1 billion secured by loans from the IDB and the World Bank.

### Monetary and external sector outlook
- Monetary policy targets:
  - Gradual reduction of inflation to 5.5 percent in 2009.
  - Toward a medium-term target of 4 percent (+/- 1 percent).
- Exchange rate: continued commitment to exchange rate flexibility to facilitate adjustment.
- Net international reserves reported as US$4.8 billion by end-March 2009 in a related statement (and US$5 billion by end-March 2009 in the annex reflecting recent disbursements).

### Financial sector resilience measures
- Financial system: limited exposure to risky structured products; consolidation following two bank failures in late 2006 and early 2007.
- Measures introduced:
  - Continuous and enhanced on-site supervision since June 2008.
  - Temporary and limited central bank measures to ensure bank liquidity.
  - Building stronger capital cushions and revamped provisioning requirements to ensure by mid-2011 all nonperforming loans are fully provisioned.
  - Changes to banking legislation to strengthen regulation, supervision, and bank resolution framework.

### Risk considerations and conditionality
- Authorities view the HAPA (high-access precautionary Stand-By Arrangement) as appropriate and plan to treat it as precautionary.
- Authorities expect staff monitoring guided by new flexible, review-based conditionality.
- Should further downside risks materialize, the authorities would expect the Fund to respond flexibly and reassess needs.

*International Monetary Fund, Press Release No. 09/142, Washington, D.C., April 23, 2009.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09143.pdf_