## 1. Guatemala: External Stability Assessment

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### Overview and Key Findings
- Economy: solid expansion; output gap closed; growth eased back to potential.
- Macroeconomic policies: prudent, contributing to relatively low inflation.
- Financial system: appears robust; current account deficit stable and fully financed by FDI.
- Main challenge: unleash higher and more inclusive long-term growth while enhancing resilience to shocks and preserving macroeconomic stability.
- Constraints on potential growth: weak investment in physical and human capital, elevated crime and insecurity, widespread poverty.
- Policy needs: increase high-quality public spending to support equitable growth, boost public revenue, strengthen expenditure management to safeguard macro stability.
- Limited policy space: fiscal space constrained by very low tax burden; monetary space limited by downwards-sticky inflation expectations and dollarization.
- Financial stability concerns: upgrade regulatory and supervisory frameworks; monitor rapid growth of credit, particularly in foreign currency.

### Recent Economic Developments (selected)
- Growth:
  - Real GDP: 2011: 4¼ percent; 2012: 3 percent; 2013: 3¾ percent.
- Inflation:
  - 2011: 6¼ percent; 2012: 3½ percent; 2013: 4.4 percent; June 2014 y-o-y: 3 percent; August 2014 y-o-y: 3.7 percent.
  - Inflation target range: 4±1 percent.
- External sector:
  - Current account deficit (2013): 2¾ percent of GDP.
  - Net international reserves (NIR) at end-2013: US$6.4 billion; import cover at end-2013: 3.9 months.
  - Net IIP position (2013): negative 20 percent of GDP.
  - FDI share of total liabilities: about 40 percent.
- Competitiveness:
  - CPI-based REER appreciated about 30 percent since 2003.
  - Current account deficit improved from 4¾ percent of GDP in 2003 to 2½ percent of GDP in 2013.
  - IMF EBA: sustainable cyclically-adjusted current account deficit of 4 percent of GDP vs actual cyclically-adjusted deficit of 1¾ percent of GDP.
  - CGER: moderate overvaluation of 7 percent (external sustainability) or moderate undervaluation of 2 percent (macroeconomic balance).
  - WHD staff model: slight undervaluation of about 3¾ percent.
  - Simple average across methodologies: slight undervaluation of 2¾ percent.
  - Survey-based competitiveness: 86th out of 148 countries in 2013-2014 (from 83rd in 2012-2013).
  - Ease of Doing Business Index: improved to 79th out of 189 countries in 2013 from 93rd in previous year.
- Fiscal:
  - 2012 tax reform aimed to raise revenues by 1–1½ percent of GDP over 2013–2014.
  - Actual yield so far: around ¼ percent of GDP in extra collections.
  - Fiscal outcomes 2013: overall deficit slightly above 2 percent of GDP (below budget target of 2½ percent of GDP).
  - Public debt: nearly constant and low as share of GDP but high relative to fiscal revenue versus regional peers.
- Monetary and financial:
  - Policy rate: +25 bps to 5.25 percent in April 2013; reduced by 50 bps to 4.5 percent by first half of 2014; cumulative 75 basis points cuts since Q3 2013.
  - Credit growth: private sector credit ~16 percent in 2013; decelerated to 12 percent since end-2013.
    - FX loans growth: 18 percent in 2013.
    - Domestic currency loans growth: 9 percent in 2013.
  - Financial Soundness Indicators (Guatemala):
    - Regulatory Capital to Risk-Weighted Assets Ratio: 14.7 (table value) / 14.8 (on-shore banks, 2013 table).
    - Nonperforming Loans to Total Loans Ratio: 1.3 (table value) / 1.2 (on-shore banks, 2013 table).
    - Return on Assets: 1.6 (table value).
  - Guatemala joined GAFISUD.
- Social:
  - MDG progress: 12 out of 16 MDGs.
  - One third of population below minimum dietary energy consumption.
  - Chronic malnutrition in children under 5: about 50 percent.
  - High informality and serious security concerns.

### Macroeconomic Outlook and Baseline Projections (selected series, preserved values)
- Staff/authorities’ baseline:
  - Real GDP projected to return to trend of 3½ percent into the medium term.
  - Inflation projected to converge toward center of CB target range.
  - Current account deficit around 2½ percent of GDP until 2019, largely financed by FDI.
  - Fiscal stance: broadly neutral in 2014; modest fiscal expansion through 2015 election cycle; measured consolidation thereafter.
  - By 2019: central government deficit projected to stabilize at 2 percent of GDP.
  - Gross financing needs: hovering around 3–3½ percent of GDP next five years.
  - Public debt: projected to rise slowly to around 27 percent of GDP by 2019.

- Projection table (annual percent change or percent of GDP as presented):
  - Real GDP (2010–2019): 2.9, 4.2, 3.0, 3.7, 3.4, 3.7, 3.6, 3.5, 3.5, 3.5.
  - Consumer prices (end of period, 2010–2019): 5.4, 6.2, 3.4, 4.4, 4.0, 4.3, 4.2, 4.1, 4.1, 4.0.
  - Central government balance (2010–2019, percent of GDP): -3.3, -2.8, -2.4, -2.1, -2.1, -2.2, -2.1, -2.1, -2.0, -2.0.
  - Public sector debt (2010–2019, percent of GDP): 24.4, 23.9, 24.6, 24.8, 25.2, 25.6, 26.0, 26.3, 26.6, 26.9.
  - Current account balance (2010–2019, percent of GDP): -1.4, -3.4, -2.6, -2.7, -2.3, -2.5, -2.5, -2.5, -2.5, -2.5.
  - Reserve adequacy (stock in percent of composite metric, 2010–2019): 150.3, 139.0, 139.6, 137.1, 126.5, 120.4, 114.4, 108.4, 103.0, 96.8.
  - Output gap (2010–2019, percent of potential output): -0.9, 0.0, -0.3, 0.0, -0.1, 0.1, 0.1, 0.0, 0.0, 0.0.
  - Fiscal impulse (2010–2019): -0.2, -0.8, 0.1, -0.3, 0.0, 0.2, -0.1, 0.0, -0.1, 0.0.

- Additional projections (selected from tables):
  - Real GDP (2009–2015 series): 0.5, 2.9, 4.2, 3.0, 3.7, 3.4, 3.7.
  - Net international reserves (US$ millions, 2009–2015): 4,797; 5,442; 5,737; 6,197; 6,433; 6,427; 6,427.
  - Exports f.o.b. (US$ millions, 2009–2015): 7,295; 8,536; 10,519; 10,103; 10,190; 11,150; 11,761.

### Risks and Risk Management
- Overall risk tilt: downside, from global uncertainties and domestic policy constraints.
- Specific risk scenarios and policy pointers:
  - Surges in global financial volatility could cause XR pressures, higher inflation, capital outflows, and higher government financing costs.
    - Policy suggestion: CB should be ready to increase policy rate and step up liquidity absorption if inflationary pressures emerge; fiscal consolidation to reduce external financing needs; enhance XR flexibility.
  - Protracted slower growth in advanced and emerging economies could trigger significant slowdown domestically.
  - Growth slowdown in China could cause sharp slowdown and large financial and fiscal losses (medium-term).
  - Heightened geopolitical risks could disrupt global markets with negative spillovers.
  - Weaker public revenues from tax reform reversal/implementation failures.
- Reserve trajectory and policy stance:
  - Staff projects little further reserve accumulation consistent with authorities' intention to emphasize greater exchange rate flexibility.
  - Reserve ratios expected to fall over time, approaching minimum levels considered appropriate relative to imports; move toward flexibility appropriate but vigilance on reserve adequacy required.

### Key Policy Recommendations
- Fiscal:
  - Boost public revenue to enable higher-quality public spending and preserve macroeconomic stability.
  - Strengthen expenditure management and improve implementation/governance of tax administration to realize revenue gains from the 2012 tax reform.
  - Continue measured fiscal consolidation to reduce external financing needs and preserve policy space.
  - Reduce tax expenditures (equivalent to about 8 percent of GDP).
  - Realign VAT rates from 12 to 14 percent.
  - Lower revenue earmarking (about 50 percent).
  - Staff advised a permanent improvement in the primary balance of about ½ percent of GDP to stabilize debt-to-GDP.
- Monetary and FX:
  - Refrain from additional cuts to the policy rate; CB should stand ready to increase the policy rate promptly if inflationary pressures emerge.
  - Enhance exchange rate flexibility while monitoring reserve adequacy.
  - Continue gradual de-dollarization measures and allow XR to fluctuate so agents internalize FX risks.
- Financial stability and supervision:
  - Upgrade regulatory and supervisory frameworks; phased move to Basel III standards recommended.
  - Strengthen consolidated supervision and definitions of related parties and economic groups.
  - Fill data gaps and adopt robust methodologies for financial stability analysis.
  - Strengthen AML/CFT framework; step up ring-fencing of on-shore banks relative to off-shore operations.
  - Monitor rapid credit growth, especially FX-denominated lending; consider macro-prudential measures (higher reserve requirements for dollar deposits; higher capital requirements for FX loans to non-exporters; prohibition of FX mortgage and consumer credit if needed).
  - Extend loan register to non-bank lenders.
- Structural and social:
  - Increase investment in physical and human capital.
  - Address crime, insecurity, corruption, and infrastructure bottlenecks to improve competitiveness and inclusive growth.
  - Better target social spending, strengthen infrastructure links, accelerate hydroelectric and mining projects with safeguards, and catalyze PPPs while strengthening controls and Ministry of Finance powers to manage contingent fiscal risks.
  - Deepen regional and global integration: complete customs union, harmonize regulations, integrate services and factor markets; potential real GDP gains of up to 0.8–1.6 percentage points per year with far-reaching integration and sophistication of exports.

### Financial Regulation, Supervision, and FSAP Update (findings and recommendations)
- Findings:
  - Reforms since 2006 FSAP undertaken, but urgent efforts still needed (2014 FSAP update).
  - Risks of overestimating capital due to flaws in consolidated supervision, lack of definition of economic group, insufficient supervision of entities posing conglomerate risks, lax related-party definitions, and off-shore bank systemic risks.
  - Banking sector shows comfortable core tier 1 capital, high profitability, excess liquidity.
- Recommendations:
  - Require higher capital and liquidity buffers; phased move to Basel III standards.
  - Strengthen consolidated supervision and supervision of entities posing material risks to conglomerates.
  - Tighten definitions of related parties; fill data gaps.
  - Strengthen AML/CFT framework; step up ring-fencing of on-shore banks vis-à-vis off-shore bank operations.
  - Consider macro-prudential measures if credit quality worsens.

### Data, Technical Assistance, and IMF–World Bank Collaboration
- Data and statistics:
  - Data provision broadly adequate for surveillance though gaps exist (social security, local governments, NFPEs not reported for consolidated statements).
  - Quarterly national accounts consistent with SNA 1993 (base year 2001).
  - Quarterly BOP published according to BPM5; IIP quarterly since 2012.
  - Several categories not meeting SDDS periodicity/timeliness.
- Fund relations and technical assistance:
  - Membership: Joined December 28, 1945; Article VIII.
  - Quota: 210.20 (100.00 percent).
  - Latest Stand-By approved 04/22/09, expired 10/21/10 (SDR 630.60 approved, SDR 0.00 drawn).
  - FSAP Update underway for 2014.
  - Technical assistance and TA missions across FAD, MCM, STA, CAPTAC detailed in staff report.
- IMF–World Bank division of labor:
  - Fund: macro-fiscal policy advice, monetary framework, TA on fiscal/expenditure management.
  - Bank: Public Expenditure Review (2013), DPL Fiscal Space for Greater Opportunities (US$340 million, under review by Congress in 2014), work on social spending and municipal expenditures.
  - Joint FSAP scheduled for spring 2014.

### Authorities’ Views (summary)
- Growth and inflation:
  - Real GDP expanded 3.7 percent in 2013; IMAE 12-month trailing average around 4.0 percent.
  - By August 2014, y-o-y inflation 3.7 percent; core inflation close to 2.0 percent.
- Fiscal:
  - Fiscal deficit in 2013 narrowed to 2.1 percent of GDP; public debt stable around 25 percent of GDP.
  - 2012 tax reform broadened tax base but yielded well below original plans; authorities committed to enhancing tax collections via Superintendency of Tax Administration.
- Monetary and FX:
  - Inflation-targeting regime since 2005; medium-term inflation target 4 percent (+/- 1 percentage point).
  - Authorities defend policy rate cut in November 2013 given low inflationary pressures.
  - Net international reserves reported by authorities as US$7.3 billion at end-2013, covering roughly 4.5 months of imports (authorities’ view).
  - Exchange rate flexible; CB intervenes under explicit rule; fluctuation margin increased from 0.65 to 0.7 percent of five-day moving average.
- Financial sector:
  - Banking system generally sound, profitable, liquid, well-capitalized.
  - Credit to private sector moderated to 9 percent at end-August (authorities’ figure).
  - Reforms since 2006 FSAP: amendments to Law of Banks and Financial Groups and CB Organic Law (April 2013), joining GAFISUD, ongoing supervisory improvements.
- Authorities broadly willing to consider IMF/FSAP recommendations as appropriate.

*International Monetary Fund staff summary based on "Guatemala: External Stability Assessment" (content unit).*

### 1. Guatemala: External Stability Assessment  _______________________________________________________6

### 1. Guatemala: External Stability Assessment

### Overview
- The Guatemalan economy continues its solid expansion, with the output gap closed and growth having eased back to potential.
- Macroeconomic policies have been prudent, contributing to relatively low inflation.
- The financial system appears robust and the current account deficit is stable and fully financed by FDI.
- Main challenge: unleash higher and more inclusive long-term growth while enhancing resilience to shocks and preserving macroeconomic stability.
  - Constraints on potential growth: weak investment in physical and human capital, elevated crime and insecurity, widespread poverty.
  - Policy needs: increase high-quality public spending to support equitable growth, boost public revenue, strengthen expenditure management to safeguard macro stability.
  - Limited policy space: fiscal space constrained by very low tax burden; monetary space limited by downwards-sticky inflation expectations and dollarization.
  - Financial stability concerns: upgrade regulatory and supervisory frameworks; monitor rapid growth of credit, particularly in foreign currency.

*Recent headline numeric indicators from the Overview*
- Potential growth estimates: Average potential GDP growth rate (1991-2013) 3.54 (table row label preserved).
- Inflation target range: 4±1 percent.
- Net international reserves (NIR) at end-2013: US$6.4 billion.
- Import cover at end-2013: 3.9 months.
- Current account deficit (2013): 2¾ percent of GDP.

### Recent Economic Developments
- Growth:
  - Real GDP surged by 4¼ percent in 2011.
  - Economic expansion decelerated to 3 percent in 2012.
  - Recovered to 3¾ percent in 2013 (around estimated potential).
- Inflation:
  - 2011: 6¼ percent (previous year reference).
  - 2012: 3½ percent.
  - 2013: closed the year at 4.4 percent (within CB target).
  - By June 2014: y-o-y inflation reduced to 3 percent.
- External sector:
  - Current account deficit (2013) unchanged at 2¾ percent of GDP.
  - NIR at end-2013: US$6.4 billion; import cover: 3.9 months.
  - Net IIP position (2013): negative 20 percent of GDP.
  - FDI share of total liabilities: about 40 percent.
  - Stock of net international reserves: 4.1 months of imports at end-2013 (Box 1 textual element).
- Competitiveness:
  - CPI-based REER appreciated about 30 percent since 2003.
  - Current account deficit improved from 4¾ percent of GDP in 2003 to 2½ percent of GDP in 2013.
  - IMF EBA: sustainable cyclically-adjusted current account deficit of 4 percent of GDP vs actual cyclically-adjusted deficit of 1¾ percent of GDP (EBA result statement).
  - CGER: moderate overvaluation of 7 percent (external sustainability) or moderate undervaluation of 2 percent (macroeconomic balance).
  - WHD staff model suggests slight undervaluation of about 3¾ percent.
  - Simple average across reliable methodologies implies slight undervaluation of 2¾ percent.
  - Survey-based competitiveness: deterioration to the 86th position out of 148 countries in 2013-2014 from the 83rd in 2012-2013.
  - Ease of Doing Business Index: improved to the 79th position out of 189 countries in 2013 from the 93rd in the previous year.
- Fiscal:
  - 2012 tax reform aimed to raise revenues by 1–1½ percent of GDP over 2013–2014.
  - Actual yield from reform so far: around ¼ percent of GDP in extra collections.
  - Fiscal outcomes in 2013: overall deficit slightly above 2 percent of GDP, below budget target of 2½ percent of GDP.
  - Public debt nearly constant and low as share of GDP but high relative to fiscal revenue versus regional peers.
- Monetary and financial:
  - Policy rate changes: +25 bps to 5.25 percent in April 2013; reduced by 50 bps to 4.5 percent by first half of 2014.
  - Exchange rate intervention: minimal net cumulative FX purchases under rules-based framework; XR fluctuation margin for intervention increased from 0.65 to 0.7 percent of the five-day moving average of the XR in early 2014.
  - Credit growth: private sector credit ~16 percent in 2013; decelerated to 12 percent since end-2013.
    - FX loans growth: 18 percent in 2013.
    - Domestic currency loans growth: 9 percent in 2013.
  - Financial Soundness Indicators (selected):
    - Regulatory Capital to Risk-Weighted Assets Ratio (Guatemala): 14.7 (table value).
    - Nonperforming Loans to Total Loans Ratio (Guatemala): 1.3 (table value).
    - Return on Assets (Guatemala): 1.6 (table value).
  - Guatemala joined GAFISUD (Latin American regional arm of FATF).
- Social:
  - MDG progress recorded for 12 out of 16 MDGs.
  - One third of population below minimum dietary energy consumption.
  - Chronic malnutrition in children under 5: about 50 percent.
  - High informality and serious security concerns.

### Macroeconomic Outlook and Risks
- Baseline projections (authorities’ view agreed):
  - Real GDP: projected to return to trend of 3½ percent into the medium term.
  - Inflation: converge toward center of CB target range.
  - Current account deficit: around 2½ percent of GDP until 2019, largely financed by FDI.
  - Fiscal stance: broadly neutral in 2014; modest fiscal expansion through 2015 election cycle; measured consolidation thereafter.
  - By 2019: central government deficit projected to stabilize at 2 percent of GDP.
  - Gross financing needs: hovering around 3–3½ percent of GDP in the next five years.
  - Public debt: projected to rise slowly to around 27 percent of GDP by 2019.
- Projections table (selected series, preserved values):
  - Real GDP (2010–2019): 2.9, 4.2, 3.0, 3.7, 3.4, 3.7, 3.6, 3.5, 3.5, 3.5 (annual percent change).
  - Consumer prices (end of period, 2010–2019): 5.4, 6.2, 3.4, 4.4, 4.0, 4.3, 4.2, 4.1, 4.1, 4.0 (annual percent).
  - Central government balance (2010–2019, percent of GDP): -3.3, -2.8, -2.4, -2.1, -2.1, -2.2, -2.1, -2.1, -2.0, -2.0.
  - Public sector debt (2010–2019, percent of GDP): 24.4, 23.9, 24.6, 24.8, 25.2, 25.6, 26.0, 26.3, 26.6, 26.9.
  - Current account balance (2010–2019, percent of GDP): -1.4, -3.4, -2.6, -2.7, -2.3, -2.5, -2.5, -2.5, -2.5, -2.5.
  - Reserve adequacy (stock in percent of composite metric, 2010–2019): 150.3, 139.0, 139.6, 137.1, 126.5, 120.4, 114.4, 108.4, 103.0, 96.8.
  - Output gap (2010–2019, percent of potential output): -0.9, 0.0, -0.3, 0.0, -0.1, 0.1, 0.1, 0.0, 0.0, 0.0.
  - Fiscal impulse (2010–2019): -0.2, -0.8, 0.1, -0.3, 0.0, 0.2, -0.1, 0.0, -0.1, 0.0.
- Risks:
  - Downside near-term risks from global uncertainties and domestic policy constraints.
  - Specific risk scenarios described in the Risk Assessment Matrix (selected textual summaries and associated policy pointers):
    - Surges in global financial market volatility (geopolitical tensions or revised UMP exit expectations) could cause XR pressures, higher inflation, capital outflows, and higher government financing costs.
      - Policy suggestion: central bank should be ready to increase policy rate and step up liquidity absorption if inflationary pressures emerge; fiscal consolidation should continue to reduce external financing needs; enhance XR flexibility.
    - Protracted period of slower growth in advanced and emerging economies could lead to significant slowdown in 2014 and beyond.
    - Growth slowdown in China could result in a sharp growth slowdown and large financial and fiscal losses (medium-term).
    - Heightened geopolitical risks (e.g., Russia/Ukraine or Middle East) could disrupt global financial, trade, and commodity markets with negative spillovers.
    - Weaker public revenues driven by tax reform reversal and/or implementation failures.
- Reserve trajectory and policy stance:
  - Staff projects little further reserve accumulation consistent with authorities' intention to emphasize greater exchange rate flexibility.
  - As a result, reserve ratios expected to fall over time, approaching minimum levels considered appropriate relative to imports; move toward flexibility is appropriate but authorities should remain vigilant to ensure continued reserve adequacy.

### Key Policy Recommendations (extracted from analysis)
- Fiscal:
  - Boost public revenue to enable higher-quality public spending and preserve macroeconomic stability.
  - Strengthen expenditure management and improve implementation/governance of tax administration to realize revenue gains from the 2012 tax reform.
  - Continue measured fiscal consolidation to reduce external financing needs and preserve policy space.
- Monetary and FX:
  - Central bank to be ready to raise policy rate and absorb liquidity promptly if inflationary pressures emerge.
  - Enhance exchange rate flexibility while monitoring reserve adequacy.
- Financial stability:
  - Upgrade regulatory and supervisory frameworks.
  - Monitor rapid credit growth, especially FX-denominated lending, to guard against currency mismatches and credit risk among non-exporters.
- Structural:
  - Increase investment in physical and human capital.
  - Address crime, insecurity, corruption, and infrastructure bottlenecks to improve competitiveness and inclusive growth.

*Italic: International Monetary Fund staff summary based on "Guatemala: External Stability Assessment" (content unit).*

### introduction of tax incentives

### introduction of tax incentives

### Overview and context
- Near-term goal: preserve macroeconomic stability and enhance resilience to shocks while supporting higher long-term inclusive growth.
- With the output gap closed, the authorities’ policy mix is judged generally appropriate for output stabilization, but monetary policy—now mildly stimulatory—must remain vigilant for inflationary and exchange rate pressures.
- Priority structural challenges: insufficient revenue effort, inadequate expenditure management, need to upgrade monetary and exchange rate (XR) framework, and strengthen the financial system while enabling its orderly deepening.
- Long-term requirements: boost investment in physical and human capital, institutional reform, and improvements to the security situation.

### Risk Assessment (RAM) — external and domestic risks
- The Risk Assessment Matrix (RAM) highlights events that could materially alter the baseline; staff subjective likelihoods: “low” (<10 percent), “medium” (10–30 percent), “high” (≥30 percent).
- External conditions
  - Risks related to U.S. monetary policy normalization are assessed as balanced.
  - If U.S. growth accelerates faster than expected, positive spillovers (U.S. is the destination of 40 percent of Guatemalan exports and primary source of remittances) could spur Guatemalan growth and offset tighter global financial conditions in the short run, if exit is orderly (AN III).
  - Extreme volatility could inflict serious damage; faster U.S. growth could push up interest rates in Guatemala more than anticipated, dampening investment and growth.
  - Deeper slowdowns in emerging markets, adverse developments in Europe, and commodity market disruptions due to geopolitical tensions could hamper growth.
  - Guatemala’s strong regional linkages may amplify global effects (AN II).
- Domestic risks
  - Continued lags in implementing the 2012 tax reform and the political impasse on the 2014 budget may endanger government programs.
  - If lower revenues are not met with spending cuts, the fiscal trajectory could be derailed, aggravating debt dynamics and lowering resilience to shocks.
- Longer-term domestic risks: insufficient revenue mobilization deterring investment in physical and human capital; deterioration of security situation could drag on expansion.

### Near-term policy mix — fiscal and monetary stance
- Fiscal
  - 2014: Congress unable to pass a new budget; nominal expenditure and financing ceilings of the 2013 budget carried over; Congress increased the 2013 spending limit by ¼ percent of GDP for health and education.
  - Headline consolidated government (CG) deficit expected to hold steady at just above 2 percent of GDP in 2014.
  - Estimates assume modest improvement in revenue collections, execution of 2014 budget based on a “continuing resolution” of the 2013 budget, and parliamentary approval of planned IFI disbursements.
  - Financing: in contrast to 2013 when external bonds worth US$700 were sold, in 2014 all bonds have been issued domestically filling the total bond ceiling prescribed by the 2013 budget. A financing gap of around 1 percent of GDP remains to be covered by IFI loans or domestic bonds, both requiring congressional approval.
  - The authorities state any revenue and financing shortfalls will be offset by spending cuts; staff recommends refraining from across-the-board cuts and safeguarding priority social programs and investment.
  - Staff recommended finalizing a reliable estimate of outstanding domestic spending arrears (estimated stock is Q3.5 billion (¾ percent of GDP), though not certified by the Office of the Comptroller) and establishing a strategy for their clearance.
  - 2015 budget: officials envision a fiscal deficit of about 2½ percent of GDP, though staff believes it will end up somewhat lower (below 2¼ percent of GDP); staff argued the budget should include overdue and current refund to the CB to cover its operational losses.
- Monetary
  - Monetary policy viewed as slightly accommodative/mildly expansionary after cumulative 75 basis points cuts since Q3 2013.
  - Headline inflation at bottom of target range; core inflation persistently low and declining; inflation expectations have declined close to mid-point of target range.
  - Bank credit continues to expand quickly; domestic demand boosted by strong remittance flows.
  - Staff recommendations:
    - Refrain from additional cuts to the policy rate.
    - Central Bank (CB) should stand ready to increase the policy rate promptly to anchor expectations if signs of an inflation upswing emerge.
    - Authorities affirmed readiness to tighten monetary policy if needed; they also noted risks inflation could be lower than projected through 2015, possibly allowing further rate cuts.

### Increasing resilience to shocks — fiscal sustainability and structural reforms
- Fiscal sustainability
  - Staff projections show government debt as a share of GDP increasing into the medium term, though slowly, even at current low interest rates.
  - Stabilizing the debt-to-GDP ratio at its current level would require a permanent improvement in the primary balance of about ½ percent of GDP (AN IV).
  - If the actuarial deficit of the social security system were included, the sustainability gap would be larger.
  - With no pressing cyclical need for cooling measures and estimated fiscal multipliers of about 0.4 on average, staff advised a moderately paced adjustment beginning in 2015–16 with modest frontloading and spaced over several years.
- Revenue mobilization and expenditure efficiency
  - Authorities favor additional efforts to mobilize revenue beyond budget consolidation.
  - Staff counseled:
    - Reduce tax expenditures (equivalent to about 8 percent of GDP).
    - Realign VAT rates from 12 to 14 percent.
    - Lower the currently high degree of revenue earmarking (about 50 percent).
  - Staff cautioned that tax exemptions and special treatments in the draft competitiveness law could threaten fiscal revenue; weaknesses in tax administration accentuate this concern.
  - Support for strengthening budgetary management and improving public expenditure efficiency:
    - Recently approved amendments to the Organic Budget Law could enhance transparency and efficiency and help reallocate resources to high priority areas.
    - Need to streamline approval of official financing to prevent under-execution of IFI-supported spending; staff recommended Congress approve all government financing—including external loans—as part of any overall budget package.

### Strengthening the financial system and monetary policy transmission
- Monetary transmission weaknesses
  - Transmission channels remain feeble; pass-through from commodity prices influences inflation heavily.
  - Staff’s four-pronged approach to enhance transmission:
    1. Continue raising XR flexibility gradually and credibly convey that inflation targeting is the monetary authority’s primary objective; consolidate CB operational independence from government and private sector interests.
    2. Step up de-dollarization of credit by allowing XR to fluctuate so agents internalize FX risks and promote hedging; adopt additional prudential measures for dollar credit (¶26).
    3. Develop public debt and private securities markets; finalize the draft capital markets law in compliance with IOSCO best practices and enact it.
    4. Refine the framework for monetary operations, including with Fund technical assistance.
  - Authorities emphasized rule-based FX intervention allows significant XR flexibility over time and CB intervention has been minimal; staff noted the regime introduced in 2005 has not been seriously tested and depreciation pressures could cause serious reserve loss.
- Macroprudential and supervisory measures
  - Officials acknowledged the need for vigilance over private credit growth, especially the slant toward foreign currency lending.
  - Staff advised considering macro-prudential measures, notably:
    - Higher reserve requirements for dollar-denominated deposits.
    - Higher capital requirements for FX loans to non-exporters.
    - Prohibition of FX mortgage and consumer credit, particularly if loan portfolio deterioration emerges.
  - Recommendation to extend the loan register system to non-bank lenders to improve monitoring of household leverage.

### Key quantitative figures and indicators (preserved exactly as in source)
- U.S. is the destination of 40 percent of Guatemalan exports.
- Congress increased the 2013 spending limit by ¼ percent of GDP for health and education.
- Headline CG deficit expected to hold steady at just above 2 percent of GDP in 2014.
- Financing gap of around 1 percent of GDP to be covered by IFI loans or domestic bonds.
- In 2013 external bonds worth US$700 were sold.
- All bonds in 2014 have been issued domestically with 24 percent being denominated in U.S. dollars.
- Estimated stock of outstanding domestic spending arrears: Q3.5 billion (¾ percent of GDP) — not certified by the Office of the Comptroller.
- Staff advised a permanent improvement in the primary balance of about ½ percent of GDP to stabilize debt-to-GDP.
- Tax expenditures equivalent to about 8 percent of GDP.
- Realign VAT rates from 12 to 14 percent.
- Degree of revenue earmarking is about 50 percent.
- Estimated fiscal deficit envisioned for 2015: about 2½ percent of GDP; staff believes it will end up somewhat lower (below 2¼ percent of GDP).
- Cumulative 75 basis points cuts since the third quarter of 2013.
- Estimated fiscal multipliers of about 0.4 on average.

*Source: _cr14287 - introduction of tax incentives*

### 27.      There was agreement that efforts to buttress regulation and supervision of the

### 27.      There was agreement that efforts to buttress regulation and supervision of the financial system should progress further

### Financial regulation and supervision: findings and recommendations
- Findings:
  - Significant reforms have been undertaken in response to the previous FSAP in 2006, but urgent efforts are still needed (2014 FSAP update).
  - Danger of overestimating capital levels exists and can be exacerbated by:
    - Flaws in consolidated supervision, including lack of a definition of economic group for supervisory purposes.
    - Insufficient supervision of financial entities that pose material risks to the conglomerate.
    - Lax definitions of related parties and controlling interests.
  - Special nature of off-shore banks (operating in Guatemala but incorporated in other countries) still poses systemic risks.
  - Banking sector shows comfortable core tier 1 capital levels, high profitability, and excess systemic and individual liquidity levels.
- Recommendations:
  - Require higher capital and liquidity buffers to raise resilience to adverse shocks, with a phased move to Basel III standards appearing appropriate.
  - Fill data gaps and adopt robust methodologies for financial stability analysis as a policy priority.
  - Further strengthen the anti-money laundering (AML) framework to assist authorities in addressing financial crimes and corruption.
  - Step up ring-fencing of on-shore banks with respect to the operations of off-shore banks.
  - Strengthen consolidated supervision and supervision of financial entities that pose material risks to conglomerates; tighten definitions of related parties.
  - If signs of worsening credit quality materialize, consider macro-prudential measures, notably higher capital requirements for FX loans to non-exporters.

### Financial interconnectedness and regional integration
- Findings:
  - Financial systems in CAPDR are becoming increasingly integrated; incentives include growing economic ties, economies of scale, and regulatory arbitrage.
  - Guatemalan banks are expanding operations in the region; foreign investors, particularly from Colombia, have taken larger stakes in Guatemalan banks.
  - Ongoing financial integration brings benefits but increases contagion concerns in case of a banking crisis and poses challenges for consolidated and transnational supervision of financial conglomerates.
- Recommendations:
  - Implement regulation and supervision arrangements that minimize regulatory gaps, arbitrage, and cross-border contagion.

### Poverty reduction, social spending, and long-term inclusive growth
- Findings:
  - Enhanced social spending could stimulate potential growth by improving social indicators and human capital, which impinge directly on productivity and competitiveness.
  - Poverty remains widespread and security concerns are very serious despite progress toward Millennium Development Goals targets.
  - Measures to spur growth include:
    - Better targeting of social spending, particularly with better monitoring of transfers to NGOs.
    - Strengthening infrastructure links to foster regional trade.
    - Accelerating implementation of hydroelectric and mining projects (subject to alleviation of possible adverse impacts on rural and indigenous populations).
  - Social initiatives such as the Zero Hunger Plan have proven effective and provide a benchmark.
  - Structural reforms to improve the business climate and reduce violence can foster productivity; legislative initiatives to improve labor force flexibility and diminish informality remain stalled in Congress.
  - Use of Public-Private Partnerships (PPP) should be catalyzed for high-quality investment and infrastructure, but controls must be strengthened to limit fiscal risks, especially by granting the Ministry of Finance more powers to monitor and manage contingent fiscal risks.
- Recommendations:
  - Increase social spending targeted at health, education, security, and infrastructure to enhance growth potential.
  - Reduce anti-competitive practices and limit the influence of vested interests.
  - Strengthen controls around PPPs and empower the Ministry of Finance to manage contingent fiscal risks.

### Regional integration and potential growth gains
- Findings:
  - Continued progress on regional and international integration can spur growth.
  - Completing the customs union, harmonizing regulations and trade rules, and integrating services and factor markets were emphasized.
  - Guatemala’s real GDP growth may increase by up to 0.8–1.6 percentage points per year by improving logistics, increasing partner diversification, deepening integration into global production chains, and raising technological sophistication of exports to the levels of the five largest Latin American countries and the EU.
  - Market enlargement (from 14 to over 40 million people) and pooling resources for infrastructure and trade could augment competitiveness.
- Recommendations:
  - Complete the customs union and harmonize regulations, deepen integration into global production chains, and raise technological sophistication of exports.

### Macroeconomic assessment and policy guidance (staff appraisal synthesis)
- Findings:
  - The Guatemalan economy is broadly sound and the macro outlook largely positive: activity rebounded after the 2008–09 global financial crisis; growth has eased back to potential; the output gap is closed; inflation is contained.
  - The financial system appears robust; the current account deficit is stable, supported by a steady trade balance and remittance flows, and largely financed by FDI.
  - Risks are tilted to the downside due to global uncertainties and domestic policy constraints.
- Short-term policy recommendations:
  - Fiscal: Consolidation of the 2012 tax reform and adoption of a budget for 2015 are critical. Strengthen taxpayer compliance, particularly in customs; timely approval of multilateral loans and Congressional passage of the 2015 budget to facilitate targeting of outlays.
  - Monetary: Monetary policy is mildly expansionary after recent policy rate cuts; there is no room for additional cuts. Authorities should stand ready to increase the rate promptly if signs of an inflation upswing emerge.
- Medium-term fiscal sustainability:
  - Public debt is low as a percentage of GDP but fairly high as a share of revenue and has been steadily increasing since the crisis.
  - Recommendation: Stabilize the debt-to-GDP ratio, which would require a permanent improvement in the primary balance of about ½ percent of GDP. A moderately paced and modestly frontloaded adjustment beginning in 2015 is recommended.
  - Revenue mobilization: Improve tax and customs administration, reduce tax expenditures, align VAT rates with regional levels, and revise the draft competitiveness law to avoid significant revenue losses from tax exemptions.
  - Public expenditure management: Reinforce budgetary management, improve efficiency and flexibility of public expenditure, reduce revenue earmarking, and streamline approval of official external financing.
- Monetary policy transmission and market development:
  - Reinforce inflation as the primary objective of monetary policy, including through a gradual enhancement of XR flexibility to help de-dollarize the economy.
  - Develop domestic securities markets by finalizing and enacting the draft capital markets law in compliance with IOSCO best practices to facilitate refinement of monetary operations.
- Financial sector vigilance:
  - Continue efforts to bolster regulation and supervision while monitoring strong credit growth. Private credit continues to expand quickly, with a recent moderation and a slant of new loans toward foreign currency and consumer financing. Close watch for signs of worsening credit quality is necessary.

*IMF staff appraisal as presented in the source content.*

### 40.      It is recommended that the next Article IV consultation be held on the standard

### _cr14287 - 40.      It is recommended that the next Article IV consultation be held on the standard

### Real Sector: Recent Developments and Drivers
- 2013 growth improved relative to peers; "Growth has slightly exceeded potential and the output gap is essentially closed."
- Real GDP growth (selected years as reported):  
  - 2009: 0.5  
  - 2010: 2.9  
  - 2011: 4.2  
  - 2012: 3.0  
  - 2013: 3.7  
  - 2014 (Est.): 3.4  
  - 2015 (Proj.): 3.7
- Growth composition: "Growth has been largely driven by healthy private consumption" and "has mostly reflected labor factor accumulation with little contribution from productivity growth."
- Contribution components (qualitative): consumption positive; investment and net exports variable; labor and capital accumulation stronger contributions than total factor productivity (TFP).
- High-frequency indicators: "growth has stabilized in early 2014."
- Inflation developments:  
  - Consumer prices (end of period):  
    - 2011: -0.3  
    - 2012: 5.4  
    - 2013: 6.2  
    - 2014 (Est.): 3.4  
    - 2015 (Proj.): 4.4  
  - Note: "The hike in inflation in early 2013 was driven by fast rising food prices but inflation has decreased markedly in 2014."  
  - Core inflation computed as headline excluding food (chart reference).

### External Sector: Exchange Rate, Trade, and Reserves
- Real effective exchange rate: "substantial real effective exchange rate appreciation over the past decade."
- Market share: "loss of the market share, commensurate with that in other emerging markets, excluding China and the Asian Tigers."
- Current account and financing: "the current account deficit has declined over the past decade and widened only modestly in 2013 remaining comfortably financed by FDI and public sector borrowing."
- Net international reserves (NIR) (stock in months of next-year NFGS imports):  
  - Reported NIR (months): 3.8 (2009), 3.7 (2010), 3.8 (2011), 3.9 (2012), 3.9 (2013), 3.6 (2014 est.), 3.4 (2015 proj.)
- Remittances: "comprising 10 percent of GDP" and an important channel linking Guatemala to U.S. growth.
- FX regime: "In fact, the FX regime introduced in 2005 has not been seriously tested so far."
- Reference exchange rate as of July 24, 2014: Q7.80 per U.S. dollar.

### Fiscal Sector: Revenues, Expenditures, and Debt Dynamics
- 2012 tax reform: "failed to generate substantial revenue gains."
- Fiscal balances and debt: "resulting in a slight improvement in the fiscal balance. Public debt is low when measured in relation to GDP... but not compared to government revenues."
- Central government fiscal aggregates (selected ratios and levels):  
  - Revenues (percent of GDP): 11.1 (2009), 11.2 (2010), 11.6 (2011), 11.6 (2012), 11.7 (2013), 11.2 (2014 est.), 11.2 (2015 proj.)  
  - Expenditures (percent of GDP): 14.2 (2009), 14.5 (2010), 14.4 (2011), 14.0 (2012), 13.8 (2013), 13.3 (2014 est.), 13.4 (2015 proj.)  
  - Primary balance (percent of GDP): -1.7 (2009), -1.8 (2010), -1.3 (2011), -0.9 (2012), -0.6 (2013), -0.5 (2014 est.), -0.7 (2015 proj.)  
  - Overall balance (percent of GDP): -3.1 (2009), -3.3 (2010), -2.8 (2011), -2.4 (2012), -2.1 (2013), -2.1 (2014 est.), -2.2 (2015 proj.)
- Central government debt (percent of GDP): 22.9 (2012), 24.1 (2013), 23.7 (2014 est.), 24.3 (2015 proj.), 24.6 (2016 proj.), 24.9 (2017 proj.), rising toward 26.1–26.8 by 2019 in projections.
- Medium-term requirement: "A moderate fiscal adjustment over the medium term is required to achieve sustainability."
- Public gross financing needs (baseline, percent of GDP): reported in DSA as in chart and tables (see projections).

### Financial Sector: Credit, Banks, and Resilience
- Credit growth: "Credit has grown rapidly, slanted toward foreign currency loans, though growth slowed by end-2013."
- Private sector credit (percent of GDP, selected): 2010: 11.3 (table headline M2/Credit stats); projections show credit to private sector rising to 14.0 (2015 proj.).
- Currency composition: notable share of foreign currency-denominated loans; foreign currency-denominated loans to total loans (Table 6): 31.0 (2009), 30.2 (2010), 34.0 (2011), 35.2 (2012), 36.7 (2013).
- Financial soundness indicators (2013):  
  - Regulatory capital to risk-weighted assets: 14.8 (on-shore banks)  
  - Nonperforming loans to total gross loans: 1.2 (on-shore banks)  
  - Provisions to non-performing loans: 157.6 (on-shore banks)  
- Monetary policy: "Despite some recent monetary policy easing, bank lending rates have risen very modestly."
- System resilience: "Banks meet minimum regulatory capital norms, non-performing loans are low.... and the financial system is generally robust to spillovers from asset quality shocks in advanced countries."

### Impact of U.S. Tapering and External Shocks
- Linkages to U.S.: Guatemala has substantial trade ties with the U.S.; exports growth is correlated with U.S. GDP growth (statistically significant but not very strong). Remittances strongly correlated with U.S. growth.
- Remittances: 10.5 percent of GDP in 2009; 10.0 (2010); 9.2 (2011); 9.8 (2012); 9.8 (2013); projected 9.5 (2014); 9.4 (2015 proj.)
- Market perception of risk: "relatively low" and mid-2013 risk premium increase "has been reversed."
- Empirical simulation (description): positive U.S. real GDP growth surprise of about 1 percent relative to baseline through 2015 triggers earlier Fed tightening; market interest rates rise due to an increase in risk premium equal to one standard deviation (for Guatemala = 100 basis points). Result: "The positive impact from faster U.S. growth is likely to outweigh tighter global financial conditions, resulting in small positive impact on Guatemala GDP in the short run."

### Social Development, Exports Structure, and Long-Term Growth
- Social and human development: mixed progress on MDG goals; poverty and inequality remain high. Selected social indicators:  
  - Population 2010 (millions): 15  
  - Gini index (2006): 54  
  - Percentage of indigenous population (2006): 38  
  - Population below the poverty line (Percent, 2006): 51  
  - Life expectancy at birth (2009): 71  
  - Adult illiteracy rate (2009): 26  
  - GDP per capita (US$, 2011): 3,234
- Exports composition and sophistication: "Guatemala exports remain relatively unsophisticated, with a small share of knowledge-intensive products, and little partner diversification."  
  - Knowledge-intensive products category defined to include transport, electrical equipment, machinery and chemicals (chart note).
  - Small shares of capital goods and intermediate goods exports; limited involvement in global production chains.

### Key Macroeconomic Projections and Balance of Payments (selected)
- Real GDP growth (annual percent change): 0.5 (2009), 2.9 (2010), 4.2 (2011), 3.0 (2012), 3.7 (2013), 3.4 (2014 est.), 3.7 (2015 proj.), then 3.6–3.5 through 2019 (Table 2).
- Current account balance (percent of GDP): 0.7 (2009), -1.4 (2010), -3.4 (2011), -2.6 (2012), -2.7 (2013), -2.3 (2014 est.), -2.5 (2015 proj.), and steady at -2.5 through 2019 in baseline projections.
- Trade balance (goods, percent of GDP): -8.9 (2009), -10.3 (2010), -10.4 (2011), -11.4 (2012), -11.5 (2013), -10.9 (2014 est.), -10.9 (2015 proj.).
- Gross domestic investment (percent of GDP): 13.1 (2009), 13.9 (2010), 15.2 (2011), 15.0 (2012), 14.2 (2013), 14.3 (2014 est.), 14.5 (2015 proj.)
- Net international reserves (stock, millions of US$): 4,797 (2009), 5,442 (2010), 5,737 (2011), 6,197 (2012), 6,433 (2013), 6,427 (2014 est.), 6,427 (2015 proj.) (Table 3/monetary table references).
- Exports, f.o.b. (millions US$): 7,295 (2009), 8,536 (2010), 10,519 (2011), 10,103 (2012), 10,190 (2013), 11,150 (2014 proj.), 11,761 (2015 proj.) (Table 3).

### Public Sector and Fiscal Tables: Levels and Projections (selected)
- Central Government totals (in millions of quetzales, Table 4A):  
  - Total revenues: 34,037 (2009), 37,425 (2010), 43,178 (2011), 45,874 (2012), 49,259 (2013), 51,517 (2014 proj.), 55,879 (2015 proj.)  
  - Total expenditures: 43,709 (2009), 48,385 (2010), 53,511 (2011), 55,320 (2012), 58,269 (2013), 61,045 (2014 proj.), 66,728 (2015 proj.)  
  - Central Government debt (memorandum): 70,579 (2009), 80,271 (2010), 87,852 (2011), 96,033 (2012), 104,083 (2013), 114,091 (2014 proj.), 126,213 (2015 proj.)
- Consolidated nonfinancial public sector overall balance (percent of GDP): -2.8 (2009), -2.8 (2010), -2.4 (2011), -2.0 (2012), -1.7 (2013), -1.7 (2014 est.), -1.8 (2015 proj.)
- Social spending (in millions of quetzales): 16,165 (2009), 18,857 (2010), 19,012 (2011), 19,012 (2012), 21,381 (2013), 22,915 (2014 proj.), 24,880 (2015 proj.)

### Debt Sustainability and Risk Scenarios
- Public DSA (baseline scenario, Table 7A): nominal gross public debt (percent of GDP): 21.9 (2012), 24.3 (2013), 24.6 (2014), 24.9 (2015), 25.3 (2016), 25.7 (2017), 26.1 (2018), 26.8 (2019).  
- Real GDP growth used in DSA baseline: 3.5 (2012), 3.0 (2013), 3.7 (2014), 3.4 (2015), 3.7 (2016), 3.6 (2017), 3.5 (2018), 3.5 (2019).  
- Inflation (GDP deflator) in DSA baseline: 5.8 (2012), 4.7 (2013), 3.3 (2014), 4.9 (2015), 4.7 (2016), 4.7 (2017), 4.6 (2018), 4.3 (2019).  
- Sovereign spreads: EMBI (bp) reported as 223 (table note); CDS (bp) N/A in table.
- Alternative scenarios analyzed: Historical, Constant Primary Balance, Contingent Liability Shock; scenario summaries and sensitivity (interest rate shock, growth shock, current account shock, real depreciation shock) are presented in charts and tables.

### External Debt Sustainability
- External debt (percent of GDP, Table 8): 28.0 (2009), 27.4 (2010), 27.5 (2011), 28.1 (2012), 29.5 (2013), 27.9 (2014 proj.), 26.2 (2015 proj.), 24.7 (2016 proj.), 23.4 (2017 proj.), 22.2 (2018 proj.), 21.0 (2019 proj.)
- Gross external financing need (billions US$): 3.4 (2009), 3.8 (2010), 5.3 (2011), 5.3 (2012), 5.9 (2013), 5.7 (2014 proj.), 6.0 (2015 proj.), 6.0 (2016 proj.), 5.9 (2017 proj.), 5.8 (2018 proj.), 5.7 (2019 proj.)
- Exports (percent of GDP): 24.9 (2009), 26.1 (2010), 26.8 (2011), 25.0 (2012), 23.7 (2013), 23.5 (2014 proj.), 23.1 (2015 proj.), 22.9 (2016 proj.), 22.8 (2017 proj.), 22.8 (2018 proj.), 22.7 (2019 proj.)

### Fund Relations, Technical Assistance, and Data/Statistics
- Membership: Joined December 28, 1945; Article VIII.
- Quota and Fund positions: Quota 210.20 (100.00 percent of quota); Fund holdings of currency 210.21 (100.00 percent).
- Outstanding Purchases and Loans: None.
- Latest financial arrangements: Stand-By approved 04/22/09, expired 10/21/10 (SDR 630.60 approved, SDR 0.00 drawn); earlier stand-bys in 2003 and 2002 listed.
- Safeguards Assessment (Bank of Guatemala): assessment completed September 2009; findings of strengthened safeguards in financial reporting transparency and management of foreign exchange reserves; recommendations to further strengthen governance and independence.
- FSAP: FSAP conducted in 2000; FSAP Update underway for 2014 with IMF and World Bank team visit during March 18–April 1, 2014.
- Technical Assistance (selected, 2010–2014): missions and assistance across FAD, MCM, STA, CAPTAC on treasury single account; revenue administration; customs; debt management strategy; monetary operations; risk-based bank supervision; producer price index; national accounts; balance of payments and IIP; and other statistical work (multiple missions and years specified).
- Resident Representative: Mr. Mario Garza, Regional Resident Representative for Costa Rica, Guatemala, and El Salvador, based in Guatemala.
- Article IV consultation: "The last Article IV consultation was concluded by the Executive Board on July 25, 2013."

*Prepared by IMF Western Hemisphere Department; Staff Report for the 2014 Article IV Consultation — informational annex (as of August 26, 2014).*

### 1.      The IMF’s Guatemala team led by Mr. Lorenzo Figliuoli (Mission Chief) has met on

### The IMF’s Guatemala team led by Mr. Lorenzo Figliuoli (Mission Chief) has met on various occasions with the World Bank’s Guatemala team led by Mr. Oscar Calvo-Gonzalez (Program Leader)

### Main macroeconomic challenges and near-term outlook
- Principal challenges:
  - Safeguard fiscal sustainability.
  - Increase the effectiveness of monetary policy.
  - Maintain financial sector stability.
- Near-term outlook:
  - Generally positive, but risks from global uncertainty and limited scope to adopt countercyclical policies if downside risks materialize.
- Headline indicators (additional information since staff report):
  - August inflation: 3.7 percent y-o-y.
  - Exchange rate: 7.7 Quetzales/USD.
  - Government emergency assistance for drought: 0.1 percent of GDP.
  - Drought-affected rural families: about ¼ million.

### Macroeconomic assessment and recent developments
- Growth and external sector:
  - Growth returned to potential at around 3.5 percent; output gap closed.
  - Current account deficit: virtually unchanged in 2013 at a relatively low level.
  - Financing: deficit financed by stable FDI and public sector borrowing; net international reserves at comfortable levels.
- Inflation and monetary policy:
  - Inflation within target range; policy rate cut 75 basis points since November 2013 to 4.5 percent.
  - Exchange rate stable with minimal central bank interventions; authorities raised fluctuation margin for interventions from 0.65 to 0.7 percent of the five-day moving average.
- Fiscal performance and tax reform:
  - 2012 tax reform aimed to raise revenues by 1-1½ percent of GDP.
  - Actual additional revenue from reform: 0.25 percent of GDP (staff estimate: around ¼ percent of GDP).
  - Fiscal deficit shrank in 2013, partly due to delays in IFI disbursements.
  - Stabilizing public sector debt at current levels will require a fiscal adjustment of about ¾-1 percent of GDP over the medium term.
- Financial sector:
  - Credit grew rapidly, skewed toward foreign currency lending, but growth tapered off end-2013 and remained lower.
  - Banks: more reliance on wholesale external funding but appear profitable, liquid, and well-capitalized.
  - Compliance and reform: Guatemala is in compliance with most of the Basel I framework and is well placed to apply key Basel III components; needs include full implementation of risk-based supervision and consolidated supervision.
  - Pending legislation: law for micro-finance institutions and the securities market law under consideration.

### Macro-critical structural reform areas identified
- Fiscal consolidation and revenue strengthening:
  - Fiscal position deteriorated in 2009-10 due to decline in public revenues and increase in current expenditures.
  - Significant fiscal adjustment occurred in 2011-12 but insufficient to stop rising public debt-to-GDP ratio.
  - 2012 tax reform yielded less additional revenue than anticipated due to implementation problems and legal challenges.
  - Beyond stabilizing debt, additional revenue-enhancing measures and improved efficiency and composition of public expenditure are critical to increase spending in social programs, infrastructure, and security.
- Monetary policy framework:
  - Strengthen monetary framework, including allowing greater exchange rate flexibility, to improve monetary policy effectiveness.
- Financial sector stability:
  - Complete implementation of risk-based and consolidated supervision.
  - Approval of micro-finance institution law and securities market law would strengthen resilience.

### Division of labor between IMF and World Bank
- Fiscal consolidation and revenue strengthening:
  - Fund: policy recommendations on macro-fiscal issues and technical assistance on budgetary management to strengthen expenditure controls and prevent new domestic payment arrears.
  - Bank: completed a Public Expenditure Review in 2013 and a municipal expenditures database; 2014 Board-approved Development Policy Loan for $340 million aiming to (i) strengthen tax administration and tax policy; (ii) enhance the quality of public expenditure; and (iii) improve coordination and management of social policy. The loan is under review by Congress and expected to be approved in 2014.
- Monetary policy framework:
  - Fund: policy recommendations and technical assistance to improve monetary framework, including exchange rate flexibility.
- Financial sector stability:
  - Bank and Fund: cooperate as necessary. A new FSAP scheduled for spring 2014 to be undertaken in collaboration.

### Information sharing requests and coordination timing
- Fund requests:
  - To be kept informed of progress in macro-critical structural reform areas. Timing: when milestones are reached (and at least semi-annually).
- Bank requests:
  - To be kept informed of the Fund’s assessments of macroeconomic policies and prospects, including updates of the Fund’s macroeconomic framework, and progress in macro-critical structural reform areas.

### Planned work programs (selected items and timing)
- World Bank work program:
  - DPL Fiscal Space for Greater Opportunities: September 2013 expected delivery December 2013.
  - Public Expenditure Review: August 2013 presentation in August 2013.
- IMF work program (including CAPTAC-DR) and technical assistance (2013-2014):
  - Staff visit: November 2013.
  - Technical assistance areas include: strengthening medium-term expenditure framework; enhancing public expenditure management and control of arrears; strengthening risk management and ex-post controls, particularly for tax and customs administration; regional customs harmonization; review of legal and regulatory PPP framework; development of liquidity risk management models and stress testing methodology; extending risk-based supervision to insurance sector; harmonization of regional financial statistics; strengthening balance of payments statistics; enhancing monetary operations; strengthening Central Bank macromodeling including for fiscal sustainability analysis.
- Joint Bank-Fund:
  - FSAP: March, 2013 (as listed in the joint program table).

### Financial relations with the World Bank (figures in million U.S. dollars)
- World Bank projects (Total loan / Undisbursed through FY13 / Projected disbursements in FY14):
  - Support for Rural Economic Development: 30.0 / 3.2 / 3.2
  - Land Administration: 62.3 / 28.7 / 18.0
  - Education Quality and Secondary Education: 80.0 / 13.5 / 10.5
  - GT Enhancing MSME Productivity Project: 32.0 / 30.5 / 6.0

### Relations with the Inter-American Development Bank (IADB) — selected data and priorities
- IADB country strategy approved December 2012 for 2012–2016 focused on rural living conditions and institutional reforms.
- As of July 2014:
  - IADB portfolio of approved sovereign-guaranteed loans under execution: US$530.1 million.
  - Undisbursed balance: US$323.8 million.
- Pipeline for 2014:
  - Two public sector projects totalling US$310 million: US$60 million (rural electrification) and US$250 million Policy-Based Loan for improving expenditure efficiency in health and education.
  - Private sector: US$150 million loan to increase SME financing approved in second semester 2013 and already disbursed.
- IADB Portfolio in Guatemala as of June 2013 (Approved / Undisbursed, in millions of U.S. dollars):
  - Water and sanitation: 99.8 / 66.0
  - Education: 150.0 / 109.8
  - Energy: 55.0 / 38.0
  - Social investment: 16.6 / 1.0
  - Environment and natural disasters: 74.4 / 44.8
  - Private firms and SME development: 29.0 / 28.8
  - Reform/Modernization of the state: 275.7 / 268.2
  - Health: 85.0 / 66.5
  - Trade: 20.0 / 13.7
  - Total: 805.5 / 636.8
- IADB Sovereign Guaranteed Loan Portfolio in Guatemala as of July 2014 (Current approved / Available, in millions of U.S. dollars):
  - Education: 150.0 / 95.6
  - Water and sanitation: 50.0 / 48.2
  - Health: 85.0 / 46.4
  - Competitiveness: 59.0 / 40.9
  - Modernization of the state: 41.7 / 31.2
  - Environment: 69.4 / 30.7
  - Energy: 55.0 / 20.7
  - Trade: 20.0 / 10.2
  - Total: 530.1 / 323.9

### Statistical issues and data adequacy (as of April–July 31, 2014)
- General: Data provision has some shortcomings but is broadly adequate for surveillance.
- National accounts:
  - Since 2010 quarterly national accounts published consistent with SNA 1993, base year 2001.
- Consumer prices and unemployment:
  - CPI re-based in 2011 to December, 2010; unemployment estimated only annually.
- Government finance statistics:
  - Revenue, expenditure, and financing statistics for social security agencies, local governments, and nonfinancial public enterprises are not reported, hindering consolidated nonfinancial public sector statements.
  - Coverage and periodicity of central government financing and debt data adequate.
- Monetary and financial statistics:
  - Quality, coverage, periodicity for Bank of Guatemala and commercial banks are sufficient.
  - Offshore sector and savings cooperatives data available quarterly with a lag of five weeks.
- External sector statistics:
  - Quarterly balance of payments published according to BPM5; international investment position publication increased from annual to quarterly in 2012.
  - Detail on private sector external debt by creditor and maturity not available.
- Data Standards and Quality:
  - Guatemala became a participant in the General Data Dissemination System in 2004.
  - Several data categories do not yet meet periodicity or timeliness requirements for the Special Data Dissemination Standard.
  - A data ROSC was completed on October 28, 2004.

### Past IMF staff recommendations (2013 Article IV) and implementation status
- Fiscal policy recommendations:
  - Fully implement the 2012 fiscal reform (designed to raise revenues by 1-1½ percent of GDP over 2013–2014).
  - Rebuild fiscal space and enhance fiscal sustainability.
  - Implementation notes:
    - 2012 reform faced obstacles including Constitutional Court claims and customs agency governance problems.
    - Staff estimates reform yielded around ¼ percent of GDP in extra collections to date.
    - Fiscal deficit declined in 2013, partly because of delays in IFI disbursements.
    - Achieving fiscal sustainability without cutting priority spending requires higher medium-term fiscal revenue.
- Monetary policy and financial sector recommendations:
  - Remain vigilant on inflationary pressures; stand ready to act on high credit growth, particularly in dollars.
  - Continue to modernize financial regulations, emphasizing risk-based and consolidated supervision.
  - Implementation notes:
    - Inflation remained within target and expectations fell; small reductions in the policy rate occurred.
    - Credit growth tapered off end-2013.
    - No new financial regulations enacted, but technical work on risk-based supervision continued.
- Exchange rate policy recommendation:
  - Enhance exchange rate flexibility to encourage de-dollarization and prioritize inflation targeting.
  - Implementation note:
    - Authorities increased fluctuation margin for interventions from 0.65 to 0.7 percent of the five-day moving average.

### IMF Executive Board and staff communications
- IMF Executive Board concluded the 2014 Article IV consultation with Guatemala on September 12, 2014 (Press Release No. 14/432).
- Statement by IMF Staff Representative (September 12, 2014):
  - Provides additional information since the staff report; does not alter the staff appraisal’s thrust.
  - Notes headline indicators in line with staff report baseline; August inflation 3.7 percent y-o-y; exchange rate 7.7 Quetzales/USD.
  - Ministry of Finance submitted draft 2015 budget to Congress; proposed revenue and expenditure somewhat higher than staff baseline but projected deficit in line with staff forecasts after taking into account spending execution constraints; financing more tilted to external sources than staff baseline.
  - Drought conditions worsened but macroeconomic impact expected negligible; emergency assistance of 0.1 percent of GDP provided; about ¼ million rural families affected.

_International Monetary Fund — Press Release No. 14/432; IMF staff report and statement by the IMF Staff Representative (September 12, 2014)._

### 3.5 percent into the medium term and inflation to converge toward the center of the central

### _cr14287 - 3.5 percent into the medium term and inflation to converge toward the center of the central

### Outlook and baseline projections
- Real GDP projected to be 3.5 percent into the medium term.
- Inflation projected to converge toward the center of the central bank’s target range.
- External current account deficit expected to stay stable and largely financed by FDI.
- Baseline fiscal stance: broadly neutral in 2014; modest fiscal expansion through the 2015 election cycle, with measured consolidation thereafter.

### Near-term and medium-term risks
- Near-term: risks related to U.S. monetary policy normalization are balanced—higher interest rates risk likely more than offset by improved export prospects as the U.S. economy expands.
- Financial market risk: extreme bouts of volatility could inflict serious damage.
- External shocks: deeper-than-expected slowdowns in emerging markets, less favorable developments in Europe, and commodity market disruptions from geopolitical tensions could hamper growth.
- Domestic fiscal risks: continued lags in implementing the 2012 tax reform and political impasse on the 2015 budget may endanger government programs.
- Fiscal execution risk: if lower revenues are not met with spending cuts, fiscal consolidation could be derailed.
- Long-term risk: insufficient government revenue mobilization could persist, deterring investment in physical and human capital and weighing on long-run growth and social prospects.

### Executive Board assessment and recommendations
- Directors commended sound macroeconomic policies and welcomed the broadly positive outlook, while noting high poverty and social inequality and downside-tilted risks.
- Key policy directions urged by Directors:
  - Accelerate efforts to improve social outcomes and foster higher, inclusive growth.
  - Increase fiscal revenue mobilization.
  - Safeguard critical social and investment spending in the event of financing shortfalls.
  - Address implementation setbacks to the 2012 tax reform through strengthened tax and customs compliance.
  - Call for congressional passage of a 2015 budget and timely approval of multilateral loans.
  - Improve budget execution and controls to stem accumulation of domestic arrears.
  - Progressively strengthen fiscal sustainability over the medium term to improve resilience and create space for increased priority spending.
  - Achieve a modest permanent improvement in the primary balance through enhanced revenue mobilization and public expenditure management improvements.
  - Strengthen monetary transmission and the policy framework by reinforcing the inflation target as the primary objective, including gradual enhancement of exchange rate flexibility to weaken dollarization incentives and safeguard foreign reserves.
  - Encourage development of domestic debt and securities markets.
  - Follow through on 2014 FSAP update recommendations: gradual introduction of Basel III standards, strengthen consolidated supervision, improve regulation of off-shore banks, enhance the Anti Money Laundering/Combating the Financing of Terrorism framework.
  - Consider adoption of macroprudential measures to control risks associated with dollarization.
  - Implement deep structural reforms and greater regional/global integration to lift growth potential and enhance social inclusion: strengthen competitiveness and business climate (including security), governance, and education quality.

### Key economic and social indicators (selected figures preserved exactly as in source)
- Social and demographic:
  - Population 2010 (millions): 15
  - Gini index (2006): 54
  - Percentage of indigenous population (2006): 38
  - Life expectancy at birth (2009): 71
  - Population below the poverty line (Percent, 2006): 51
  - Adult illiteracy rate (2009): 26
  - Rank in UNDP development index (2011; of 187): 131
  - GDP per capita (US$, 2011): 3,234
- Economic indicators (annual percent change; Est./Proj. columns retained in series):
  - Real GDP: 2009: 0.5; 2010: 2.9; 2011: 4.2; 2012: 3.0; 2013: 3.7; 2014: 3.4; 2015: 3.7
  - Consumer prices (end of period): 2009: -0.3; 2010: 5.4; 2011: 6.2; 2012: 3.4; 2013: 4.4; 2014: 4.0; 2015: 4.3
  - M2: 2009: 10.0; 2010: 11.3; 2011: 10.7; 2012: 9.8; 2013: 9.0; 2014: 10.0; 2015: 10.5
  - Credit to the private sector: 2009: 1.1; 2010: 5.7; 2011: 14.1; 2012: 17.7; 2013: 12.0; 2014: 13.0; 2015: 14.0
- Savings and investment (percent of GDP):
  - Gross domestic investment: 2009: 13.1; 2010: 13.9; 2011: 15.2; 2012: 15.0; 2013: 14.2; 2014: 14.3; 2015: 14.5
  - Gross national saving: 2009: 13.8; 2010: 12.6; 2011: 11.9; 2012: 12.4; 2013: 11.5; 2014: 12.0; 2015: 11.9
  - External saving: 2009: -0.7; 2010: 1.4; 2011: 3.4; 2012: 2.6; 2013: 2.7; 2014: 2.3; 2015: 2.5
- External sector (percent of GDP):
  - Current account balance: 2009: 0.7; 2010: -1.4; 2011: -3.4; 2012: -2.6; 2013: -2.7; 2014: -2.3; 2015: -2.5
  - Trade balance (goods): 2009: -8.9; 2010: -10.3; 2011: -10.4; 2012: -11.4; 2013: -11.5; 2014: -10.9; 2015: -10.9
  - Exports: 2009: 19.3; 2010: 20.6; 2011: 22.1; 2012: 20.0; 2013: 18.9; 2014: 19.2; 2015: 18.9
  - Imports: 2009: -28.2; 2010: -31.0; 2011: -32.5; 2012: -31.4; 2013: -30.4; 2014: -30.0; 2015: -29.8
  - Of which: remittances: 2009: 10.5; 2010: 10.0; 2011: 9.2; 2012: 9.8; 2013: 9.8; 2014: 9.5; 2015: 9.4
  - Capital and financial account: 2009: 0.5; 2010: 4.4; 2011: 6.5; 2012: 4.5; 2013: 4.7; 2014: 2.9; 2015: 2.5
  - Of which: FDI: 2009: 1.5; 2010: 2.0; 2011: 2.2; 2012: 2.4; 2013: 2.4; 2014: 2.4; 2015: 2.4
  - Overall balance: 2009: 1.3; 2010: 2.2; 2011: 2.7; 2012: 1.0; 2013: 1.3; 2014: 0.0; 2015: 0.0
- Net international reserves (months of next-year NFGS imports): 2009: 3.8; 2010: 3.7; 2011: 3.8; 2012: 3.9; 2013: 3.9; 2014: 3.6; 2015: 3.4
- Public finances (percent of GDP):
  - Revenues: 2009: 11.1; 2010: 11.2; 2011: 11.6; 2012: 11.6; 2013: 11.7; 2014: 11.2; 2015: 11.2
  - Expenditures: 2009: 14.2; 2010: 14.5; 2011: 14.4; 2012: 14.0; 2013: 13.8; 2014: 13.3; 2015: 13.4
  - Primary balance: 2009: -1.7; 2010: -1.8; 2011: -1.3; 2012: -0.9; 2013: -0.6; 2014: -0.5; 2015: -0.7
  - Overall balance: 2009: -3.1; 2010: -3.3; 2011: -2.8; 2012: -2.4; 2013: -2.1; 2014: -2.1; 2015: -2.2
  - Central Government Debt: 2009: 22.9; 2010: 24.1; 2011: 23.7; 2012: 24.3; 2013: 24.6; 2014: 24.9; 2015: 25.3
- Memorandum items:
  - GDP (US$ billions): 2009: 37.7; 2010: 41.3; 2011: 47.7; 2012: 50.4; 2013: 53.8; 2014: 58.1; 2015: 62.3
  - Output gap (% of GDP): 2009: -0.7; 2010: -0.9; 2011: 0.0; 2012: -0.3; 2013: 0.0; 2014: -0.1; 2015: 0.1

### Authorities’ statement (summary of points made by Guatemalan Executive Directors)
- Growth and inflation:
  - Real GDP expanded 3.7 percent in 2013, up from 3.0 percent in 2012.
  - Monthly index of economic activity (IMAE) increased 5.6 percent in July (year-on-year), taking the 12-month trailing average around 4.0 percent.
  - By August 2014, y-o-y inflation was reduced to 3.7 percent while core inflation remains close to 2.0 percent.
  - Inflation closed at 4.4 percent in 2013 and in 2014 has remained below the center part of the target range (4 +/- 1 percentage point).
- Fiscal stance and tax reform:
  - Fiscal deficit in 2013 narrowed to 2.1 percent of GDP from 2.4 percent in 2012, driven mainly by significant expenditure control.
  - Fiscal deficit relative to GDP has averaged 2.1 percent in the last 20 years, exceeding 3 percent only during the worst years of the past global recession.
  - Authorities expect the 2014 fiscal deficit to close at 2.1 percent of GDP.
  - Public debt stable at around 25 percent of GDP.
  - 2012 tax reform broadened the corporate and personal income tax base but yielded well below original plans due to Constitutional Court claims and administrative shortcomings at the customs agency; authorities committed to enhancing tax collections and implementing administrative measures via the Superintendency of Tax Administration.
- Monetary and exchange rate policy:
  - Inflation-targeting regime adopted in 2005; medium-term inflation target of 4 percent (+/- 1 percentage point) established in 2013.
  - Authorities disagree with staff judgment that reducing the policy rate in November 2013 was inappropriate; they cite significant decrease in inflationary pressures and subdued expectations.
  - Credit growth decelerated to 9 percent as of August (authorities’ figure).
  - Authorities intend to remain vigilant and tighten monetary policy if inflationary pressures emerge.
  - Exchange rate is flexible; central bank intervenes only to moderate volatility under an explicit rule that has become more flexible year by year.
  - Net international reserves reached US$7.3 billion at end-2013, covering roughly 4.5 months of imports.
  - Authorities contest staff view that the regime has not been seriously tested, citing banking resolution processes in 2006–2007 and foreign exchange pressures associated with 2008–2009 global financial crisis as tests demonstrating regime effectiveness.
  - Authorities broadly endorse IMF advice to continue raising exchange rate flexibility gradually.
- External sector:
  - Current account deficit amounted to 2¾ percent of GDP in 2013, mostly financed by steady FDI and other private capital flows.
  - No significant impact observed thus far from U.S. monetary policy normalization; competitiveness broadly adequate and REER generally in line with medium-term fundamentals per IMF estimates.
- Financial sector and supervision:
  - 2014 FSAP update: banking system generally sound; banks profitable, liquid, well-capitalized, and resilient to advanced-country spillovers.
  - Credit to the private sector moderated to 9 percent at end August, down from about 16 percent in 2012 and 12 percent by end-2013.
  - Foreign exchange credit represents less than one third of total private sector credit; decelerated to 12.6 percent by end August from almost 30 percent in 2011.
  - Reforms since the 2006 FSAP: upgraded regulatory and supervisory frameworks, macroprudential monitoring, capacity building, inter-agency coordination, and improved financial stability analysis models.
  - Amendments to the Law of Banks and Financial Groups and the Central Bank Organic Law entered into force in April 2013 covering offshore operations, connected lending, supervisory enforcement powers and bank resolution procedures.
  - Guatemala joined GAFISUD (the Latin American regional arm of FATF) for AML/CFT efforts.
  - Authorities emphasize banking system resilience to domestic and external shocks and effective crisis management coordination between the Central Bank and the Superintendency of Banks.
  - Authorities express willingness to consider FSAP and Article IV recommendations where appropriate to enhance financial system stability and inclusive growth.

*Source: IMF staff report and authorities’ statements (2014 Article IV consultation and 2014 FSAP update).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14287.pdf_