Guatemala’s General Menacing Streak
Former General Molina won the second round presidential runoff over business executive Baldizon, briefly boosting external bonds which must soon be rolled over as both candidates proclaimed centrist economic policies and a law and order stance against drug traffickers and kidnappers. The BB sovereign rating outlook had recently been downgraded to negative on security dangers and the persistent tax revenue to output gap threatening 3 percent medium term fiscal deficits. GDP growth and inflation are likewise running at 3 percent, as the central bank projects an almost 10 percent remittance rise to $4.5 billion to counter a $1 billion higher trade shortfall. Commodity, tourism, and financial services earnings have held up despite the worsening violence condemned by the UN’s reconciliation monitors and other observers. Volcanic eruptions have also repeated the specter of natural disaster after heavy reconstruction costs from previous episodes.
Next-door El Salvador, which has a precautionary standby with the IMF, faces similar physical fears with the first lady traveling to Washington in November to seek support from the expatriate community and development agencies. With the dollar the official currency, household expense increases have caused 5 percent inflation on economic growth less than half that figure. Banking cleanup has progressed, but the structural reform pace will slacken ahead of next year’s congressional elections which may swing back to conservative party dominance under tough unemployment and poverty conditions. In Central America a contrast is often drawn with safer and wealthier Costa Rica where GDP expansion is double at 4 percent on buoyant hospitality and free-zone inflows. The current account deficit has swelled to 2 percent of output, but is offset by foreign investment in telecoms and hotel projects. President Chinchilla was educated in the US and garners attention as a female head of state on the area, but domestic debt continues to advance under her watch inviting rating agency caution.
In the broader geography, the Dominican Republic, as a member of the DR-CAFTA free trade pact, is cited as more attractive with its public debt at 30 percent of GDP and good marks on its 3-year $1.5 billion IMF program. Visitor revenues are up 5 percent on an annual basis and FDI should jump one-fifth to $2 billion and should remain unaffected by upcoming presidential elections. Even further afield among second-tier credits, Uruguay, which has been frequently in the news as a Greece restructuring precedent, may return to investment-grade status a decade after its voluntary swap given reduced foreign currency exposure and “prudent” economic management. The peso is closely correlated to the Brazilian real, but offshore banking is also a haven from Argentine flight in an historic pattern that may settle from 2001’s deviation.
