Mon | Oct 14, 2019

Walter Molano | Guatemala: A picture of economic stability

Published:Friday | December 7, 2018 | 12:00 AM
President of Guatema Jimmy Morales
A boy flies a kite in the cemetery on Day of the Dead in Zunil, Guatemala. The Central American country is roiled by drugs and politics, but it's economy its economy is in flight and on a steady course.

Guatemala is the largest economy in Central America. Well, no.

Actually, Panama is the largest, but most Central Americans consider Panama to be in its own category. They see the region starting at the northern border of Panama and ending on the southern border of Mexico.

Within that region, Guatemala stands out, with a GDP of almost US$80 billion and a population approaching 20 million. Although it has been the centre of drug-related violence, as well as political intrigue, it is also one of the better managed economies of the region.

One of the reasons for the stability is the large concentration of economic power in a handful of families and business groups. This allows for easier coordination among the major actors.

The other reason for the stability is remittances. Guatemalans living abroad send more than US$8 billion in remittances back home.

An estimated 1.5 million Guatemalans, or almost 10 per cent of the population, live abroad. These inflows helped transform the current account into a surplus, north of 1.5 per cent of GDP. It also helps stabilise the currency, making it into the picture of stability - despite being a floating exchange rate regime.

However, there are concerns that remittances have peaked, and they may begin to decline. The election of Donald Trump as president of the United States in 2016 raised concerns that the new administration would slap restrictions or controls on remittances. Therefore, many people increased their transfers, leading to a 13 per cent increase in 2016 and 2017. However, the concerns have abated, and it now appears that inflows will decline.

What of remittances?

A possible slowdown in the US would definitely reduce remittances. Moreover, emigration from Guatemala is being eclipsed by Hondurans and Salvadoreans, who are fleeing drug-related violence, social unrest and economic privation. With the economy growing slightly more than three per cent year-on-year, the situation in Guatemala is not so bad. This helps explain why Guatemalan bond spreads tend to be so stable.

One of the concerns that worry economists and sociologists is what is going to happen to remittances as time goes on and links between family members fade. Typically, this happens after one generation.

However, one of the things that makes Guatemalans unique is that approximately 40 per cent of the population is indigenous, and of Mayan descent. These people have very different cultural characteristics, with unique Mayan languages. There are Guatemalan banks dedicated to provide services to these groups, staffed with native Mayan-language speakers. The unique culture provides strong ties that transcend across generations and may ensure that the links will survive longer than other immigrant groups who move to the US.

Of course, Guatemala is much more than emigrants and remittances. That is more of a Salvadorean tale. Guatemala has a rich agricultural sector, enjoying its position as the fourth-largest sugar exporters in the world. The first three slots are occupied by Brazil, Thailand, and Australia.

Guatemala's huge sugar industry acts as a natural hedge against rising oil prices. Except for a handful of wells in the north that produce 9,000 barrels per day, the country imports all of its oil needs. This has been a blessing during the last few years, when oil prices were low, but it can be a curse when oil prices are soaring.

Fortunately, advances in biofuels, during the last decade, have allowed the country to take advantage of its huge sugar production to convert some of its output into ethanol. Sugar prices are highly correlated with oil prices, creating a natural hedge against an energy price hike. As a result, the country has nothing to worry about on the external front.

The political situation has been a bit noisy as of late. An ongoing feud between the government and a United Nations anti-corruption commission has come to a head. President Jimmy Morales, who was formerly a television comic and was elected in 2015, was a major advocate of the UN commission. It was thought that the Guatemalan court system was too inept and corrupt to bring powerful individuals to trial.

This is the double-edged sword of the concentration of power in Guatemala. However, the UN panel was able to imprison several former presidents and ministers, removing the country's image of impunity. But the court did not stop there. It continued its investigations against the current administration, finding evidence of illegal campaign financing of the sitting president.

No longer a laughing matter, the former comic turned on members of the commission, barring the head of the commission from re-entering the country. Although much noise was made of the incident, the US seems to be backing President Morales and the conflict appears to be fading.

So, as they say in Latin America, in regards to Guatemala: Meester, no problema.

- Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.