April 19, 2017 / 2:26 PM / 8 months ago

Fitch Affirms Guatemala at 'BB'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, April 19 (Fitch) Fitch Ratings has affirmed Guatemala's sovereign ratings as follows: --Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB', Stable Outlook; --Senior unsecured Foreign- and Local-Currency bonds at 'BB'; --Country Ceiling at 'BB+'; --Short-Term Foreign-and Local-Currency IDRs at 'B'. KEY RATING DRIVERS Guatemala's ratings are supported by its track record of macroeconomic stability and disciplined policies, low public debt to GDP and sound external liquidity. These strengths are counterbalanced by a narrow tax base that constrains policy flexibility and limits debt tolerance, as well as weak governance and human development indicators. Economic growth slowed to 3.1% in 2016, a level below potential yet still resilient in comparison to median growth rates across the region and among Guatemala's rating peers. Fiscal retrenchment was the main drag on headline growth in early 2016. Uncertainty lingering from the 2015 political crisis and surrounding the subsequent political transition weighed on investment spending. With higher budget execution and improving confidence spurring investment and strong remittances inflows supporting private consumption, real GDP is forecast to accelerate to 3.4% in 2017 and 3.7% in 2018. Inflation expectations remain anchored within the Central Bank's target range of 3%-5%. Investment and growth are constrained by a low domestic savings rate, narrow revenue base, shallow credit penetration, and governance problems. Investment to GDP has fallen steadily since 2007 and was only 12.5% in 2016. The government plans to boost fixed capital spending and promote public-private partnerships (PPP) in infrastructure. The PPP projects currently in the pipeline are still in the evaluation and tendering phases and construction is only scheduled to begin from 2018 onwards, delaying any potential growth impulse. Guatemala's external indicators are strong compared to peers in the 'BB' category. The current account balance flipped into surplus in 2016 mainly because of a smaller energy import bill and strong remittance inflows. These drivers are expected to become less supportive during the forecast period, and the current account is forecast to revert to a small deficit by 2018. External financing needs are adequately covered by broad-based foreign direct investment and external borrowing from multilaterals. Modest external debt and ample FX reserves - Guatemala's liquidity ratio is more than double the BB median - mitigate external liquidity risks. FX reserves rose by 18% in 2016 to USD9.2 billion or 5.3 months of CXP. Guatemala's central government fiscal deficit is low relative to peers. In 2016, it shrank to the lowest level in over a decade (1.1% of GDP). Institutional strengthening of the tax administration office (SAT) plus large payments of back-taxes and fines for tax evasion helped to arrest the slide in revenue-to-GDP underway since 2013. Better tax collection in conjunction with a pick-up in economic growth could deliver additional revenues of around 1 percentage point of GDP by 2018. However, at only 11% of GDP, the revenue take is still one of the lowest of all rated sovereigns. Raising it to a level that is closer to the BB or Central American medians of 32% and 20% of GDP respectively would require deeper structural fiscal reform. A fragmented legislature and the executive's limited political capital suggest to Fitch that this is unlikely in the near term. A primary surplus in 2016 kept central government debt stable while enabling the government to cure arrears and rebuild its cash position. The primary balance is forecast to turn negative again in 2017, in line with higher budgeted outlays on education, public health, and security and on the assumption of improved budget execution. Even so, Fitch expects fiscal deficits to remain modest over the forecast period, which combined with faster economic growth will keep the debt-to-GDP ratio relatively stable. At 22% of GDP (net of public debt holdings by the social security fund IGSS), the government debt ratio is the lowest in the 'BB' category, although the strength this confers to the credit profile is limited by the low revenue take. Debt- and interest-to-revenue ratios are higher than the 'BB' median and represent a weakness in terms of debt tolerance and fiscal flexibility. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Guatemala a score equivalent to a rating of 'BB' on the Long-term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's view that upside and downside risks to the rating are broadly balanced. The main risk factors that, individually or collectively, could trigger a rating action are: Positive: --Sustained improvements in tax collection and the budget process that enhance fiscal policy flexibility; --Higher investment and growth prospects; --Improvements in governance and human development indicators relative to peers. Negative: --Continued erosion of the revenue base that undermines fiscal flexibility; --Political gridlock that constrains government financing flexibility and/or leads to interruptions in external financing; --Social unrest and governability challenges leading to macroeconomic and policy uncertainty. KEY ASSUMPTIONS --Fitch forecasts that Guatemala's economy and balance of payments will continue to benefit from relatively low oil prices (USD52.5/bl in 2017 and USD55.0/bl in 2018) and supportive U.S. economic growth rates (2.3% in 2017 and 2.6% in 2018) Contact: Primary Analyst Arend Kulenkampff Director +1-646-582-4720 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Richard Francis Director +1-212-908-0858 Committee Chairperson Charles Seville Senior Director +1-212-908-0277 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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