IMF staff concludes virtual visit to Guatemala

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WASHINGTON, USA – An International Monetary Fund (IMF) team, led by Esther Pérez Ruiz, conducted a virtual staff visit to Guatemala during October 26-30, 2020. At the end of this mission, Pérez Ruiz issued the following statement:

“Guatemala’s expected contraction of about 2 percent in 2020, and recovery to 4 percent next year, fares well in global and regional comparison. Resilient remittances and exports, and lower oil prices, have given rise to a current account surplus and allow significant accumulation of international reserves. A number of COVID-19 programs (family bonus, employment protection plan, working capital credit fund), alongside temporary loans restructuring, are helping to support households’ income and firms’ liquidity.

The central bank’s policy rate cuts, the activation of liquidity facilities and flexible reserve requirements have also secured the provision of liquidity with no detriment to the inflation objectives. To enable these policy responses, the authorities have promptly mobilized market funding and loans from international financial institutions, including US$ 594 million under the IMF Rapid Financing Instrument (pending Congress approval).

“Despite this resilience, the COVID-19 crisis is likely to have a durable economic and social impact. After falling markedly, the recovery in formal employment and tax collections is lagging activity, while chronic malnutrition and food insecurity keep rising, and significant downside risks remain. These risks include a rise in COVID-19 infections, which might lead to partial lockdowns, and a possible worsening of the global outlook and external financial conditions. Against this backdrop, policies should continue to sustain the recovery and safeguard downside risks.

“The draft 2021 Budget presented to the Congress of Guatemala duly maintains fiscal support in the short term and proposes a withdrawal in a gradual and sustainable manner. In order to maximize the impact of fiscal support, staff encourages: (i) better targeting of the social assistance leveraging on the family bonus’ digitalization; (ii) expanded provision of healthcare and virtual education to the most vulnerable to tackle inequality; and (iii) the prompt and transparent execution of infrastructure programs. To maintain fiscal sustainability, staff calls for consistent efforts at revenue mobilization over the medium term. Monetary policy should remain accommodative and neutralize, as planned, any effects of monetization on inflation. Further monetization of the budget deficit by the Central Bank should be avoided.

“The authorities’ Economic Recovery Plan aims to improve Guatemala’s business environment and foster greater labor market flexibility. In that regard, staff recommends the swift adoption of the new infrastructure, leasing, insolvency laws, and the ILO Convention 175. Increased legal certainty is key to enhance the business environment.

“Entering the crisis with relatively high capital and liquidity buffers, the banking sector has by now restructured about one-third of its loan portfolio under regulatory forbearance. Non-performing loans remain low at just over 2 percent (reflecting the lack of penalty in the debtors’ rating upon restructuring) but loan-loss provisions have increased steadily, indicating a possible deterioration of loan quality. To ensure financial stability, the financial supervisor should assess any build-up of risks in banks’ loan portfolios, strengthen provisioning and capital buffers as warranted, and consider a gradual withdrawal of temporary relief measures.

The reform of the law of banks and financial groups, pending in Congress, would be important to strengthen the banks’ resolution framework; as well as the approval of the new Law on the Prevention and Suppression of Money Laundering and Terrorism Financing (AML/CFT), which would modernize the tools to fight those offences.

“During the virtual staff visit, the team met with Sergio Recinos, the President of the Central Bank of Guatemala, Alvaro Gonzalez Ricci, the minister of finance, Erick Vargas, the superintendent of banks, Marco Livio Diaz, superintendent of SAT, other senior officials and representatives of the private sector. Edgar Cartagena (OED) participated in the discussions. The mission would like to thank the authorities for their close cooperation and candid discussions.”

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