Interview with Guatemala’s Minister of Public Finances, Julio Hector Estrada, and Vice Minister, Dr. Lionel Lopez

December 7, 2016

Guatemala’s GDP growth rate has slowed under this administration; why is that?

Julio Hector Estrada: Guatemala has been one of the strongest economic performers in Latin America in recent years, with a GDP growth rate of 3% since 2012, and 4.1% in 2015. Economic projections for 2016 show that the country will grow between 3.1% and 3.7%, which is near to its potential output growth.

In addition to the international economic environment, Guatemala’s GDP growth rate has slowed because there are structural issues that depend upon continued reforms, for example the high level of inequality, a poverty rate of 51% and the slowdown in public consumption and investment during political crisis. Another challenge is that the government collects the lowest share of public revenues in the world relative to the size of its economy.

Boosting growth will depend upon continued reforms to mobilize increased private investment and revenue to fund important pro-growth investments in infrastructure and human capital.

Guatemalan exporters’ biggest worry is the strong quetzal; will this government try to persuade the central bank to devalue?

Dr. Lionel Lopez: One of the steadying influences during the political crisis of last year was Guatemala’s macroeconomic stability. Our central bank, the Bank of Guatemala, is very conservative and prudent and keeps control of inflation. That stability meant that we were not downgraded by the ratings agencies, even as our ex-president sits in jail. In fact we were upgraded by one of them.

A key part of the stability comes from the fact that Banguat is independent from the government. I understand that exporters don’t like a strong quetzal but it would be a bad sign for international investors if in the midst of political turmoil they saw the bank devaluing the quetzal for political reasons. I think the solution is to drive innovation and productivity so that our exporters can compete on the international market. As a government we have to play a role in this. We have a small fiscal deficit and a low debt-to-GDP ratio so we could issue bonds to finance vital infrastructure, such as roads and schools that will help make local companies more competitive.

So can we expect more bond issues in the future?

Julio Hector Estrada: According to the budget proposal presented by the government to the legislature branch, the gross financing needs could be 3% of GDP. These resources could be funded by fixed rate securities and strategic loans. On the fixed-rate security side I would expect a mix of Eurobond issuance with a maturity of 15 to 25 years, and bonds issued in the local market, with maturities of 5 to 15 years. That could be supported by official credit from multilateral and bi-lateral sources.

Your ministry’s efforts to improve Guatemala’s tax take have faced opposition; are you optimistic that you will succeed?

Dr. Lionel Lopez: At present tax take is around 10% of GDP, so it is not enough. Of course nobody, in any country, wants to pay more taxes so we have faced opposition. We tried to pass a tax reform because we believed there was a window to get it through congress. To be honest there were some elements missing in that reform so now we are working on a more comprehensive package. We will add green elements to the new law, with the idea being that if you are a company that pollutes, you will pay more taxes. But we will also have incentives there to encourage firms to look at solutions such as recycling, because it’s something that needs to be more developed in Guatemala.

On the corruption side there was a particular problem at customs, because imports have long been an area that has been manipulated….

But we have already had some success when it comes to tax collection. We took over SAT (equivalent to HMRC) that was full of corruption and disorder. On the corruption side there was a particular problem at customs, because imports have long been an area that has been manipulated. In other areas the problem was just general disorganisation, which meant that some individuals and companies were not paying the tax that they should be. We have changed the organisation and brought in new staff at every level. It is now far more efficient. And if you don’t believe me just look at the numbers for tax collection: in August 2015 the SAT was 3billion quetzales short of its collection target, this August it was just 120million quetzales short. So that is a huge improvement.

Guatemala’s historic problem is not just raising money but spending it efficiently; what is this administration doing to improve the efficacy of government?

Dr. Lionel Lopez: One of the remits of this Ministry is to look at the productivity of government. So we are also looking into different ministries and how they are spending the money. We are creating clear indices to measure the quality of management in those ministries and putting processes in place that emphasise the relationship between fixed costs, variable costs and the eventual impact of a project. I think our success with SAT shows that we have a model that works and that we can come into a public entity and improve performance. Obviously there is a lot left to do. We have highlighted key areas, such as the Ministry of Health, the Ministry of Education and the Ministry Communications, Transport and Housing, and we will make them more efficient in terms of how they spend public money.

Where are the opportunities in Guatemala for British investors?

Julio Hector Estrada: I think the first thing to emphasise is the country’s strong macroeconomic position. Economic performance has been solid in 2016 and growth is set to return to its potential rate of 3.8% and gradually rise to 4% in the medium term, reflecting the positive impact of efforts to increase transparency of public sending. In September, inflation increased to 4.6% in 2016 from 1.8% in 2015. Despite a pick-up in food prices, headline inflation has remained within the target range (4 +/- 1 percent) and is expected to stay on course in the medium term.

In addition to the macroeconomic stability there are several factors that are attractive to investors. The country is strategically located, has substantial natural resources and a young multi-ethnic population that could drive faster growth and shared prosperity. Guatemala has been considered the “gateway” into the Mesoamerican market, the country has ports on both the Atlantic and Pacific Oceans (and a proposed dry port with Mexico) providing connectivity to external markets, thus making it an attractive destination for foreign direct investment.

This administration is fighting Guatemala’s corruption problem; should that worry investors?

Julio Hector Estrada: Actually there are a lot of positives that investors can take from the situation. The new administration, that took office in January, 2016, is undertaking important efforts to tackle corruption, which is one of the major challenges facing the country’s economy and society at large. The main strands of these efforts include a broad-based reform of the tax and customs administration, more transparent public procurement, increased accountability of congress, a more independent judiciary and a stricter application of the rule of law.