Corruption scandals imperil Guatemala’s short-term governability & economic growth

Multiple corruption scandals ensnaring politicians at the highest levels have recently ignited popular unrest in Guatemala, placing the country’s political and economic stability into doubt in the run-up to the September 2015 elections.

Guatemala’s popular class took to the streets in May after it was revealed that the office of then vice-president Roxana Baldetti was involved in a system of bribes paid by importers. Since this revelation, and the subsequent resignation of Ms. Baldetti, two additional corruption scandals involving top government officials have been uncovered. These most recent scandals have also impacted Guatemala’s president, Otto Perez, forcing him to request the resignation of three cabinet members while helplessly looking on as his ex-personal secretary and the president of Guatemala’s central bank were arrested.

The number of protestors has increased significantly since the initial popular reaction in May, and it now includes a broader base of opposition to the government. While there have been calls for his resignation, President Perez has stated that he will complete his mandate, which runs through Jan. 14, 2016. Moody’s has downgraded Guatemala due to political volatility, and the impact it is likely having on the economy’s performance, which will likely imperil the gains made to its external debt position. Additionally, the general discontent is not only aimed at President Perez’s Partido Patriota, but rather at the political class at large, creating significant uncertainty surrounding the outcome of September’s elections.

Implications for multinationals 

  • Compliance crackdown: The recent push against corruption should be expected to continue, with all candidates in the upcoming election cycle to make promises to clean the public sector and crack down on private sector corruption. As such, companies should review their compliance procedures and consider what vulnerabilities might exist. Furthermore, moving forward, companies should expect the need to devote greater resources to compliance measures in Guatemala.
  • Deteriorating fiscal outlook: Recent fiscal reforms have been important for improving the investment environment in Guatemala. However, the weakness of the ruling party in addition to upcoming elections means that this trend is likely to be reversed over the short term. While the current government will most likely look to use government spending to boost its popularity in the short run, this is likely to result largely in a severe deterioration of the country’s fiscal accounts. Though greater social transfers could result in a boost to consumer spending, multinationals would be obvious targets for the necessary increase in tax revenue that will follow, with unpopular tax increases also likely to impact consumer spending.
  • Lurch toward populism: Although the main opposition party is considered to fall in the center of the political spectrum, the general pushback against the political class at large could provide space for more populist, anti-system actors to take precedence. As such, companies should prepare for a more difficult operating environment including the need for greater public consultations before initiating significant capex investments.
  • Potential for rising crime and violence: Rampant violence, including threats to property and person, complicates business operations in Guatemala. While President Perez has applied heavy handed tactics in confronting his country’s security issue, the situation has improved little. Recent political events may lead to greater instability, and companies should prepare accordingly.
  • Reduction in economic growth: Guatemala’s external economic drivers are likely to remain supportive, but rising political uncertainty will drive falling investor sentiment and consumer spending over the medium term. While inflation is projected to remain well within the Central Bank’s target, economic growth will be revised down to 3.3 percent this year. A strengthening US economy, in addition to a depreciating quetzal will serve to boost the country’s exports.

FSG will continue to monitor rising political volatility and its impact on the Guatemalan economy. Such an event would serve to undermine Guatemala’s already weakened institutional structure, threatening the country’s economic stability. Additionally, we are closely following the development of new political coalitions and will continuously update the outlook on September’s elections as the country’s political realignment coalesces in the months to come.

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