VZCZCXYZ0000
RR RUEHWEB

DE RUEHGT #0807/01 2371832
ZNR UUUUU ZZH
R 251832Z AUG 09
FM AMEMBASSY GUATEMALA
TO RUEHC/SECSTATE WASHDC 7968
INFO RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS GUATEMALA 000807 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EAID GT
SUBJECT: Bond Passage Loosens Fiscal Straightjacket 
 
¶1.  SUMMARY:  On August 6, the Guatemalan Congress passed a measure 
authorizing the issuance of Q3 billion (approximately $375 
million)in bonds to help cover the 2009 budget gap created by tax 
collections that are running nearly 8 percent below 2008 levels and 
nearly 20 percent below 2009 expectations.  The measure together 
with a Q2.8 billion ($350 million) World Bank budget assistance loan 
should help plug the budget shortfall, expected to be approximately 
Q7.5 billion ($940 million) by year's end.  The Guatemalan Central 
Bank (Banguat) recently revised downward its estimate for 2009 GDP 
growth from a range of 1 to 2 percent to a range of 0.4 - 1.2 
percent.  Falling growth explains the deterioration in tax revenues 
and the urgency of passing the bond issuance.  Members of the 
Patriot Party, opponents of First Lady Sandra Torres de Colom's 
controversial Conditional Cash Transfer program, mounted an 
unsuccessful attempt to block the bond issuance.  As it has in the 
past, the Colom Government marshaled sufficient support from other 
parties' congressional benches to overcome Patriot Party opposition. 
 As posturing for the 2011 presidential elections gets underway, 
economic measures such as this will increasingly be subject to 
partisan congressional polemics.  END SUMMARY. 
 
Government Bonds to Alleviate Fiscal Pressures 
--------------------------------------------- - 
¶2.  According to data from the Superintendence of Tax 
Administration, tax collections declined 7.9 percent during the 
first half of 2009 compared to the same period of 2008 and were 
running nearly 20 percent below 2009 projections.  To cover the tax 
revenue gap, which is currently estimated at Q7.5 billion ($940 
million), the government announced budget cuts and requested 
Congressional approval for the placement of Q3.0 billion ($375 
million) in bonds.  Congress approved the issuance on August 6. 
 
¶3.  The right-leaning opposition Patriot Party, as well as leftist 
Congresswoman Nineth Montenegro of "Encounter for Guatemala," 
requested that Congress approve the bonds issuance only with a 
special provision to forbid budget transfers.  They and some other 
opposition members were concerned that the government would transfer 
some of the funds to the First Lady's controversial social welfare 
programs, which have inadequate transparency controls.  The private 
sector had also requested Congress approve transparency controls as 
part of the law.  The approved law includes the requested budget 
"locks." 
 
¶4.  On August 24, the government met with investors and other market 
participants in anticipation of the August 25 launch of the bond 
issuance.  An IMF mission was recently in the country to assess the 
fiscal situation and review tax revenue estimates for this year. Per 
the approved law, Q1.68 billion ($210 million) will be allotted to 
the Ministry of Communications, Q500 million ($63 million) to 
service public debt, Q400 ($50 million) to the National Peace Fund, 
and Q200 million ($25 million) to the National Registry of Citizens. 
 
 
Central Bank Lowers Growth Estimates 
------------------------------------ 
¶5.  In late July the Guatemalan Central Bank lowered its estimate of 
economic growth from a range of 1 to 2 percent to a range of 0.4 - 
1.2 percent.  The move follows a pattern over the last year of 
Banguat revising downward its growth projections in the wake of 
downward revisions by international financial institutions and 
private economists.  On July 15, the UN Economic Commission for 
Latin American and the Caribbean (ECLAC) forecasted a 2009 GDP 
contraction of 1 percent for Guatemala.  Similarly, Standard and 
Qcontraction of 1 percent for Guatemala.  Similarly, Standard and 
Poor's and Fitch Ratings respectively projected GDP contraction of 
0.5 and 0.6 percent for this year.  The IMF and World Bank still 
project GDP expansion for 2009 at0.4 and 0.6 percent, respectively. 
Oscar Monterroso, Banguat's chief economist, refutes pessimistic 
predictions of GDP decline, citing Banguat's superior information on 
national accounts.  (Note:  Banguat's estimates of growth in 
previous quarters have generally lagged other institutions, but 
later fell in line with international estimates.  End note.) 
 
¶6.  Banguat's most recent estimate is based on projections that 
exports will decline by 8.5 percent in 2009, imports by 16.7 
percent, remittances by 9.5 percent and foreign direct investment by 
9.3 percent.  According to Banguat, the construction sector will be 
the most affected by the crisis in 2009, with a contraction of 9.1 
percent compared to 2008.  Though the new estimates from Banguat 
project that agricultural and industrial activities will have 
positive growth rates this year, representatives from those chambers 
believe the new estimates are unrealistic.  Data from the 
Superintendence of Tax Administration show that the volume of sales 
of industrial products such as cement, non-alcoholic beverages and 
tobacco declined by 9.5 percent, 5.8 percent and 6.5 percent 
respectively during the first five months of 2009 in relation to the 
same period of 2008. 
 
Congress Approves Law on Economic Recovery Program 
--------------------------------------------- ----- 
¶7.  On August 4, Congress also approved reforms to the law that 
authorizes the construction of the Northern Transversal Highway. 
The construction of this highway is one of the infrastructure 
projects included in the Economic Recovery Program.  The approved 
reforms ratify the contract that was awarded to the only bidder 
(Solel & Boneh) in 2007 and also allows use of a $203 million loan 
from the Central American Bank for Economic Integration (CABEI) to 
fund the project.  The loan from CABEI was approved by Congress on 
August 10. 
 
¶8.  COMMENT:  Congressional approval for the bonds issuance was 
slower than it otherwise might have been because of the increasingly 
charged political atmosphere.  The governing UNE and the opposition 
Patriot Party anticipate that they will be the main two competitors 
in the 2011 presidential elections, and have begun posturing. 
Nonetheless, the opposition's concerns about inadequate transparency 
controls in the First Lady's social welfare programs have some 
merit. 
 
¶9.  A small part of the budget is funded through issuance of bonds 
each year and Congress approves each issuance separately.  The 
issuance of bonds approved by Congress on August 6 will be only used 
to cover the budget gap in 2009.  With revenues and economic growth 
continuing to fall, the government may face a larger fiscal deficit 
than currently anticipated, and therefore may need to make more 
drastic cuts before the end of the year. 
 
MCFARLAND