Press Release No. 09/142

Press Release: IMF Executive Board Approves US$935 Million Stand-By Arrangement for Guatemala

April 23, 2009

The Executive Board of the International Monetary Fund approved on April 22 an 18-month, SDR 630.6 million (about US$935 million, or 300 percent of quota) Stand-By Arrangement for Guatemala. The Guatemalan authorities intend to treat the arrangement as precautionary, meaning that they do not intend to draw on the Fund’s resources unless the need arises. Guatemala has no immediate balance of payments need, and this program is part of a comprehensive preventive strategy to strengthen the country’s liquidity cushion in the face of an uncertain global environment, thereby enhancing the confidence of investors and market participants.

Guatemala has made substantial progress in consolidating macroeconomic stability and implementing structural reforms. Adverse external conditions, however, are affecting economic activity and financial conditions. The Guatemalan authorities have taken a number of upfront measures to mitigate the impact of the external shock and preserve macroeconomic stability. The program will support the authorities’ policies and provide insurance against significant downside risks.

Following the Executive Board discussion on Guatemala, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, issued the following statement:

“Guatemala has a strong track record of prudent macroeconomic policies and structural reforms, which has helped to solidify the economy in recent years. As in many countries in the region, however, the global crisis has weakened economic conditions. A more prolonged global recession could increase downside risks to Guatemala’s outlook in 2009 and 2010. The authorities’ economic program, supported by a Stand-by Arrangement with the Fund, which the authorities plan to treat as precautionary, is an appropriate response to mitigate these risks and preserve macroeconomic and financial stability.

“The authorities’ strategy entails a moderate fiscal expansion, continued efforts to anchor inflation at low levels in the context of the inflation-targeting framework and a flexible exchange rate regime, a further strengthening of the financial sector, and the mobilization of substantial external financing, including from the World Bank and the Inter-American Development Bank. This financing will boost the economy’s foreign currency liquidity buffers, and provide protection against any larger-than-anticipated shocks to the balance of payments.

“The Bank of Guatemala is cautiously easing the monetary policy stance, after succeeding in controlling inflationary pressures that surged in 2008. The authorities plan to strengthen their inflation-targeting framework further, with a view to achieving a medium-term inflation target of 4 percent (+/- 1%). They are committed to maintaining a flexible exchange rate to facilitate the adjustment to external shocks.

“The authorities’ fiscal program aims to provide some stimulus to the economy and protect the most vulnerable segment of the population. To achieve these goals, the 2009 budget envisages higher spending on labor-intensive public infrastructure projects and a strengthening of the social safety net. This countercyclical fiscal policy is possible given the low level of public debt, resulting from prudent fiscal policies pursued in the past.

“Guatemala’s banking system is not exposed to risky structured financial products and has consolidated in recent years. The authorities are nonetheless taking measures to safeguard the liquidity and capital positions of banks through adequate liquidity-provision arrangements by the central bank and a gradual increase in provisioning requirements. At the same time, continuous on-site supervision has been put in place to monitor developments closely, anticipating risks and corrective actions, if needed. During the program period, the government plans to further strengthen financial sector policies by enhancing supervision and regulation and strengthening the framework for bank resolution,” Mr. Portugal said.

ANNEX

Recent Economic Developments

Real GDP growth is estimated to have slowed to 4 percent in 2008, from 6.3 percent in 2007. The decline has been driven by domestic demand, particularly investment, as external demand remained robust through most of 2008.

Annual inflation continues to decline, from its peak of 14 percent in mid-2008, to 9.4 percent by year-end, and further to 5 percent in March 2009. The decline in inflation has become firmly entrenched: various measures of core inflation have declined consistently in the last quarter of 2008; inflation in services and nontradables has moderated substantially; and inflation expectations are declining rapidly.

The external current account narrowed to 4¾ percent of GDP in 2008, already signaling lower domestic absorption, helped by the reversal of the negative terms-of-trade shock from commodity prices in the second half of last year. Since the last quarter of 2008, remittances have been declining, export growth has slowed and imports fell markedly. Private capital inflows have slowed, but nonetheless international reserves increased to US$5 billion by end-March 2009 due to recent disbursements of public external financing.

The strength of the fiscal position was maintained during 2008, with the central government deficit declining to 1.7 percent of GDP, despite a real decline in tax revenue. The drop in revenue has become more severe in early 2009, due to cyclical and structural factors.

Program Summary

The Guatemalan authorities have been proactive in addressing the effects of the global crisis through a comprehensive policy response. Their strategy has four key elements:

• A moderate fiscal stimulus to support domestic demand, financed with substantial external resources from multilaterals to minimize crowding out the private sector;

• A monetary policy focused on consolidating the decline in inflation in the context of a flexible exchange-rate regime to facilitate economic adjustment;

• Strengthening of financial sector policies to increase the resilience of banks and enhance the banking sector safety net and resolution procedures;

• A refocusing of public expenditures towards strengthening social spending and labor-intensive public works.

To complement those efforts, Guatemala is now aiming at building a higher external liquidity cushion to reduce risks from sudden changes in the current and capital account. Fund support is a key element of the strategy to face these risks, not only through the contingent financing provided under the proposed SBA, but also through the endorsement of the authorities’ program, which will help maintain investor confidence.

The authorities’ social protection policy aims at enhancing current programs to offset the effect of the crisis on the most vulnerable segments of the population. Social spending will increase from 4.4 percent of GDP in 2008 to 5.0 percent of GDP in 2009. To address extreme poverty, emphasis will be placed on four flagship government programs. A key conditional cash transfer program initiated in 2008 will be expanded aiming at reaching 500,000 families in 2009, with a cost of 0.4 percent of GDP.