TEXT-S&P revises Guatemala outlook to stable

Overview

-- We expect Guatemala's government to reduce fiscal deficits to an average of 2.5% of GDP over the next three years, compared with previous estimates exceeding 3% of GDP.

-- New tax legislation will provide an opportunity for Guatemala to increase gradually its still remarkably low tax collection through improved tax administration.

-- As a result, we are revising the outlook on our ratings on Guatemala to stable from negative. We are also affirming our 'BB' long-term foreign currency rating and 'BB+' long-term local currency rating on Guatemala. Rating Action On Sept. 6, 2012, Standard & Poor's Ratings Services revised its outlook on the Republic of Guatemala to stable from negative. At the same time, we affirmed our 'BB+/B' local currency and 'BB/B' foreign currency sovereign credit ratings on Guatemala. The transfer and convertibility assessment and the recovery rating are unchanged at 'BBB-' and '3', respectively. Rationale The revision in the outlook to stable (after it had been revised to negative in August 2011) is based on the gradually improving prospects for GDP growth and tax revenue in Guatemala and the implications these factors could have on Guatemala's fiscal prospects over the next few years. We expect real GDP-per-capita growth to improve to 1.3% in 2013 and 2014 despite the uncertainty in the world economy. Together, with an expected gradual increase in Guatemala's tax burden of about 1% of GDP between 2012 and 2014, these developments could stabilize Guatemala's increasing net general government debt burden at 20% of GDP in 2014. The expected improvement in economic growth and fiscal revenues should diminish the downside risks for Guatemala at the current rating level. However, the country is unlikely to generate sufficient resources to make rapid progress in economic and social development or public security. Guatemala's political parties and its private sector support broadly similar economic policies. Parties from different political origins have won each of the last four presidential elections in Guatemala. However, changes of governing parties have not modified the broad orientation of macroeconomic policy, which has included moderate fiscal deficits, an inflation-targeting regime and a floating exchange rate, and current account deficits roughly half funded by foreign direct investment. Nevertheless, Guatemala's weak public institutions and a polarized political environment continue to constrict credit quality. A fractured party system and vested private-sector interests limit the executive branch's ability to advance controversial legislation, such as increasing the tax burden, which is currently among the lowest of sovereigns we rate (equivalent to 11% of GDP). Drug-related organized crime increasingly challenges a weak police force and judiciary system. An effective offensive against crime, coupled with efforts to address social needs, implies higher government spending, exacerbating the already limited fiscal flexibility if the government doesn't increase its own revenue. The new tax legislation approved in February provides more tools for the government to enforce tax controls and supervision starting in 2013 as well as reducing tax exemptions. However, the legislation also reduces corporate income tax rates, so the final fiscal impact will depend on the government's willingness and capacity to improve tax compliance. Outlook The stable outlook balances Guatemala's improving growth prospects and fiscal and inflation performance against its limited fiscal flexibility stemming from low revenues and high infrastructure, social, and security needs. Additional progress on a reform agenda that improves Guatemala's business climate and growth momentum and, at the same time, generates more fiscal resources to finance a more-comprehensive social and security policy could lead to an upgrade. On the contrary, signs of greater political polarization, deterioration in public security, higher inflation, or wider external or fiscal deficits could lead to a downgrade of the sovereign. Related Criteria And Research

-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011

-- Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

-- Introduction Of Sovereign Recovery Ratings, June 14, 2007 Ratings List Ratings Affirmed; Outlook Action

To From Guatemala (Republic of) Sovereign Credit Rating Foreign Currency BB/Stable/B BB/Negative/B Local Currency BB+/Stable/B BB+/Negative/B Ratings Affirmed Guatemala (Republic of) Transfer & Convertibility Assessment Local Currency BBB- Senior Unsecured BB Recovery Rating 3