Can the Quetzal remain hovering in the air?

Guatemala has built a strong track record of prudent macroeconomic, fiscal and financial management over the years, with real GDP growth averaging +3.5% between 2020 and 2023. The Guatemalan economy was remarkably resilient during the pandemic, with GDP slightly contracting by -1.8% in 2020. Underpinned by a favorable external environment and the authorities’ swift, comprehensive and coordinated policy response, Guatemala experienced a robust recovery and maintained solid growth in 2024, estimated at +3.5%.

Inflationary pressures persisted after the pandemic and the increase in international prices of commodities in 2022, leading to +4% yearly increases in 2023-2024. Additionally, a decrease in rainfall has affected primarily the eastern departments of the country, weighing on the agricultural output. The combination of these factors resulted in an inflation rate which remains rather close to the upper end of the +3-5% target range set by the central bank. Inflation remained elevated at +6% in 2023 before gradually converging to +3% in 2024 and moving closer to +1% by year-end. It is expected to stay within or slightly below the target range in 2025-26. In this context, the Banco de Guatemala (Banguat) started easing its monetary policy in the fourth quarter of 2024. As inflation falls towards the target range, Banguat is expected to continue monetary easing, taking the policy rate to 2.50% by the end of 2025.

Guatemala has traditionally been fiscally prudent. Over the past decade, fiscal deficits have consistently stayed below 2% of GDP on average. This will give the government adequate access to external financing from bond markets on reasonable terms. President Bernardo Arevalo’s administration plans to run larger fiscal deficits in the coming years (around 3% of GDP) to address the economy’s structural gaps: infrastructure, social safety net and governance. This is unlikely to create significant problems and may even be credit-positive if the government succeeds at improving the structural issues.

Powerful political opponents will try to prevent President Bernardo Arévalo of the center-left Movimiento Semilla (Semilla) from making progress on his policy priorities of fighting corruption and poverty. A diplomatic initiative by the US government in January 2024 allowed the president to take office after winning the presidential run-off and after months of stalemate by the previous administration, which has maintained most seats in Congress. The inauguration itself took place after midnight on 15 January, following a dramatic last-ditch effort by members of Guatemala's outgoing government to stop the process. The struggle to neutralize these opponents is likely to occupy Arévalo – and undermine the government's effectiveness – for most of his term. In addition to Semilla's temporary suspension by the Supreme Court for irregularities in its formation, voter disillusionment was evident in 2024, especially among indigenous communities. This has manifested itself in sporadic protests, which are likely to remain a feature of the political landscape throughout the forecast period. However, such protests will be limited in scope and focused on specific issues, such as blocking a highway to draw the government's attention to an unresolved local land rights dispute. Such protests will not target the government itself and are unlikely to bring it down. General elections will likely be held by August 2027.

The relationship with the US and the management of migration flows and incidents of violence will be key elements for the country's stability. Domestically, reducing inequality and the ability to invest in education will mitigate potential negative effects from third countries. In early December 2024, the ruling coalition managed to pass the 2025 budget, which includes substantial spending of about 16% of GDP, resulting in a deficit of -3.1% for next year – the highest in a decade. About 17% of the budget will go to education, followed by health and social services, communications, infrastructure and housing.