Bloomberg News

Guatemala Debt Beats Regional Peers as Tax Plan Reverses Deficit

July 04, 2012

Guatemala’s month-old dollar bonds are delivering the best returns in Central America as President Otto Perez Molina takes steps to improve tax collection and cut spending.

Guatemala’s 10-year dollar bonds, the country’s first global notes since 2004, have returned 5.7 percent since they were sold on May 31, compared with 2.2 percent for El Salvador’s 2023 notes and 2.8 percent for Panamanian bonds, according to JPMorgan Chase & Co.’s EMBIG index and data collected by Bloomberg. Similarly rated Latin American debt has returned 2.5 percent, according to Credit Suisse Group AG’s LABI index.

Central America’s biggest economy is increasingly marked by “prudent macroeconomic management,” said Jose Raul Gonzalez, chief financial officer of Cementos Progreso, Guatemala’s largest construction company. Under Perez Molina, who took office in January, the government had a fiscal surplus of $97 million through May after a $300 million deficit in the first five months of last year.

“Investors are starting to pay more attention to the country,” said Consuelo Palomo, who helps manage $350 million in assets including government bonds at Guatemala City-based Banco G&T Continental. “Guatemala, after the elections, has been perceived as pro-market.”

Guatemala’s BB credit rating from Standard & Poor’s, two levels below investment grade, puts the country of 15 million in the same category as Turkey and Portugal and one level below Costa Rica.

Tax Evasion

Perez Molina, 61, won election in November after vowing to crack down on drug gangs blamed for undermining foreign investment and pushing the country’s murder rate to 45 per 100,000 inhabitants, more than double the average for Latin America. After he took office, Congress strengthened laws against tax evasion and raised the income tax paid by non- salaried workers to seven percent from five percent.

Government revenue rose 5.6 percent to $2.3 billion while expenditures fell 10 percent through May, according to the central bank. The currency, the quetzal, has weakened 0.3 percent against the dollar this year, compared with a 2.7 percent strengthening of the Costa Rican colon and a 0.4 percent decline in the Honduran lempira.

“We don’t have any sort of uncontrollable fiscal deficits and have had currency stability for almost 20 years,” said Gonzalez in a phone interview from Guatemala City. “It is not by accident. It is a product of demand for institutional stability that aims to provide investors financial confidence.”

Growth Forecast

The $47 billion economy will grow 3 percent this year after expanding about 4 percent in 2011, according to the International Monetary Fund. Remittances rose 8.7 percent in May from a year earlier to $452 million. Coffee exports of 2.3 million 60-kilogram bags in the six months through May made Guatemala the world’s eighth-biggest seller.

Opposition lawmaker Luis Pedro Alvarez said Perez Molina has to deliver on promises to reduce crime if economic growth is to be sustained. The president said he would use an “iron fist” to fight drug gangs that have ties to Mexico’s most violent cartels.

“There is no question that violence is the biggest inhibitor to social and economic strides in Guatemala,” said Alvarez in a phone interview. “Citizen insecurity and crime have paralyzed this country from living up to its potential.”

Silver Mining

Investors have also been wary about efforts to change the constitution to allow the government to take as much as a 40 percent stake in natural resource companies. Tahoe Resources Inc. (THO), the Reno, Nevada-based developer of the Escobal silver mine southeast of Guatemala City, plunged 23 percent on June 28 after the proposal was reported.

The constitutional changes, which may be sent to congress next week, could help win greater public support for foreign investment projects, said Boris Segura, a Latin America strategist at Nomura Securities International in New York.

Foreign direct investment climbed to a record $985 million in 2011, about triple the level a decade ago, according to the United Nations. More oil exploration permits will probably be issued this year in untapped areas of the country, said Luis David, director of the national investment board Invest In Guatemala. Perenco SA, a closely held French oil company, owns oil concessions in Guatemala, Central America’s biggest oil producer.

“The economy is growing at a steady pace,” said Palomo. “That has resulted in an increased demand for the bonds and given investors more confidence about coming to the country.”

To contact the reporter on this story: Adam Williams in San Jose, Costa Rica at awilliams111@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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