Guatemala returned to relative political stability with the ending of the nation’s civil war on December 29, 1996 after the signing of the United Nations peace accords. The nation’s civil war that began in 1960 between government armed forces and leftist guerrillas (mostly Mayan Indians) greatly destabilized Guatemala and held back economic advancement. The conflict left 200,000 Guatemalans of mostly poor Mayan native Indians dead or missing along with one million refugees. The Guatemalan conflict was a battleground for the Cold War during the 1980’s. Further complications included Hurricane Mitch in 1998 which inflicted large damage to Guatemala. At present, Guatemala is home to the largest population base within Central America consisting of a very young population with 43 percent of the 14.3 million citizens under the age of 14. The make-up of Guatemala consists of the wealthy Spanish, the next group is the Ladinos which is a mix of Spanish and the native Mayan Indians, and the final third group is the Mayan Indians of the historical Mayan empire. The majority of Guatemalan citizens are the Mayan Indians, this segment is very poor with a great many living in sun dried huts.
POLITICS: President Oscar Rafael Berger has been in power since January 2004 representing the Grand National Alliance party, a centre-right party. Guatemala obtained independence from Spain in 1821. President Berger came to power on a platform of increasing prosperity with greater FDI (foreign direct investment) for job creation, a mandate to reduce poverty & eradicate corruption and new public works projects in the countryside for rural development whilst improving the education system. He also supports democratic reforms including less military in the domestic political affairs. Immediate challenges for Guatemala include its very unequal income disribution as 75 percent of the Guatemalan people live in poverty. Much of this income disparity might be considered root causes of the long standing conflict from the Mayan Indians. Guatemala’s civil war that ended in 1996 was primarily a conflict between military dictators and left-wing guerrillas. Political risk is heightened by the country’s vulnerability to coup which in turn can quickly destabilize the economy. Prior coup risk was noticed in a coup in 1993 when the military regained control as Guatemala has had a long history of military governments.
Drug Trade - Illegal Cocaine
The urban centres such as Guatemala City are developed unlike the rural areas which tend to host underdeveloped infrastructure (primitive, basic in the country) although infrastructure deficiencies in roads and airports are prevalent. It is in parts of rural Guatemala where areas are under the control of drug cartels. The business of transporting cocaine has grown in Guatemala as it is believed that Guatemala is a major transshipment centre for Colombian & Peruvian cocaine to markets in the United States via Mexico. The profits of drugs have impacted Guatemala directly with scandals, bribes & corruption amongst military and government officials. There is currently a violent crime wave in much of Central America due to poverty and the fallout from the large drug industry affecting the urban centres of the country. Guatemala has a very high murder, robberies, kidnappings, etc. mainly instigated by young people who are associated with gangs and drug traffickers. More monies are required for policing within Guatemala and in neighboring countries that are also experiencing the same crime wave.
ECONOMICS: the economy is now open for business and FDI from abroad as free market reforms and policies have been implemented. Agriculture dominates the economy as the sector accounts for 25 percent of GDP, 65 percent of exports and half the labor force. Guatemala has had a very long history as that of a plantation economy yielding harvests in sugar, coffee, fruits, etc. Foreign conglomerates have operated many of Guatemala’s large plantations now for over 100 years taking advantage of cheap Third World labor and its ideal semi-tropical climate for agricultural production. The country’s trade position is usually in deficit although Guatemala receives annual remittances upwards of $1 billion USD from Guatemalans living abroad provides for a capital account surplus which helps to close the current account deficit. The manufacturing and construction component of the economy consist of 20 percent of GDP. Within the energy sector, Guatemala is a net electricity exporter although it is a net oil importer at 40,000 bpd (2001). Major industries include textiles, rubber, agriculture (ie. sugar, bananas) tourism, chemicals, petroleum and metals. In the medium to long term, it is quite conceivable that Guatemala will want to seek North American Free Trade (NAFTA) membership to foster future prosperity with access to greater markets at favorable terms.
Coffee, Sugar Industry
Coffee represents 4 percent of GDP as Guatemala is the world’s number three exporter of coffee. The coffee industry is vulnerable to volatile swings in coffee prices. The early 1990’s saw the global coffee market crash in price and again in year 2001 when the world average price dropped to 49 US cents/lb in March 2001, down almost half during the previous 6 months. The coffee pricing cycle has returned with prices again peaking recently in June 2004 at just over 90 US cents/lb although dropping to the 75 US cent level in September 2004. The sugar industry itself is vulnerable to price swings as current challenges are evident in the sector with the European Union presently playing hardball with many sugar suppliers within the Caribbean community. The medium term outlook for sugar is positive as forecasted by BankINTO.com with continued increasing demand from countries like India and China placing upward price pressure on the majority of commodities including coffee.
Economic Statistics:
GDP as measured by purchasing power parity at $57 billion USD (2003) and corresponding GDP/Capita at $4,100 USD. Market GDP for year 2002 at $23.3 billion USD. Year 2004 GDP growth at 2.6 percent, year 2005 is estimated at 3.1 percent. Other GDP growth figures include year 2003 at 2.1 percent, 1998 at 5 percent. Inflation figures have year 2004 projected to come in at 7 percent, year 2005 estimated at 5 percent. Inflation for October 2004 was running at 8 percent, year 2003 at 5.5 percent. The current account deficit during the late 1990’s was running at 3.5 to 5.5 percent of GDP, year 2001 at 4.6 percent and 2003 at 4.7 percent shortfall. The nation’s fiscal deficit recorded a figure of 3 percent of GDP shortfall in year 2001. Unemployment have some statistics suggesting 10 percent. Public debt is measured at 30 percent of GDP, external debt amounted to $5 billion USD (2003) which represented a figure of 25 percent of GDP which is well below the Latin American average.
POSITIVE: low taxation levels althought the VAT is at 12 percent, free-trade agreement with Mexico, WTO member. CONCERN: weather-drought, cocaine transshipment centre, kidnappings - security risk, net debtor nation, land reforms for peasant families, only 20 percent of kids go to secondary school.
BANKING SYSTEM: weak, vulnerable. Privatization reforms in the financial sector have been implemented since 1998 along with increased supervision & regulation to help correct the difficulties in the banking system resulting from scandal and corruption that led to three bank failures in 2001. Foreign exchange reserves were measured at $2.843 billion USD (2003). Current lending interest rates are in the 15 percent range. Scandals have rocked the banking system in previous years coupled with Guatemala being listed on an international black list for money laundering in 2002. The nations’s central bank Banco de Guatemala at times may intervene to help support the quetzal.
REGIONAL ANALYSIS: Mexico, Honduras, El Salvador, United States
The United States is Guatemala’s largest trade partner as the U.S. accepts 55 percent of exports, El Salvador at 10 percent. Mexico is the third largest source of imports behind that of the U.S. and South Korea. A great regional difficulty lies in the illegal immigration of people from Central America to an end destination in the United States. As mentioned in this currency review, crime is one of the most crippling issues that is presently impacting Guatemala, Honduras and El Salvador. It is estimated that upwards of 400,000 young people are in gangs within the region with 100,000 members alone in Guatemala itself. Gangs go hand and hand with crime, this is a clear and present threat to business, trade and tourism. The governments of Central America must keep pressure on this crime wave of drug traffickers and illegal immigration rings to contacts within the United States as crime is deterring foreign investment into the region.
KNOWLEDGE: Mining & Eco-Tourism
Guatemala is rich in natural resources including petroleum, gold, silver, nickel, lead, iron, etc. Mineral exploration is very active within Guatemala particularly in gold mining in light of the recent spectacular price increases in gold bullion and metals. Canadian mining companies that are active include Radius Gold and Glamis Gold with operations within Guatemala. In 1998, the government introduced a new mining code that resembles that of Australia and Canada which have very advanced established mining industries. Of strategic importance is that there has been very little mineral exploration within Guatemala, the potential is significant for economic viable discoveries.
Guatemala is a beautiful country consisting of a semi-tropical climate with great weather ‘eternal spring’ home to 38 volcanoes. The government has set aside 25 percent of the country as protected areas as a visionary policy to preserve the environment that will be a boom for eco-tourism in competition to nearby Costa Rica. The tourism industry is small but growing although Guatemala has to overcome the fear of security risk. Today, Guatemala is world renown for the Tikat Mayan ruins tourist attraction.
CURRENCY: ISO Symbol ‘GTQ’, ‘USD’, Guatemalan quetzals, United States dollar. At time of review on November 4, 2004, the quetzal had an exchange value of 7.775 GTQ to the US-dollar ‘USD’. On October 22, 2004, the quetzal was valued at 9.87 GTQ to 1 EUR (Euroland euro). The quetzal follows that of a floating exchange rate regime, no exchange controls. As of May 2004, the quetzal was approximately 30 percent undervalued to the then declining USD as measured by purchasing power parity.
US-dollar ‘USD’ Dollarization as Parallel Currency to the Quetzal ‘GTQ’
In May 2001, the US-dollar became legal parallel currency to the quetzal along with other foreign currencies that are now allowed for transactions. Guatemalan government policies are aimed at liberalizing the economy and creating an environment for greater FDI. Guatemala became the fourth Latin American country to dollarize following Panama, Ecuador and El Salvador which also uses the USD and their currency, the colon.
CURRENCY HISTORY: in 1945, the quetzal abandoned the gold standard in favour of the gold exchange standard. Historical exchange quotes include: year 2003 at 7.94 GTQ to the US-dollar ‘USD’, 2002 at 7.82, year 2001 at 7.85, 2000 at 7.76, year 1999 at 7.38, January 1998 at 6.25, 1997 at 6.06, 1996 at 6.05, 1995 at 5.81, 1994 at 5.75, year 1993 at 5.63.
CURRENCY FORECAST: if Guatemala can continue to stabilize politically and provide for a low tax environment, the country may see a foreign investment boom going forward for development of the country’s agricultural and natural resources. Fortunately for Guatemala, the world is now in the early stages of a historic massive commodities boom with greater demand for some of Guatemala’s resources including both mineral and agricultural such as coffee, cocoa, sugar and bananas. Guatemala’s other parallel currency, the US-dollar ‘USD’ is in trouble as noticed with its dramatic decline in valuation over the last 3 years. For further details on the USD please visit UNITED STATES in this BI.C currency index. Other currency risks for the quetzal include domestic security as tensions from the aftermath of the civil war may result in the potential for increased rebel insurgencies that maybe resurfacing in rural areas. Overall, the quetzal remains in a riskier ranked currency category as the Guatemalan economy still remains hostage to political violence and corruption scandals. However, BankINTRO.com believes that President Berger’s liberalization policies is the correct strategy as free market forces will ultimately root out any rebel terrorist inclinations and to help mitigate youth gang popularity if prosperity can be achieved by all Guatemalans. The net result will be less political influence from the various self-interest groups including the Catholic Church, the military, the politicians and the leftist guerrillas. A strong economy and stable democratic institutions will reduce the risk for the re-appearance of widespread guerrilla warfare. Guatemala needs strong political leadership, President Berger may indeed deliver. Time will tell.
UPDATED: November 4, 2004
