Q What is the perspective on inflation in Guatemala and how is it impacting upon monetary policy?
A Inflation is affecting every economy but it is particularly strong in central American nations, which are net importers of oil and commodities. The region is experiencing two-digit inflation and even dollarised nations have been getting close to that level.
Price rises have been severe in staples, such as corn and wheat, which account for much of our consumer price index [CPI]. Whereas in developed nations, food accounts for 12% to 14% of CPI, in Guatemala it accounts for almost 39%.
To meet this challenge, we adjusted the interest rate six times last year by 150 basis points and had made two adjustments this year by September. The future of inflation depends on whether external shocks dissipate – we have recently seen a decline in the prices of oil and corn and wheat but it is very unclear whether this will last.
Q How is Guatemala working to harmonise monetary and fiscal policies?
A We pursue monetary policy with a high degree of co-ordination with fiscal policy. We have a long tradition of low fiscal deficits and low external and total debt, which has supported monetary policy. Fiscal policy has been positive, especially in a year with so many external shocks, and the ministry of finance is now presenting a reform package to congress.
There is a concern about how monetary tightening could affect growth in a year in which we are experiencing deceleration. That’s why the monetary board has been cautious and implemented measures gradually.
Last year, gross domestic product growth was 5.7% and this year the initial estimate, forecast at the end of last year, was for growth of 5.3%. That has been reviewed down to 4.8% and will probably be reduced again. We think that it could be close to the recent projections of the International Monetary Fund and others of 4.4% for the region.
Q Where does the inflation-targeting regime leave control of the quetzal?
A We have a flexible exchange rate regime that is determined by market. We only intervene when there’s excess volatility, such as in May and June. There’s a simple, flexible rule to determine when we do this, which has been approved by the monetary board. We are reviewing this law to make it even more flexible. But remember, nominal exchange rate appreciation of 2.5% is mild compared to countries such as Chile, Colombia and Brazil.
Q What is happening to remittances with the slowdown in the US?
A Remittances have been growing more slowly than 2007. In September, the rate of growth was 13% and this year it is below 8%. We estimate a year-end rate of between 11% to 12% compared to last year’s 14.4%. Most Guatemalan migrants work in the agricultural sector, which has been less affected than areas such as real estate.
Remittances are the second largest contributor to our balance of payments after exports and if we experience a big drop, it would put pressure on short-term local rates. In the medium term, we are seeking to attract more long-term foreign investment to compensate and create more jobs locally.
We have been working to make it easier to establish a business and the World Bank has identified Guatemala as being a leader in improving the business climate every year for the past three years. Government and private entities are working to promote Guatemala and we are investing in ports and airports to improve infrastructure.
Q How is Guatemala developing relationships with multilaterals and donors?
A We have a very close relationship with them and have a programme of fast-disbursing loans for budgetary support linked to reforms, for example. The first is in the fiscal area to encourage transparency and quality of expenditures. Programmes are made on a three-year basis and those countries that stick to reforms qualify for more. We have six years of consecutive performance.
The multilaterals are also changing, becoming quicker and more effective at poverty reduction and emphasising country ownership of projects. In the past, the projects for small developing countries used to be prepared by Washington. That’s changed.
Q What will be the effect of foreign ownership in the Guatemalan banking sector?
A Foreign banks still don’t have a significant presence in Guatemala but they are arriving. We expect them to bring international standards and practices in risk management, and technology and efficiency for clients, which would be positive for the whole banking system. Local banks are following technology advances closely too. Two local institutions are reducing costs by taking advantage of new technologies for remittances and we have one institution that is rolling out voice-activated ATMs using regional languages in rural areas. Also, the number of banks has fallen from 35 in 2003 to 20 due to consolidation.
We are also seeing more lending to small business. The US Treasury is working to identify obstacles that have impeded this. Many banks do not have adequate infrastructure, but some are working hard in this area and including small business financing in their business plan. Large banks are also starting to pay attention to this niche.
