Central Bank Says Guatemala Crisis to Hit Growth If It Persists

(Bloomberg) -- Guatemala’s second major political crisis in two years could hurt economic growth if it drags on, interim Central Bank President Sergio Recinos said.

The crisis, which deepened this week after a court overruled President Jimmy Morales’s attempt to expel UN-backed anti-corruption chief Ivan Velasquez, was a factor in this week’s Central Bank decision not to raise raise interest rates, and has dampened investor confidence, Recinos said.

"Matters like these political crises don’t stop worrying us," Recinos said during an interview in Guatemala City. "If it is prolonged, it would definitely have an affect on economic growth and employment," he said.

Central America’s largest economy has struggled to fulfill its potential in recent years as a series of corruption scandals and political crises deters investment. The economy, which exports coffee, sugar and textiles to the U.S., needs annual growth of 5 percent a year or more to pull people out of poverty, Recinos said.

Eurasia Group said this week that the current crisis could lead to Morales’s ouster. Local banking deposits and foreign currency trading have been stable this week despite the crisis, according to Recinos.

Silver Mine

The central bank cut its growth forecast for the year to 3 percent to 3.4 percent this month, from 3 percent to 3.8 percent, after a court decision suspended work at a Tahoe Resources silver mine in the country. A year-long suspension of the mine could shave 0.4 percentage points off growth, Recinos said, while court rulings that temporarily halted hydroelectric dams further hindered sentiment.

Growth in lending to the private sector has slowed this year while public spending has struggled to rebound from a 2015 political crisis that saw the President, Vice-President and Central Bank chief jailed. Investors "perceive that in next six months, the conditions for investing and new businesses aren’t the best," Recinos said.

The government will end the year with a deficit 1.5 percent of gross domestic product, below an original forecast of 1.9 percent amid a slower than expected recovery in public spending, Recinos said.

An estimated 2.3 million Guatemalans living in the United States will help send home a record $8 billion in remittances this year, partly driven by fears that the government of U.S. President Donald Trump may tighten rules on migrants. The higher dollar inflows from migrants and lower oil prices have helped the country’s currency, the quetzal, gain 3.2 percent this year versus the dollar, the best performance among major currencies in the region.

Recinos is heading the central bank while a trial involving Central Bank chief Julio Suarez is ongoing. If found guilty of fraud, Suarez would have to resign and a new central bank governor would be appointed by the president to serve until September 2018 when his term was set to expire.

To contact the reporter on this story: Michael McDonald in Guatemala City at mmcdonald87@bloomberg.net.

To contact the editor responsible for this story: Matthew Bristow at mbristow5@bloomberg.net.