Event

Since April, multiple cases of graft involving high-level public officials have been unearthed by Guatemalan prosecutors and the UN-backed International Commission Against Impunity in Guatemala (CICIG). Major indictments include those against senior members of the tax authority and those of the entire board of the social security institute, among whom the president of the Guatemalan central bank. Unsurprisingly, the scandals have had significant political fallout. Vice-president Roxana Baldetti resigned earlier this month (her private secretary having been named a key suspect) and so did the Minister of Mining and Energy (the opposition accusing him of irregularities in the awarding of contracts). Also, dozens have been arrested, including the central bank chief and the head of the national tax authority. Meanwhile, tens of thousands have taken to the streets to express their outrage and demand the resignation of President Otto Pérez Molina.

Impact on country risk

While Pérez Molina is highly unlikely to be forced to step down over the corruption scandals (he denies any involvement and has nearly completed his presidential term), his ruling Patriot Party (PP) stands to suffer the political consequences in the general election that will be held in September. Indeed, PP approval ratings have recently dropped and the opposition is set for an election victory. On the economic front, the scandals will clearly harm Guatemala. Most obviously, involved companies may see their state contracts revised (or cancelled altogether) and their access to credit confined. This may in turn force them to cut back operations, hence impairing economic activity. Another and more important issue concerns reputational damage. For one thing, the scandals may weigh on capital inflows by reinforcing foreign investors’ perception of Guatemala as a high-risk environment. Moreover, the misconduct exposed at the national tax authority will further increase distrust of this institution and thus undermine recent efforts to boost Guatemala’s notoriously low tax take. Note that with 2014 government revenues amounting to merely 11.2% of GDP, Guatemala ranks poorly, even by modest regional standards.

Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com