Guatemala – Renewed Crisis

In mid-2015, Guatemala was convulsed by a massive corruption scandal that led to the forced resignations of both President Otto Pérez Molina and Vice President Roxana Baldetti and fueled a revolt by voters that vaulted Jimmy Morales, a television comedian with no political experience, into the national presidency. Not yet at the halfway mark of his four-year term, Morales has now become embroiled in a campaign-finance scandal that has placed his political future in jeopardy.
Earlier this month, the Congress rejected the recommendation of a legislative committee to lift the president’s immunity from prosecution, and subsequently approved a “national emergency” decree that makes it harder to prosecute politicians accused of campaign-finance violations. The moves outraged Guatemalans, who have taken to the streets in large numbers calling for the removal of the president, who has himself alienated the international community by attempting to expel the Colombian-born head of CICIG, the UN-sponsored anti-impunity body that has played a key role in uncovering the corruption that has contributed to the political tumult of the last two years.
As the political tides move against the president, his government is crumbling, and it appears that Morales will either limp along through the second half of his term wielding little influence and facing a persistent threat of hostile moves by the Congress if he attempts to assert his authority, or he will be removed from office and replaced by his vice president, Jafeth Cabrera Franco, a medical doctor who, like Morales, has little political experience. In either case, the president will become little more than a placeholder, and the lack of direction from the executive will pose an obstacle to implementing the political and economic reforms that are necessary to create a more hospitable climate for investment.
Real GDP growth slowed to 3.1% in 2016, in part reflecting the negative impact of the uncertainty arising from the political crisis that erupted in mid-2015 and the subsequent election of a blank-slate president. The pace of expansion accelerated in the first half of this year, as a threatened tightening of restrictions on immigration in the US fueled a surge in inflows of overseas remittances that boosted the spending power of Guatemalan households.
However, even before the most recent political disquiet, the growth outlook for the second half of 2017 was clouded by a court ruling that suspended the licenses issued to Tahoe Resources for the Escobal silver mine pending an investigation into allegations that the government did not fulfill a requirement to consult with indigenous communities affected by the mining project. Operations were shut down in July, and the central bank estimates that a full-year shutdown would reduce real GDP growth by up to 0.4 percentage points. With recent business confidence indicators pointing to growing pessimism amid the political crisis, real GDP growth is forecast to accelerate only moderately, to 3.5%, this year, but downside risks to the forecast are considerable.
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