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Fitch: Guatemala's slow structural progress costing economy, credit rating

Structural flaws will continue to hamper Guatemala's economy and credit rating over the medium term as necessary reforms that would elevate potential growth are not expected to be passed in the near term, Fitch Ratings said.

The rating agency expects Guatemala's economy to be buoyant, forecasting GDP to grow 3.4% in 2017 and 3.7% in 2018, driven by rising investment confidence after the 2015 political crisis.

However, faster economic growth is held down by structural weaknesses depressing investment and curtailing productivity growth. While the Morales administration plans to raise fixed-capital spending by about $450 million, or 1% of the 2019 GDP, over the remainder of its term, and promote public-private partnership projects valued at $1.5 billion, they are only in the evaluation and tendering phases with construction set to start in 2018.

The country's revenue collection also remains dismal, standing at less than 11% of GDP and one of the lowest among Fitch-rated sovereigns. While the government came up with the reorganization of the tax administration department and enhanced bank disclosures which could improve tax compliance in the future, these would not be enough to sustain revenue growth in the long term given the smaller pool of tax evasion cases, Fitch said. The country also failed to pass a tax reform bill in 2016 due to little support from the congress.

The rating agency also noted that policymaking has slowed since Jimmy Morales became president in 2016, due to a decline in congressional backing. "Congress is fragmented and the administration's popularity has been eroded by fiscal austerity and fresh corruption scandals," Fitch said.