INDEX. No. I. GENERAL ASPECTS 1 D.

Transcription

1 INDEX No. I. GENERAL ASPECTS 1 D. A. INTERNATIONAL ECONOMIC SCENARIO 1 1. Advanced economies 2 2. Other emerging market economies and developing countries 3 B. THE NATIONAL ECONOMY 4 1. The real sector 4 2. The foreign sector 5 3. The fiscal sector 6 4. The monetary sector 7 II. THE INTERNATIONAL ECONOMY 10 A. GENERAL PANORAMA 10 B. ADVANCED ECONOMIES 11 C. OTHER EMERGING MARKET ECONOMIES AND DEVELOPING COUNTRIES 20 III. THE NATIONAL ECONOMIC ACTIVITY 32 A. GENERAL ASPECTS 32 B. GROSS DOMESTIC PRODUCT MEASURED BY THE EXPENSE DESTINATION 33 C. GROSS DOMESTIC PRODUCT MEASURED BY PRODUCT ORIGIN 34 D. GROSS DOMESTIC PRODUCT MEASURED BY INCOME DISTRIBUTION 41 E. INSTITUTIONAL SECTOR ACCOUNTS 42 F. BEHAVIOR OF DOMESTIC PRICES Consumer Index Price Subjacent Inflation Imported inflation 49 IV. INTERNATIONAL PAYMENTS BALANCE 52 A. GENERAL ASPECPECTS 52 B. PAYMENTS BALANCE Current Operations 53 a) Exports 53 b) Imports 56

2 c) Goods balance 58 d) Services 59 e) Profit 60 f) Net Current Transfers Capital and Financial Account Operations Net International Monetary Reserves 62 C. NOMINAL EXCHANGE RATE 63 D. REAL EFFECTIVE EXCHANGE RATE INDEX 64 E. EXTERNAL PUBLIC DEBT 65 F. SUSTAINABILITY OF THE EXTERNAL PUBLIC DEBT 66 V. MONETARY AND FINANCIAL SITUATION 69 A. GENERAL ASPECTS OF THE MONETARY POLICY 69 B. EVOLUTION OF THE MAIN MONETARY AGGREGATES 72 C. CREDIT ACTIVITY OF THE BANCO DE GUATEMALA 78 D. CREDIT TO THE BANKS AND FINANCIAL STOCK COMPANIES IN THE PRIVATE SECTOR 79 E. LEGAL BANKING RESERVE 81 F. INTEREST RATES In national currency In foreign currency 86 G. MONETARY STABILIZATION OPERATIONS In national currency In foreign currency 90 H. BALANCE ACCOUNTS OF THE BANKS IN THE SYSTEM 91 I. LEGAL AND IMMEDIATE CREDIT EXPANSION ABILITY OF THE BANKS IN THE SYSTEM 92 J. PAST DUE PORTFOLIO 93 K. NON-PRODUCTIVE ASSETS 95 L. BANKING INSTITUTIONS 96 M. ACCOUNTS BALANCE OF FINANCIAL STOCK COMPANIES 97 N. FINANCIAL GROUPS 98 Ñ. OFF SHORE ENTITIES 100 O. PROGRESS IN THE STRENGTHENING PROCESS OF THE NATIONAL FINANCIAL SYSTEM Strengthening of the Financial System Banking Consolidation Complementary Reform 106 VI. PUBLIC FINANCE 107 2

3 A. GENERAL ASPECTS OF THE BUDGET 107 B. BUDGETARY EXECUTION 108 C. INCOME 111 D. EXPENDITURE Expenditure according to the program and the specific objective Expenditure by instiutional destination Expenses according to their nature 116 a) Operation expenses 116 b) Capital expenses 116 E. FISCAL TILL 117 F. PUBLIC SECTOR DEBT Domestic public debt 118 a) Movement of the domestic public debt 118 b) Balance of the domestic public debt per holder 119 c) Interest rate and due date External Public Debt 121 G. MAIN DECISIONS REGARDING PUBLIC FINANCE IN STATISTICAL CHARTS AND TABLES 3

4 I. GENERAL ASPECTS A. INTERNATIONAL ECONOMIC SCENARIO According to the International Monetary Fund (IMF) 1, in 2008, the world GDP grew 3.2% (5.2% in 2007). It is worth indicating that the deceleration of the global economy was generated by the spread of the financial market of the United States of America and that international commerce deteriorated. The emerging market economies and developing countries were also affected by the reduction of their exports to the advanced economies as well as by the lower income of foreign capital. The inflationary pressures increased in 2008, although there was less economic activity in the international price of the main raw materials, especially in the second quarter, and the absence of salary increases. In 2008, advanced economies inflation was at 3.4%, higher to the 2.2% registered the year before. It is worth highlighting that in Japan, after having 0.0% inflation in 2007, the inflation for 2008 was 1.4%. As to the United States of America, the inflation rate was at 3.8% (2.9% in 2007) and in the Euro Zone it was at 3.3% (2.1% in 2007). Regarding inflation in the set of countries with emerging economies and developing countries, this was at 9.3%, rate higher to that registered the year before (6.4%). It is worth highlighting that the People s Republic of China had an increase of 1.1 percentage points in the inflation rate, going from 4.8% in 2007 to 5.9% in In emerging market economies in Europe, inflation increased, to 8.0% (6.2% in 2007), while in the Community of Independent States an inflationary rhythm of 15.6% was registered, percentage higher to the observed in 2007 (9.7%). 1. Advanced Economies 1 World Economic Perspectives, April and October IMF. 4

5 During 2008, the economic growth rate of advanced economies was at 0.9%, rate lower than that of 2007 (2.7%). In the US economy the GDP grew 0.4%, rate lower to the registered in 2007 (2.1%). The lower growth of this economy was caused, among other factors, by the contraction of domestic credit and a rise in price of goods, as well as the reduction of internal consumption, due to the drop in trust of the economic agents. Regarding the US current payments balance account, in 2008 it registered a 4.9% deficit of the GDP, which means a slight reduction of the imbalance regarding the observed in 2007 (5.2% of the GDP), which contrasts with the registered surplus in oil exporting countries, in the People s Republic of China, in Japan and other emerging Asian market economies. The reduction of the referred deficit was caused by the US dollar depreciation in International markets and by the lower dynamism of that economy in In the Euro Zone, the growth rhythm was of 0.9%, showing a reduction regarding the registered growth rate in 2007 (2.7%). Said reduction was caused by the negative incidence that the global financial crisis had on the Euro Zone s financial system, as well as a reduction in aggregate demand, domestic and foreign. In effect, the domestic aggregate demand was weakened by the lost trust of consumers, caused by the uncertainty on the continuity of the world economic crisis, while foreign demand was affected by less dynamism in the world economy. The Japanese economy registered a negative growth of 0.7% in 2008, rate lower to the observed in 2007 (2.6%). The lower dynamism of this economy was caused by the drop in domestic investment as well as in manufacturing exports. 2. Other emerging market economies and developing countries In the countries with emerging markets and developing countries group, the economic activity was at 6.0%, lower to the observed in 2007 (8.3%). The developing countries in Asia showed a growth of 6.7%, lower to the registered in 2007 (9.8%). In this group of countries, we highlight the economic expansion of the People s Republic of China, when growing 9.0% (13.0% in 2007). 5

6 This growth was due to the expansive macroeconomic policies that strengthened consumption and investment in infrastructure and, the economic growth in India that was at 7.3% (9.3% in 2007), result of the strengthening of domestic demand through lax monetary and fiscal policies. In Latin America and the Caribbean, the economic activity registered a growth rate of 4.6% in 2008 (5.7% in 2007). The lower dynamism observed in 2008 was influenced by the reduction of exports, especially to the United States of America, main business partner to the region. Added to this, these economies were affected by the reduction in tourism and family remittances, as well as by the increase to the cost of external credit and a lower income of capital. The Middle East region registered economic growth of 5.4%, in 2008 (6.2% in 2007). The slight reduction in economic dynamism of this región was due to the drop in international oil prices, by the adverse conditions of external credit, by the reduction of family remittances and less income of foreign capital. In the countries on the African continent, the economic activity grew 5.2% in 2008 (6.3% in 2007). Said behavior was influenced by the reduction in the amount and price of exports, by the drop in foreign investment, direct as well as in portfolio, as well as a significant shrinkage in the family remittances income sector and adverse conditions for obtaining international credit. 6

7 B. THE NATIONAL ECONOMY 1. The real sector The dynamism that the national economic activity had registered since 2004 reverted in Economic growth, measured by the variation of the Gross Domestic Product (GDP) in real terms, registered a rate of 3.3%, lower by 3.0 percentage points to the registered in 2007 (6.3%). This result, influenced mainly by the factors of foreign origin, because of the economic deceleration observed in the majority of countries, caused by the global financial crisis, influenced the deterioration of the expectations of the economic agents. The performance of the national economy was influenced by foreign and domestic factors. Among the external order factors we find: a less favorable environment, particularly, from the US economy and from the rest of the commercial partners of Guatemala (Central America, Mexico and the Euro Zone), and on the other hand, the presense of supply shocks, as a result of the increase of international prices of oil, wheat and corn. In the internal order, maintaining macroeconomic stability because of the application of disciplined monetary and fiscal policies, as well as the solidity of the main macroeconomic basics of the country, allow counteracting the negative effects of the world economic crisis. In the described context, it is worth indicating that from product origin, the gross domestic product showed a positive behavior in the majority of its activities in 2008; however, the observed growth rates were less dynamic than those of the previous years. Regarding the GDP components due to expense destination, in 2008, the majority registered negative growth rates or less dynamic ones than those observed in 2007, with the exception of consumption expense of the general government, which showed behavior that is more dynamic. Regarding the gross make-up of fixed capital,it registered a variation rate of -6.2%, lower to the observed in 2007 (5.0%), behavior influenced by the drop in 7

8 investment in construction as well as in machinery and equipment; headings that, in 2008, showed a variation rate of -0.5% and -11.6%, respectively (8.3% and 2.1% in 2007). As to the corresponding to foreign demand, constituted by the exports of goods and services, it registered a drop of 0.1% in 2008 (9.4% in 2007) in real terms. Said behavior is mainly explained by the loss in dynamism registered in exports of manufactured products and mining (that represent 62.8% of the total exported), which grew 0.7% in real terms in 2008 (5.6% in 2007); as well as by the drop of 1.1% observed in exports of agricultural products (growth of (16.6% in 2007). As to foreign supply, the imports of goods and services, in real terms, registered a drop of 5.6%, (7.2% growth in 2007), associated to the drop in the majority of imported goods. In effect, when analyzing the behavior of imports in 2008, it was seen that manufactured goods and mining registered a drop, in real terms, of 6.2% (7.2% growth in 2007); while agricultural and livestock goods showed a variation rate of 1.3%, less dynamics to the observed in 2007 (6.2%). 2. The foreign sector In the mentioned international economic scenario, in 2008, the payments balance registered an increase of net international monetary reserves for US$338.5 million, equivalent to an increase of US$332.7 million in Reserve Assets of the Banco de Guatemala; result that was determined by a surplus of US$1,596.1 million in the capital account and by a deficit in current account of US$1,862.7 million 2, which gave as a result that the deficit in current account/gdp ratio was at 4.8% (5.2% in 2007). The current account balance was explained by the deficits of goods, services and rent, which rose to US$5,573.9 million, US$369.9 million and US$929.3 million, respectively, as well as the surplus of net current transfers for US$5,010.4 million. 2 The Errors and Ommisions heading is estimated at US$599.3 million. 8

9 The capital account surplus was mainly determined by the increase in direct investment and other investments, associated to the positive expectations derived from macroeconomic stability. Because of current and capital operations of the payments balance, the net international monetary reserves, were at US$4,658.8 million, number higher by US$338.5 million to the observed level to December 31, 2007 (US$4,320.3 million), variation equivalent to US$332.7 million of increase in the Reserve Assets of the Banco de Guatemala. The level of the net international monetary reserves reached its equivalent to 4.4 months of imports of goods (3.6 months in 2007), which indicates that the foreign position of the country in 2008 continues to be favorable. Regarding the exchange rate of the quetzal regarding the US dollar, it registered a nominal depreciation of 2.0%, when going from Q per US$1.00 on December 28, 2007 to Q per US$1.00 on December 30, It is worth highlighting that in 2008, episodes of high volatitily in the variation of the exchange rate were registered, reason why it was necessary for the Banco de Guatemala to participate in the exchange market through the Electronic System of Foreign Currency Negotiation (SINEDI, for its acronym in Spanish), holding purchases for US$237.4 million and sales for US$58.3 million. 3. The fiscal sector Regarding public finance, the fiscal deficit to December 31, 2008, was at Q4,777.4 million, amount higher by Q1,005.8 million to the observed in The behavior of the referred variable is mainly due to greater dynamism in public expense, which registered a relative variation of 8.0%, whereas the total income registered an increase of 5.9%. Therefore, the fiscal deficit/gdp ratio increased by 1.4% in 2007 to 1.6% in On the other hand, the level of tax collection during 2008 gave as a result that the tax burden was at 11.3%. As to Central Government expenses in 2008, these rose to Q40,355.4 million, amount higher by Q2,973.3 million (8.0%) to the registered in Said 9

10 result caused the total Central Government expense, as a portion of the gross domestic product to be at 13.6%, lower to the observed in 2007 (14.3%). As to fiscal deficit financing sources, the net internal financing was positive by Q1,625.6 million. On the other hand, net foreign financing rose by Q849.7 million. It is important to point out that the resources coming from financing allowed closing the fiscal gap and generate a financial surplus of Q2,302.1 million, which increased the availability of the fiscal till by the same amount. Last, regarding public debt, when closing 2008, the balance of the nonfinancial public sector internal debt was of Q26,209.9 million, equivalent to 8.9% of the GDP, amount higher by Q2,018.9 million to the registered in The foreign public debt balance, on the other hand, rose to US$4,382.4 million, equivalent to 11.2% of the GDP. 4. The monetary sector The implementation of the monetary policy in 2008 was consistent with the inflation targeting, that is based on the choice of inflation targeting as the nominal anchor of said policy and is consolidated with a current flexible exchange rate regimen, with the use of indirect monetary control instruments (monetary stabilization operations, giving privilege to market decisions), as well as with the strengthening of the Central Bank actions. It is worth pointing out that for 2008 the Monetary Board determined that as a monetary policy target that inflation would be 5.5% with a tolerance margin of +/- 1.5 percentage points. With the pertaining to inflation, the continuous increase in international oil, corn and wheat prices, in good measure, caused the inflationary rhythm to accelerate 8.39% in January to 14.26% in July. In effect, in the indicated period the increase in the internal price of goods and services associated to said raw materials and supplies, intensified. Notwithstanding, as of August there was evidence of an important reduction in international oil and corn prices, which drops influenced in a reduction in total inflationary rhythm as of August. In December 2008, the inflationary rhythm was at 9.40%, higher by 0.65 percentage points to the 10

11 observed in December 2007 (8.75%). On the other hand, imported inflation, after affecting at a maximum of 5.84 percentage points to total inflation in June 2008, began to drop, influencing December by 0.94 percentage points in total inflationary rhythm. It is worth pointing out that in the presence of supply shocks, the monetary policy can only moderate the inflation expectations of the economic agents and the second round effects of the referred shocks. In the first semester of the year, added to the presence of inflationary pressure associated to the external shocks, inflation expectations were becoming unanchored and the product gap showed evidence of the inflationary pressures due to aggregate demand. For this reason, the Monetary Board decided to increase the monetary policy s leading interest rate in March by 6.50% to 6.75% and in July from 6.75% to 7.25%, in order to moderate the inflation expectations of the economic agents and of counteracting the second round effects of imported inflation. As to the indicative variables of the monetary policy, it was estimated that for the end of 2007 the total payment means (M2) would rise between 8% and 11%, in inter-annual terms, whereas the total banking credit to the private sector, must grow between 14% and 17%. At the end of 2008, the inter-annual growth rate of M2 (that includes national and foreign currency) was at 7.6%, whereas the banking credit to the private sector had an inter-annual growth rate of 11.0%, both are, therefore, below the lower limit of their respective margins. Last, the weighted average asset and liable interest rates of the banking system continued to show stable behavior. In effect, the asset interest rate, weighted average, in national currency was at 13.84% at the end of 2008, value higher by 0.95 percentage points to the registered on the same date the previous year. As to liable interest rates, weighted average, in national currency, they were at 5.47%, higher by 0.56 percentage points to the observed at the end of

12 A. GENERAL PANORAMA II. THE INTERNATIONAL ECONOMY According to the International Monetary Fund (IMF 3 ), in 2008, the world GDP grew to 3.0% (5.2% in 2007). It is worth indicating that the slight global economic deceleration was generated by the deepening financial crisis that was originated in the financial market in the United States and by the following reduction of international commerce. In the same manner, the emerging market economies and those of developing countries affected the reduction of their exports to advanced economies as well as to lower income of foreign capital. The inflationary pressures increased in 2008, even though there was a lower level of economic activity, a reduction in the international price of the majority of raw materials as of the second semester of the year and of the absence of salary increases. In the advanced economies 4, in 2008 inflation was at 3.4%, which is higher to the 2.2 registered the previous year. It is worth indicating that in Japan, after having an inflation of 0.0% in 2007, inflation was 1.4% in As for the United States of America, the inflation rate was at 3.8% (2.9% in 2007) and in the Euro Zone, inflation was at 3.3% (2.1% in 2007). Regarding inflation in the group of countries with emerging market economies and developing economies, these were at 9.3% in 2008, rate higher to the registered the year before (6.4%). It is worth mentioning that the People s Republic of China had an increase in inflation, when going from 4.8% in 2007 to 5.9% in As to India, they had an increase in inflationary rhythm, when located at 8.3% in 2008, higher to the observed the previous year (6.4%). In the emerging market economies in Europe, inflation increased when it was at 8.0% (6.2% in 2007), while in the Community of Independent States an inflationary rhythm of 15.6% was registered, higher to the observed in 2007 (9.7%). 3 Perspectives of World Economy, April and October 2009, IMF. 4 The classification of countries used by the IMF, regarding the groups and regions of countries, is presented in Annex 1 of the present chapter. 12

13 B. ADVANCED ECONOMIES In 2008, the economic growth rates of advanced economies were at 0.6%, lower to that of 2007 (2.7%). In the case of the US economy, it grew at a rhythm of 0.4%, lower to the observed in 2007 (2.1%). The lesser growth of this economy was caused, among other factors, by the contraction of internal credit and the fact that it became very expensive, as well as the reduction of domestic consumption caused by the drop in the trust of the economic agents. Regarding the current account of payments balance of the United States of America, in 2008 this registered a deficit of 4.9% of the GDP, lower to the observed in 2007 (5.2% of the GDP). The mentioned reduction of the mentioned deficit was due to the depreciation of the US dollar in the international markets and by the lower dynamism of this economy in The mentioned situation contrasts the surpluses registered in the oil exporting countries, in the People s Republic of China, Japan and other economies with emerging markets in Asia. In Canada, the growth rate of the GDP reached 0.4%, lower to the registered in 2007 (2.5%). This reduction was influenced by the weakening of foreign demand, especially coming from the United States of America and Asia. In the Euro Zone, the growth rhythm was at 0.7% (2.7% in 2007). The mentioned deceleration of the economic activity was caused by the negative incidence that the global financial crisis had on the financial system of the EuroZone, as well as due to the reduction of the aggregate demand, domestic as well as foreign. In effect, the internal aggregate demand was weakened because of the increase in unemployment and the loss in consumer trust caused by the uncertainty generated by the duration of the global financial crisis, as well as foreign demand being affected by the marked deceleration of global economy. In Germany a reduction in the economic growth rhythm was observed, when the GDP went from 2.6% in 2007 to 1.2% in This behavior was due to the fall of exports and by the negative effects derived from the world financial crisis. In the United Kingdom, the GDP grew 0.7% in 2008, percentage lower to the registered in 2007 (2.6%). Said behavior was influenced by the negative incidence 13

14 of the global financial crisis on domestic credit conditions, as well as consumer reduction, due to the uncertainty on the duration of the world financial crisis. In Japan, the GDP registered negative growth of 0.7% in 2008, rate lower to the observed in 2007 (2.3%). The drop in economic activity was caused by the reduction not only of domestic investment but also of the manufacturing exports. CHART 1 ADVANCED ECONOMIES GROWTH OF THE REAL GDP YEARS (In percentages) Country TOTAL United States of America Canada Euro Zone Germany France Italy Spain United Kingdom Japan Other countries a/ a/ Korea; Australia; Taiwan; Sweden, Switzerland Special Administrative Region ofhong Kong of the People s Republic of China; Czech Republic, Norway; Singapore; Denmark; Israel; New Zeland, and Iceland SOURCE: Perspectives of World Economy; April and October, IMF. The advanced economies registered an inflation of 3.4% in 2008, lower to that of 2007 (2.2%). In the United States of America, the inflation rate was at 3.8% (2.9% in 2007). In Canada, a slight rise in inflationary rhythm was seen, when going from 2.1% in 2007 to 2.4% in In Japan, the inflation was 1.4%, 14

15 whereas in 2007 it was at zero. In the Euro Zone, inflation saw a slight increase when going from 2.1% in 2007 to 3.3% in The countries that registered the lowest inflation rates in 2008 were: Japan 1.4%, Switzerland 2.4%, Canada 2.4%, Portugal 2.7%; and Germany 2.8% (0.0%, 0.7%, 2.1%, 2.4% and 2.3% in 2007, in that order.) ADVANCED ECONOMIES INFLATION YEARS (In percentages) CHART 2 COUNTRY TOTAL United States of America Canada Euro Zone Germany France Italy Spain United Kingdom Japan Other countries a/ a/ Korea; Australia; Taiwan; Sweden; Switzerland; Special Administrative Region of Hong Kong from the People s Republic of China; Czech Republic; Norway, Singapore, Denmark, Israel; New Zealand; and Iceland. SOURCE: Perspectives of World Economy; April and October 2009, IMF.. In the advanced economies, the unemployment rate increased in 2008, when at 5.8% (5.4% in 2007). In this group of economies, the United Sates of America, Japan, Canada, the Euro Zone and the United Kingdom, experienced rates of unemployment of 5.8%, 4.0%, 6.2%, 7.6% and 5.5%, respectively (4.6%, 3.8%, 6.0%, 7.5% and 5.4% in 2007, in that order). 15

16 CHART 3 ADVANCED ECONOMIES UNEMPLOYMENT YEARS (In percentages) COUNTRIES TOTAL United States of America Canada Euro Zone Germany France Italy Spain United Kingdom Japan SOURCE: Perspectives of World Economy, April and October IMF. In the United States of America, to counteract the weakening economic activity, the Federal Reserve reduced the Federal Funds rate to close to zero. However, the adverse conditions in the credit market limited the efectiveness of the cutbacks of the monetary policy interest rate, so during the second semester the US Central Bank, given the international financial crisis, decided to implement unconventional measures to stimulate credit flow and promote economic reactivation. On the other hand, the Bank of England, the European Central Bank, and the Bank of Japan implemented expansive monetary policies to stimulate economic activity. In the main international exchange markets, in 2008 the US dollar experienced an appreciation regarding the following currencies: Sterling Pound, 38.3%; Euro, 7.8%; and, the Canadian dollar 23.0%; while it depreciated before the Yen 17.1%. The US dollar was strengthened before the main Latin American currencies. It is worth indicating that, notwithstanding the financial crisis that 16

17 affected the US economy, the dollar continued to be used as a reserve currency, so, in 2008, the majority of investments were made in financial instruments made in that currency. AVERAGE EXCHANGE RATES OF SELECTED CURRENCIES REGARDING THE US DOLLAR DECEMBER DECEMBER 2008 (Monetary units per US dollar) CHART 4 MONTH YEN STERLING CANADIAN EURO POUND DOLLAR December January February March April May June July August September October November December SOURCE: Bloomberg informational services. As to the volume of world commerce of goods and services, these had a reduction in 2008, when registering a growth rate of 3.0%, lower to the registered in 2007 (7.3%), behavior that is mainly explained by the deterioration of the world economy. The advanced economies group presented a reduction of its exports, which grew 1.9%, percentage lower to the observed in 2007 (6.3%). The exports of the emerging market economies and developing countries also had less dynamism, when located at 4.6%, lower to the registered in 2007 (9.8%). As to the imports of advanced economies, these grew 0.5%, percentage lower to the observed in 2007 (4.7%). In the same way, the growth rate of imports of other economies with emerging markets and developing countries was of 9.4%, percentage lower to the registered in 2007 (13.8%). Concerning the exchange rates, in the advanced economies, these registered a drop in 2008, when there is evidence of a relative variation of -1.8% (0.3% in 17

18 2007), result that is explained by the increase in the prices of some imported foods and raw materials. On the other hand, other emerging market economies and developing countries experienced an increase of their exchange terms, when registering a relative variation of 4.1% (0.7% in 2007), due to the increase in the international prices of its main export products. WORLD COMMERCE OF GOODS AND SERVICES VOLUME AND TERMS OF EXCHANGE YEARS (Percentage variations) CHART 5 CONCEPT TOTAL VOLUME Exports Advanced economies Other emerging market Economies and developing countries Imports Advanced economies Other emerging market economies And developing countries TERMS OF EXCHANGE Advanced economies Other emerging market economies And developing countries SOURCE: Perspectives of World Economy, April and October, 2009, IMF.. Regarding the foreign sector, the advanced economies, as a whole, increased their deficit in the payments balance of the current account, which was at 1.3% of the GDP, amount higher to the observed in 2007 (0.9% of the GDP). This result was mainly influenced by the behavior of the current account payments balance of the Euro Zone, since contrary to the surplus of 0.3% of the GDP in 2007; in 2008, there was a deficit of 0.7% of the GDP. The payments balance current account of Japan experienced a reduction of its surplus, when going from 18

19 4.8% of the GDP in 2007 to 3.2% of the GDP in On the contrary of the mentioned economies, in the United States of America observed a reduction of said deficit, which was at 4.9% of the GDP, lower to the registered in 2007 (5.2% of the GDP). ADVANCED ECONOMIES BALANCE IN CURRENT ACCOUNT OF THE PAYMENTS BALANCE AS A PERCENTAGE OF THE GDP YEARS CHART 6 COUNTRY TOTAL United States of America Canada Euro Zone Germany France Italy Spain United Kingdom Japan SOURCE: Perspectives of World Economy, April and October 2009, IMF In 2008, the advanced economies, at an aggregate level, presented a fiscal deficit of 4.6% of the GDP, higher percentage to the registered in 2007 (2.2%). In this group of economies, the United States of America and Japan registered the biggest fiscal deficits, which were at 5.9% and 5.8%, (2.8% and 2.5% in 2007, in that order). In the United Kingdom, the fiscal deficit increased to 5.1% of the GDP (2.6% in 2007). The increase of the fiscal deficit in the indicated economies is mainly associated to the reduction of the income tax and to the implentation of anticyclical policies because of the world economic crisis. 19

20 In the Euro Zone, efforts were made to strengthen the economic activity through the fiscal policy, so the aggregate fiscal deficit of that region was at 1.8% of the GDP (0.6% of the GDP in 2007). In Italy, the fiscal deficit was at 2.7% of the GDP, whereas in France, it was at 3.4% of the GDP (2.7% in 2007) and in Germany, it was reduced to 0.5% of the GDP in 2007 to 0.1% of the GDP in C. OTHER ECONOMIES WITH EMERGING MARKETS AND DEVELOPING COUNTRIES According to the IMF, the economic activities of other economies with emerging markets and developing countries shrunk, when going from 8.3% in 2007 to 6.0% in It is worth indicating that in the case of oil exporting countries, the growth rate in 2008 was of 5.4% (7.4% in 2007), while in the countries that do not export oil, the economic growth was of 6.1% in 2008, lower to that of 2007 (8.5%). It is important to indicate that among the economies that make up this group of countries, those in Africa, as a whole, reached a GDP growth of 5.2% in 2008, percentage lower to that observed in 2007 (6.3%). Said behavior was mainly influenced by the reduction of volume and the price of exports, due to a drop in foreign investment, real as well as portfolio, as well as a significant shrinkage of income due to family remittances and adverse conditions for obtaining international credit. The Sub-Saharan economies jointly registered an economic growth of 5.5%, lower rate to that experienced in 2007 (7.0%). Asia s emerging economies showed an increase of 6.7%, lower to the registered in 2007 (9.8%). In this set of countries, we can highlight the economic expansion of the People s Republic of China and India. Regarding the People s Republic of China, in 2008 it registered a growth rate of 9.0% (13.0% in 2007), due to its expansive macroeconomic policies that strengthened consumption and investment in infrastructure. In the case of India, economic growth was of 7.3% (9.4% in 2007), as a result of the strength of domestic demand through monetary and fiscal policies. On the other hand, Asia s developing countries showed a growth of 7.6% in 2008, lower to the registered the previous year (10.6%). 20

21 The Middle East registered economic growth of 5.4% in 2008 (6.2% in 2007). This reduction in the economic dynamism of this region was caused by the drop in the international price of crude oil, due to the adverse conditions in foreign credit, due to the reduction in family remittances and by the lower income of foreign capital. In the Western Hemisphere, the GDP showed an economic growth of 4.2% in 2008 (5.7% in 2007). This lower dynamism was influenced by the reduction in exports, especially toward the United States of America, the main commercial associate of the region. Added to this, these economies were affected by the income reduction of exports, especially toward the United States of America, main commercial partner of the region. These economies were also affected by the reduction of foreign currency income from tourism and due to less flow of family remittances, as well as the increase of the cost of foreign credit and lower capital income. 21

22 OTHER ECONOMIES WITH EMERGING MARKETS AND DEVELOPING COUNTRIES VARIATION OF THE REAL GDP YEARS (In percentages) CONCEPT TOTAL Oil exporters Non-oil exporters BY REGIONS Africa Emerging countries in Asia Developing countries in Asia Middle East Western Hemisphere SOURCE: Perspectives of World Economy, April and October, IMF. CHART According to the data from the Comisión Económica para América Latina y el Caribe (CEPAL 5 ) [Economic Commision for Latin America and the Caribbean], Latin America and the Caribbean registered a growth of 4.6%, as in 2008, lower to the observed in 2007 of 5.7%. The economic shrinkage of the region was caused by the international crisis. In effect, the world recession caused a reduction in the flow of family remittances, which weakened the aggregate internal demand. The economy was also affected by a reduction of net direct foreign investment, which went from US$84.6 billion in 2007 to US$81.7 billion in It is worth stating that the economic growth of the region sustained positive evolution in the South American economies, particularly Uruguay 11.5%, Peru 9.4%, Argentina 6.8% and Brazil 5.9% (7.4%, 8.9%, 8.7% and 5.7%, in the same order, in 2007). On the other hand, the Caribbean economies, as a whole, showed a growth rate of 2.4% (3.8% in 2007), while those in Central America registered growth of 3.3% (5.6% in 2007) and Mexico, 1.8% (3.2% in 2007). 5 Preliminary Balance of the Latin American and Caribbean Economies CEPAL. 22

23 In monetary policy matters, during the first semester of 2008, the majority of central banks increased their policy rate to minimize the second round effects generated by the increase of food and fuel prices in international markets. However, in the second semester of the year, the restrictions on international credit and the uncertainty caused by the world crisis caused the Central Banks to increase the liquidty of their banking systems in order to facilitate the operation of the internal credit market. Regarding public finance, the governments were able to keep discipline, although there was an increase in current public expense and investment, so the fiscal deficit in the region was at 0.3% of the GDP in 2008 (surplus of 0.4% of the GDP in 2007). It is worth indicating that the economic policy was oriented toward containing the negative effects of global financing. 23

24 CHART 9 LATIN AMERICA AND THE CARIBBEAN VARIATION OF THE REAL GDP YEARS (In percentages, based on the value of prices from 2000) COUNTRY a/ REGIONAL Antigua and Barbuda Argentina Bahamas, The Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Cuba Dominica Ecuador El Salvador Granada Guatemala b/ Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Dominican Republic Saint Kitts and Nevis Saint Vicent and The Grenadines Santa Lucia Surinam Trinidad and Tobago Uruguay Bolivarian Republic of Venezuela a/ Preliminary numbers. b/ According to the Banco de Guatemala, the growth rates are 6.3% and 3.3%, in the same order. SOURCE: Preliminary Balance of Latin American and Caribbean Economies, CEPAL. 24

25 CHART 10 LATIN AMERICA AND THE CARIBBEAN GDP PER INHABITANT YEARS (Annual variation rates) COUNTRY a/ REGIONAL Antigua and Barbuda Argentina Bahamas, The Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Cuba Dominica Ecuador El Salvador Granada Guatemala b/ Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Dominican Republic Saint Kitts and Nevis San Vicent and The Grenadines Santa Lucia Surinam Trinidad and Tobago Uruguay Bolivarian Republic of Venezuela

26 According to the IMF, in 2008 the inflation rate of the set of countries that include the other economies with emerging markets and developing countries increased by regarding the previous year, when at 9.3% (6.4% in 2007). In Africa, the inflation was of 10.3% (6.0% in 2007). In the Sub-Sahara, it registered an inflation rate of 11.9%, percentage higher to that observed in 2007 (6.8%). In the developing countries of Asia, inflation increased moderately, when going form 5.4% in 2007 to 7.5% in In the People s Republic of China, the inflation was at 5.9% (4.8% in 2007), while in India inflation was of 8.3% in 2008 (6.4% in 2007). Regarding the Western Hemisphere, inflation registered a tendency to rise, at 7.9% in 2008 (5.4% in 2007). The main economies in this region registered the highest inflation rates in 2008, which were Venezuela 30.4%, Chile 8.7%, Argentina 8.6%, Colombia 7.0% and Brazil 5.7% (18.7%, 4.4%, 8.8%, 5.5% y 3.6% in 2007, in that order). The Middle East region registered inflation of 15.0%, higher to the observed in 2007 (11.2%). 26

27 CHART 11 WESTERN HEMISPHERE VARIATION OF PRICES YEARS (Annual Averages) Country REGIONAL Antigua and Barbuda Argentina Bahamas, The Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Dominica Ecuador El Salvador Granada Guatemala a/ Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Dominican Republic Saint Kitts and Nevis Santa Lucia San Vicente and The Grenadines Surinam Trinidad and Tobago Uruguay Bolivarian Republic of Venezuela a/ According to the Banco de Guatemala the inflationary rhythm was of 8.75 and 9.4%, in that order. SOURCE: Perspectives of World Economy. April and October IMF. 27

28 Regarding the financial conditions of the economies with emerging markets and developing countries, the net private capital flow showed a drop from US$696.5 billion in 2007 to US$129.5 billion in According to the IMF, such flows dropped in Africa, Central Europe and the East, as well as the Western Hemisphere. In the Middle East and in the Community of Independent States, a net capital outflow was registered. In effect, in 2008 the net private capital flow for Africa was at US$28.5 billion (US$30.0 billion in 2007), for the economies of Central and Eastern Europe, observing a net flow of private financial resources of US$154.7 billion (US$185.5 billion in 2007) and for the group of countries that make up the Western Hemisphere the net private capital income was at US$67.0 billion (US$112.2 billion in 2007). In the Middle East, negative capital net flow was of US$58.9 billion, that contrasts the surplus of US$43.3 billion in 2007, while in the Community of Independent States, after a suprlus of US$124.9 billion 2007, registered a flow of private net capital of US$97.4 billion, in 2008). Regarding the balance of the current payments balance account of the economies with emerging markets and developing countries, in 2008 it showed a surplus of US$724.6 billion, significantly higher to the registered in 2007 (US$664.5 billion). This result was influenced by the positive balances in developing countries of Asia of US$381.5 billion; in the Middle East it was of US$42.8 billion; in the Community of Independent States of US$48.0 billion. According to CEPAL, in 2008, the exports from Latin America increased 18.2% (1.9% in terms of volume and 16.1% in terms of unit price). This growth rate reflected a greater dynamism regarding 2007, when exports grew 12.6% (3.3% in terms of volume and 9.2% in terms of unit price). On the other hand, imports from the region also reflected an increase in 2008, when registering 22.8% (10.6% in terms of volume and 11.0% in terms of unit price), while in 2007 they increased 19.2% (11.8 % in terms of volume and 6.5% in terms of unit price). It is worth pointing out that, although there was less world economic growth, this region was able to keep commercial dynamism sustained by an increase of 4.6% of the exchange terms. 28

29 Regarding the balance of goods, in 2008, for the seventh consecutive year, it registered a positive balance, which was of US$44.6 billion, equivalent to 1.4% of the regional GDP, though lower than the surplus of US$64.4 billion in 2007 (2.0% of the GDP). On the other hand, the current account of the region s payment balance was a deficit of US$30.4 billion, (0.6% of the GDP), surplus of US$14.3 billion in 2007, and equivalent to 0.7% of the GDP). The countries of the Community of Independent States in 2008 registered an economic growth of 5.5%, which implies a deceleration regarding 2007 (8.6%). This behavior is mainly explained by the reduction of export demand, by the adverse conditions of international credit and by a drop in the international prices of raw materials, especially those that are employed in the generation of energy. Last, the countries of Central and Eastern Europe jointly showed an economic growth of 3.0% in 2008, lower than 5.5% of the previous year. Said behavior was influenced by the reduction of its exports and by the lower income of capital. 29

30 CENTRAL AND EASTERN EUROPEAN COUNTRIES COMMUNITY OF INDEPENDENT STATES VARIATION OF THE REAL GDP YEARS (In percentages) CHART 12 COUNTRY Central and East Europe Albania Bosnia and Herzegovina Bulgaria Croatia Estonia Hungary Latvia Lithuania Macedonia, former Yugoslav Republic Poland Republic of Montenegro Romania Serbia Turkey Community of Independent States Armenia Azerbaijan Bielorrusia Georgia Kazakhstan Moldovia Mongolia Republic of Kirgistan Russia Tajikistan Turkmenistan Ukraine Uzbekistan SOURCE: Perspectives of World Economy. April and October, IMF. 30

31 ANNEX CLASSIFICATION OF COUNTRIES According to the report on the Perspectives of World Economy by the International Monetary Fund (IMF), October 2009, the countries are classified in two main groups: a) advanced economies and, b) other economies with emerging markets and developing countries. ADVANCED ECONOMIES BY SUB-GROUPS OF COUNTRIES Main Other Economies from Asia Advanced Advanced European Union Euro Zone Recently Economies Economies Industrialized Germany Australia Germany Germany Korea Canada Korea Austria Austria Hong Kong, SAR of a/ United States Denmark Belgium Belgium Singapore France Hong Kong, SAR of a/ Bulgaria Cyprus Taiwan Italy Iceland Cyprus Slovenia Japan Israel Denmark Spain United Kingdom Norway Slovenia Finland New Zealand Spain France Czech Republic Estonia Greece Singapore Finland Ireland Sweden France Italy Switzerland Greece Luxembourg Taiwan Hungary Malta Ireland The Netherlands Italy Portugal Latvia Slovak Republic Lithuania Luxembourg Malta The Netherlands Poland Portugal United Kingdom Czech Republic Slovak Republic Romania Sweden a/ On July 1, 1997, the People s Republic of China recovered its sovereignty overhong Kong, which made it the Special Administrative Region (SAR) of Hong Kong of the People s Republic of China. SOURCE: Perspectives of World Economy. October, 2009, IMF. 31

32 OTHER EMERGING MARKET ECONOMIES AND DEVELOPING COUNTRIES PER REGIONS Developing countries Developing countries Middle East Western Hemisphere of Asia of Africa Afghanistan Saudia Arabia Antigua and Barbuda Angola Bangladesh Bahrein Argentina Algeirs Bhutan Egypt Bahamas, The Benin Brunei United Arab Emirates Barbados Botswana Cambodia Iraq Belize Burkina Faso Fiji Iran Bolivia Burundi Philippines Jordan Brazil Cape Verde India Kuwait Chile Cameroon Indonesia Lebanon Colombia Chad Solomon Islands Lybia Costa Rica Comoros Kiribati Oman Dominica Ivory Coast Malaysia Qatar Ecuador Djibouti Maldives Syrian Arab Republic El Salvador Eritrea Myanmar Republic of Yemen Granada Ethiopia Nepal Guatemala Gabon Pakistan Guyana Gambia Papua New Guinea Haití Ghana Lao People s Dem. Republic Honduras Guinea People s Republic of China Jamaica Guinea-Bissau Samoa Mexico Equatorial Guinea Sri Lanka Nicaragua Kenya Thailand Panama Lesotho Timor Paraguay Lyberia Tonga Peru Madagascar Vanuatu Dominican Republic Malawi Vietnam Saint Kitts and Nevis Malí San Vicente and The Granadines Morrocco Community of Independent Santa Lucia Mauricio Central and Eastern Europe States Surinam Mauritania Albania Armenia Trinidad and Tobago Mozambique Bosnia and Herzegovina Azerbaijan Uruguay Namibia Bulgaria Bielorrusia Bolivarian Rep. of Venezuela Niger Croatia Georgia Nigeria Estonia Kazakhstan Central African Republic Hungary Moldovia Dem.Rep. of Congo Latvia Mongolia Republic of Congo Lithuania Republic of Kirgistan Rwanda Macedonia, ex Yugoslav Republic of Russia Senegal Republic of Montenegro Tajikistan Seychelles Poland Turkmenistan Sao Tomé and Príncipe Romania Ukraine Sierra Leone Serbia Uzbekistan South Africa Turkey SOURCE: Perspectives of World Economy. October 2009, IMF. Sudan Swaziland Tanzania Togo Tunisisa Uganda Zambia Zimbabwe 32

33 III. NATIONAL ECONOMIC ACTIVITY A. GENERAL ASPECTS The dynamism that had been registered in the national economic activity since 2004 reverted in In effect, the economic growth, measured by the Gross Domestic Product (GDP) in real terms 6, registered a growth rate of 3.3%, lower by 3.0 percentage points to the registered in 2007 (6.3%), result mainly influenced by external origin factors, due to the economic deceleration observed in the majority of countries in the world, caused by the global financial crisis, which influenced the expectations of economic agents, and private investment levels. It is worth stating that said rate is higher for the fifth consecutive year to the population growth rate (2.5%) 7, as is seen in the following graph. Graph 1 Real Gross Domestic Product (Base 2001) Variation Rates Years P/Preliminary In the external order, the behavior of the registered national economic activity, was based on a less favorable environment, due to world economic deceleration, particularly in the United States of America and the main commercial partners of Guatemala (Central America, Mexico and the Euro Zone). On the other 6 7 Calculations made based on the methodology contained in the 4th Revision of the National Accounts Systems Manual 1993 (Revisión 4 del Manual del Sistema de Cuentas Nacionales 1993 (SCN93), base year Projection made by the National Statistics Institute (INE, for its acronym in Spanish), based on the XI National Population Census

34 hand, it was based on the presence of supply shocks, because of the increase of international oil prices and derivatives, of corn and wheat. Regarding the domestic order, macroeconomic stability as a result of the application of disciplined monetary and fiscal policies was kept, as well as the solidity of the main macroeconomic foundations of the country, which allowed counteracting the negative effects of the world economic crisis. B. GROSS DOMESTIC PRODUCT MEASURED BY THE EXPENDITURE DESTINATION In 2008, the majority of variables that make up the GDP per expenditure destination, in real terms, registered negative growth rates or less dynamic than those observed in 2007, except the general government consumption expense, which showed a more dynamic behavior. Regarding domestic demand, made up of consumption, investment and variation of stock, it showed a growth of 0.8%, lower than the observed in 2007 (6.0%). Said behavior was mainly explained by the drop of 6.2% in making up fixed gross capital (5.0% growth in 2007), as well as by the deceleration in private consumption. In effect, final consumption of homes and non-for-profit institutions that serve homes, registered a growth rate of 4.4%, lower to that observed the year before (5.4%), associated to an increase in the prices of final consumer goods and the deceleration in the income of family remittances, when going from 14.4% in 2007 to 4.5% in According to the International Organization for Migration (IOM) 8, of the income from family remittances, families use an average of 48.0% for consumer expenses. Regarding the expense of general government consumption, that includes salaries and procurement of goods and services; it registered a growth of 11.3%, in 2008, higher to the observed in 2007 (8.3%), mainly, as a result of the increase in central government spending in the purchase of goods and services. 8 International Organization for Migration (IOM), Survey on Remittances and the Environment

35 The gross formation of fixed capital registered a variation rate of -6.2% in 2008, lower to the observed in 2007 (5.0%), behavior influenced by the drop in investment in construction with machinery and equipment; heading that in 2008 showed variation rates of -0.5% and -11.6%, respectivley (8.3% and 2.1%, respectively, for 2007). Regarding foreign demand, constituted by the export of goods and services, registered a drop in 2008 of 0.1% in real terms (increase of 9.4% in 2007). Said behavior is mainly explained by the loss in dynamism registered in the export of manufactured products and mining (that represent 62.8% of total exports), which in real terms increased 0.7% in 2008 (5.6% in 2007); as well as a drop of 1.1% observed in the export of agricultural and farm products (increase of 16.6% in 2007). Regarding foreign supply, the import of goods and services registered a drop of 5.6% (7.2% increase in 2007), associated to a decrease in the majority of imported goods. In effect, when analyzing the behavior of imports in 2008, manufactured goods and mining registered a drop, in real terms of 6.2% (increase of 7.2% in 2007); while the agricultural and farm products showed a variation rate of 1.3%, less dynamic than the observed in 2007 (6.2%). C. GROSS DOMESTIC PRODUCT MEASURED BY ORIGIN PRODUCTION In terms of the origin production, the gross domestic product exhibited positive behavior for the majority of activities in 2008; however, the growth rates observed were less dynamic than those from the previous year. As to the behavior of the aggregate value of the Agriculture, livestock, hunting, forestry and fishing activity (with a participation of 13.2% in the GDP), based on the information obtained in the National Agricultural Survey 2008 (ENA, for its acronym in Spanish), producers, trade-unions and public and private entities registered a growth rate of 0.9%, lower to the observed in 2007 (5.9%). This behavior is mainly explained by the drop observed in the production of traditional crops when going from 7.4% in 2007 to -1.6% in 2008, by lower dynamism in the 35

36 non-traditional harvest production and in the sub-activities of livestock, forestry and fishing, when going from 5.9% and 4.9% in 2007 to 0.6% and 3.1% in 2008, respectively. Regarding the behavior of the aggregate value generated by traditional crops in 2008, this was influenced by the lower dynamism observed in the production of coffee and banana, when registering growth rates of 3.4% and 17.9% in 2007 and of 2.5% and 0.2% in 2008, respectively; as well as due to the drop of 20% in the production of cardamom (-6.0% in 2007). Regarding coffee production, the Asociación Nacional del Café (ANACAFÉ) stated that the lower dynamism was mainly associated to a drop in the harvest yield, due to unfavorable climate factors, as well as the bi-annuality of the bean production process 9. In the case of the added value of banana production, there was a slight increase of 0.2% in 2008 according to information provided by Compañía de Desarrollo Bananero, S. A. (Bandegua) and Compañía Bananera Guatemalteca Independiente, S. A. (Cobigua). This is the result of the combination of the damage caused to the plantations from intense rains that characterize the rainy season, and of the normalization of the production in the areas broadened the previous year. The added value in cardamom production, registered a higher fall, from - 6.0% in 2007 to -20.0% in According to the information provided by the Federación de Cooperativas de las Verapaces (Fedecovera), the marked reduction in the production is mainly explained by the neglect and reduction of planting areas in some producer regions of the Verapaces, due to the fall of the price of said herb in the international market in the period. Regarding the production of non-traditional crops, in 2008, the same was less dynamic, when going from 5.9% in 2007 to 0.6% in 2008, mainly as a result of the deceleration in bean and orchard production, which registered growth rates from 2.8% and 2.5%, respectively in 2008 (3.2% and 5.1%, in 2007; as well as the 9 Cycle of coffee harvest that indicates that, after a high harvest season; a low harvest season follows, due to plant exhaustion. 36

37 drop of 8.9% in the production of fruit (growth of 16.0% in 2007). The behavior registered in these crops was mainly influenced by the unfavorable climate conditions prevalent during According to the Ministerio de Agricultura, Ganadería y Alimentación (MAGA) [Equivalent to the Department of Agriculture.], losses were reported, caused by said phenomenon in 14 territorial divisions of the country, which were valued in Q111.2 million. Regarding the aggregate value in the production of sugar cane, it also dropped, when going from 11.6% in 2007 to 2.4% in According to the Asociación de Azucareros de Guatemala (Asazgua) and Centro Guatemalteco de Investigación y Capacitación de la Caña de Azúcar (Cengicaña), the lower dynamic is explained by the deficiency of luminosity in the plants and stronger winds that battered the production area at the beginning of the year, and also due to the presence of rodents that impacted some cultivated zones in the sourthern part of the country. As to the aggregate value generated by the activities of live stock, forestry and fishing, the lower dynamism was explained by the deceleration in the production of the sub-activities of breeding bovine cattle and domestic fowl, which went from 2.8% and 3.0% in 2007 to 2.1% and 2.7% in 2008, in the same order, there was behavior associated to less growth rhythm of internal demand of beef and poultry. The aggregate value generated by the Exploitation of mines and quarries activity (with a participation of 0.6% in the GDP) registered a variation rate of -4.3% (13.9% in 2007). This result was mainly influenced by less extraction of oil and natural gas, when going from -5.0% in 2007 to -7.3% in In that regard, according to the Ministerio de Energía y Minas (MEM) [Roughly equivalent to the Department of Energy.], this was due to a drop in the production of crude oil in the main oil wells in the country, as a result of the process of exhausting the same. On the other hand, the extraction of stones, sand and clay; of other non-metallic minerals; and, metallic minerals, saw negative variation rates of 4.3%, 5.0% and 0.6%, respectively (growth of 14.6%, 13.2% and 52.7%, in that order, in 2007). In the case of extraction of stones, sand and clay, there was a drop in demand in 37

38 them by construction activities; on the other hand, the behavior of the non-metallic minerals was associated to a reduction in foreign demand; while the slight drop seen in the extraction of metallic minerals is due to the normalization in the process of gold and silver extraction, by Montana Exploradora de Guatemala. The added value of the Manufacturing industries activity (with a participation of 18.3% in the GDP), registered a growth rate of 2.0%, lower than the percentage observed in 2007 (3.0%). This result was mainly influenced by the growth of 3.0% observed in the food, beverage and tobacco industry, lower to the registered in 2007 (3.7%); behavior basically explained by the drop in sugar production, which, according to the Guatemalan Sugar Producers Association (Asazgua, for its acronym in Spanish), showed an inter-annual variation of -1.4% that contrasts the record production in 2007, which growth rate was of 13.6%. In the referred sector there is also a drop of 0.7% in textile and clothing production (-0.4% in 2007), associated to less demand from the United States of America, main destination of these products. In effect, according to the Clothing and Textiles Commission (Vestex) and the Guatemalan Exporters Association (Agexport), said behavior was influenced by the world economic deceleration, particularly that of the mentioned commercial partner, by the increase in production costs and due to an increase in international competition. On the other hand, there was also a drop in demand for industrial products for construction, mainly of cement, block, iron and other metals, due to a decrease observed in the levels of public and private investment for said activity. It is important to mention that the lower dynamism observed in the manufacturing industries in 2008 coincides with the results of the Business Opinion Survey carried out from February to March 2009 to a sample of 370 industrial institutions, from which 52.4% are big (more than 50 workers); 18.4% medium (20 to 49 workers); and, the remaining, 29.2%, are small (5 to 19 workers). In effect, 47.5% of the interviewed entrepreneurs stated that in 2008 the production volume decreased (31.0% en 2007), while 21.5% stated that the production remained the same (21.3% en 2007) and the remaining 31.0% stated that the production volume increased (47.7% en 2007), as shown in the following graph. 38

39 Percentage of interviewees Graph 2 Business Opinion Survey Industrial Volume Production Years As to the aggregate value of the Power supply and water collection activities (with a participation of 2.6% in the GDP), this registered a growth of 1.6% (6.3% in 2007), which, according to the Wholesale Market Adminsitrator (WMA), was mainly associated to a drop in energy demand, due to less growth observed in the commercial activities for wholesale and retail, telecommunications, manufacturing industries and private services. The aggregate value of the Construction activity (with a participation of 3.9% of the GDP), showed a variation rate of -0.8% (8.8% in 2007). Mentioning that this behavior was influenced by less dynamism in the construction of buildings 10, that explained 68.6% of the behavior of said activity. In effect, in 2008, based on the municipal survey of construction permits held by the Banco de Guatemala, it was determined that less authorizing licenses were issued for housing and apartment building construction. According to the Guatemalan Construction Chamber (CGC, for its acronym in Spanish), said behavior is mainly due to the increase in construction materials and the deceleration of economic activity. 10 Includes construction for one-family housing, series homes, multi-family units, commerce, industry, extensions, walls and repairs. 39

40 The aggregate value in Wholesale and retail commerce (with a participation of 11.9% in the GDP) registered a growth rate of 2.0% (4.1% in 2007), as a result of less flow of commercial goods in the economy, mainly due to the deceleration observed in agricultural production (going from 5.9% to 0.9%) and industrial (going from 3.0% to 2.0%), like in the import of goods and services, which in value terms increased by 5.4% regarding the previous year (15.1%). The aggregate value of Transportation, warehousing and communications activities (with a particiaption of 10.3% of the GDP), in 2008 registered a growth of 14.6% (22.8% in 2007). Said behavior was mainly explained by the growth of 22.3% in the sub-activity of mail and communications (33.0% in 2007), basically because of less dynamism observed in telecommunications, which aggregate value showed a variation rate of 23.5% in 2008 (35.0% in 2007), representing 98.0% of this sub-group. According to the information provided by the Superintendence of Telecommunications of Guatemala (SIT), the dynamism of this activity was mainly affected by the deceleration observed in the number of active lines. On the other hand, the sub-activity of ground, water and air transportation, also observed a deceleration, when going from 5.9% in 2007 to 2.2% in 2008, mainly associated to less intermediate demand of land cargo transportation services by the agricultural and industrial activities. As to Financial intermediation, insurance and auxiliary activities (with a relative weight of 4.2% of the GDP), the aggregate value registered a growth rate of 8.3% (9.9% in 2007), mainly associated to less dynamism seen in the net result of the banking system 11, which, to December 2008, registered a variation rate of 19.3% (41.9% in 2007). Congruent with the behavior observed in the activity of financial, insurance and auxiliary intermediation, there was less dynamism registered in the Indirectly Measured Financial Intermediation Services 12, which variation rate was at 6.2% in 2008, lower to the observed the previous year (13.3%). 11 Refers to the net gains or losses reported in the state of results consolidated by the banking system. 12 Represents the difference between paid interest and interest charged by the financial intermediaries. 40

41 In the Home Rental activity (with a relative weight of 10.0% in the GDP), the aggregate value showed a growth rate of 3.6% (3.9% in 2007), due to less supply of new housing for rental. Regarding the economic activity for Private Services (with a participation of 15.8% of the GDP), its aggregate value registered a growth rate of 6.2% (6.6% in 2007). This behavior was explained by the loss of dynamism for the sub-activity of maintenance and repairs, for 4.1% (6.1% in 2007); and, of the real estate, business and rent activities, 8.1% (9.7% in 2007); that together represented 46.3% of the activity. On the other hand, the sub-activities of teaching, health and social services; and hotels and restaurants, showed greater dynamism when observing rates of 7.1% and 4.9% (5.6% and 4.1%, in 2007). On the other hand, the aggregate value generated by the Public and Defense Administration activity (with a relative weight of 6.4% of the GDP), registered a growth rate of 4.3% (4.6% in 2007). This result was explained by less dynamism observed in the payment of salaries for the General Government, net transfers, which in nominal terms showed a growth of 9.0% (15.0% in 2007). Finally, regarding the heading for Net Taxes for Subsidizing Products 13, showed a variation of -1.5% in real terms, less than the observed in 2007 (6.6%), which is explained by the loss of dynamism in indirect tax collection, that grew in nominal terms, 3.4% in 2008 (16.8% in 2007). D. GROSS DOMESTIC PRODUCT MEASURED BY INCOME DISTRIBUTION The gross domestic product can also be measured by the income generated by institutional units, as a result of their participation in the productive process, or by the asset property that can be needed for production purposes. In that sense, the aggregate value created by production is distributed among the employee 13 In the SCN93, for methodological reasons, the production is valued at basic prices; in other words, no including net subsidy taxes on products. 41

42 salaries, net subsidy taxes on production and imports, the exploitation surplus 14 and mixed income 15. In 2008, the primary income 16, in nominal values, generated by the country s productive activity, showed that the salaries to employees, taxes on production and imports and the surplus of the gross exploitation reported less dynamic growth rates than the observed in 2007, at 1.7% and 14.6%, respectively (16.7% and 15.6%, in 2007); while employee salaries and mixed gross income registered greater dynamism, surpassing growth rates of 10.9% and 14.6% in 2007, to 12.2% and 15.5% in Regarding the participation of the income components within the GDP, in 2008, 40.5% was destined to the rent of companies constituted in society (exploitation surplus), 30.6% were received by families as employee salaries, 21.6% was distributed to family companies and to individual workers (mixed income) and 7.3% was received by the general government as net subsidy taxes on production and imports. C. ACCOUNTS OF THE INSTITUTIONAL SECTORS The national accounts allow analysis of resident institutional units of sets with analogoue characteristics. Such units are grouped in five institutional sectors, depending on their main function, the nature of their resources, their behavior and objectives, as follows: Non-Financial Societies (NFS), producers of goods and nonfinancial services to market prices; Financial Societies (FS), mainly dedicated to financial intermediation and insurance activities; General Government (GG), service producer at non-market prices for individual or collective consumption; homes, consumers and producers of market goods and services; and, non-profit institutions that serve homes (ISFLSH) [Acronym in Spanish.], producers of service at non-market prices to families. 14 Rent of the companies constituted in society. 15 Rent of family companies and individual workers. It is called Mixed Income because it implicitly contains a remuneration element for the work carried out by the owner or other family members that cannot be identified separately from his income as an entrepreneur. 16 Accounting balance that shows how the gross added value is distributed among work and capital factors; the government; and, if it corresponds, the flow from or towards the rest of the world. 42

43 In this context, in 2008, the institutional sectors contributed to the nominal GDP in the following way: Non-financial Societies, 49.1%; Homes, 36.8%; General Government, 6.3%; Financial private Stock companies, 3.1%; ISFLSH, 0.6%; and, the remaining 4.1% corresponded to the adjustment registered not only by the value of the net subsidy taxes to the products but also by the SIFMI (Indirectly Measured Intermediary Financial Services). The institutional sectors accounts also showed that the total of salaries paid to employees in the economic process were distributed as follows: Non Financial private stock companies, 50.1%; Homes (companies not constituted in society), 24.2%; General Government, 20.6%; Financial Societies, 3.3%; and, ISFLSH, 1.8%. Regarding Available Income, 17 in 2008, it was observed that the Homes sector showed the highest participation, which received 82.9%, followed by the General Government with 10.8%, Non-Financial Societies with 4.0%, ISFLSH and Financial Societies with 1.5% and 0.8%, respectively. Regarding the contribution of the institutional sectors in the savings of the country s economy 18, in 2008, it was observed that Homes generated 38.9%, followede by Non-financial stock companies with 28.1%, the General Government with 22.7%, the Financial Private Stock Companies and the ISFLSH and Societies with 5.5% and 4.8%, respectively. F. BEHAVIOR OF DOMESTIC PRICES 1. Consumer Price Index The Consumer Price Index (CPI) prepared by the Instituto Nacional de Estadística (INE), at Republic level, registered an inflationary rate of 9.40% in 2008, over the target established by the Monetary, Exchange Rate and Credit Policy fixed by the Monetary Board in 2008 of 5.5% (+/- 1.5 percentage point). The 17 Incomes derived from the participation of the institutional sectors in the productive process, of the property revenue (interests, dividends, land rent), current taxes on the income and richness, of contributions and social benefits and other current transferences, as family remittances. 18 Is part of the income of the resident institutional units of the economy that are not destined to consumption; therefore, it represents a funding source for investment. 43

44 referred inflationary rate was higher by 0.65 percentage points than the observed in 2007 (8.75%), as shown in the following graph. Graph 3 Consumer Price Index Inflationary Rhythm Years The behavior of the inflationary rate can be divided into two phases. The first, covered the period from January to July, in which such rate increased from 8.39% to 14.16%, mainly due to the increase in the international price of oil, corn, and wheat which influenced high prices for products that use these supplies. For oil and its derivatives, the increase observed was the result of a close gap between supply and demand of crude oil, as well as less refining capacity, especially by the United States of America. Regarding the high price of corn, this was mainly due to the demand in the world market for ethanol production. In the case of wheat, the increase was due to damage caused to crops by climatic factors during In the second phase, the inflationary rate dropped 4.29 percentage points, from 13.69% in August to 9.40% in December, especially due to a reduction in the price of some food products and in the prices of gasoline on the national market. On the other hand, the inter-annual variation of the CPI to December 2008 showed growth in the indexes of the nine expenditure divisions that constitute the same, mainly Food, non-alcoholic beverages and take-out food, registering an inter-annual variation of 12.35% and explained 59.58% of the CPI inter-annual 44

45 increase. Other divisions that explained the behavior of the inflationary rate are: Personal property, home equipment and routine home maintenance, 12.16%; Transportation and communications, 10.47%; Recreation and culture, 5.43%. Inter-annual variation of the Consumer Price Index In the entire republic Base: December 2000 = To December of each year Chart 13 Such divisions added to the Food, non-alcoholic beverages and take-out food division explaining the 83.62% of the CPI inter-annual variation to December 2008, as shown in the following table. In the Food, non-alcoholic beverages and take-out food division (weighting 38.75%), the variation of 12.35% was mainly associated to the rise in expense groups: orchard products, legumes and tubercules; oils and fats; milk, dairy products and eggs, Bread and cereals; and meats that together explained 80.0% of the inter-annual variation of this division. The division for Personal property, home equipment and routine home maintenance (weighting of 7.95%), registered an inter-annual variation of 12.16%, mainly determined by the increase in the median price of the following expense 45

46 groups: goods for routine home maintenance: crystal ware, cutlery, dishes and utensils for home use; and, routine home maintenance service that combined, explained the 90.48% inter-annual variation for the mentioned division. The Transportation and communication division (weighting 10.92%), registered an inter-annual variation of %, mainly determined by the behavior in the following expenditure groups: public transportation; postal service, personal transportation; and, operation expenses and equipment maintenance for personal transportation, which together explained 95.33% of the inter-annual variation of such division. On the other hand, the division for Recreation and culture (weighting 6.83%), registered an inter-annual variation rate of 5.43% and is explained by the behavior of the following expense groups: acquisition of animals; and, social, cultural, and recreational services, that combined explain 79.41% of the inter-annual variation of this division. At regional levels 19, region VIII reached the highest inflationary rhythm, with 13.86%, followed by región V with an inflationary rhythm of 11.78%. As for region I, that has greater weighting (64.32%) of the total regions, present give an interannual variation of 8.75%, lower by 0.65 percentage points to the inflationary rhythm in the republic (9.40%). In region VIII, with a weighting of 1.59% within the structure of the regions, they registered important hikes in the median price of products: tomato (67.21%); potato (54.09%); snacks, synthetic products and other prepared foods outside the home (48.96%); beans (47.60%); rice (43.02%); air transportation (36.00%); balled soap (34.70%); and, tortilla products (33.83%). It is worth stating that the mentioned increases, as a whole, represented 44.52% of the inter-annual variation of said region. In region V, with a weighting of 9.46% among the total of regions, the interannual variation registered is mainly explained by the increase in the average price 19 Region I, Metropolitan (Guatemala); region II, North (Ata Verapaz and Baja Verapaz); region III, North-East (El Progreso, Zacapa, Izabal and Chiquimula); region IV, South East (Santa Rosa, Jalapa and Jutiapa); region V, Central (Chimaltenango, Sacatepéquez and Escuintla); region VI, South West (San Marcos, Quetzaltenango, Totonicapán, Suchitepéquez, Retalhuleu and Sololá); region VII, North West (Huehuetenango and Quiché); and, region VIII, Petén (Petén). 46

47 of the following goods and services: potato (106.88%); chayote (72.05%); rice (43.80%); balled soap (42.61%); beans (40.30%); other vegetables and orchard fruit (35.15%); and, vegetable oils (33.98%), which as a whole explained 24.79% of the inter-annual variation of the region. In the case of region I, with a weighting of 64.32% among the total of regions, the inter-annual variation registered was mainly explained by the increase in the median price of the following goods and services: potato (65.58%); extraurban transportation (52.04%); balled soap (49.56%); urban transportation (48.24%); air transportation (36.00%); fresh, refrigerated or frozen poultry meats (19.72%); and eggs (16.59%); the aggregate form explained 36.69% of the inter-annual variation of the region. Following is a graph in which the behavior of the inflationary rhythm per regions is illustrated. Graph 4 Consumer Index Prices Inflationary Rhythm per regions Year Subjacent Inflation In general terms, subjacent inflation is the growth rate of the price index that, in order to eradicate distortions in its calculation, excludes the price of some goods and services that show a higher monthly volatility, measuring postive as well as negative variations that go further than two standard deviations, so that said index 47

48 represents the inflation level attributed to monetary factors. In that sense, in December 2008, the prices of the following goods were excluded: Tomato, Other legumes or root vegetables, chayote; extra-urban transportation; other culinary herbs; gasoline, avocados; and onion, which weightings within the CPI are of 0.74%, 0.20%, 0.15%, 0.87%, 0.11%, 2.05%, 0.15%, and 0.28%, respectively, which represent 4.55% of the CPI. It is important to indicate that the subjacent inflation registered an inter-annual variation of 7.28% to December 2008, lower to the variation of the total CPI (9.40%). Graph 5 Consumer Index Prices Inflationary Rhythm Total and Subjacent Index Year Imported Inflation The behavior of the inflationary rhythm registered during 2008, was moderately influenced by imported inflation, which, at the same time, was mainly the result of the international price of oil and its derivatives, corn and wheat. For analysis purposes, imported inflation can be divided in direct and indirect. The direct refers to the effect that the international price of oil and its derivatives has on the prices of 32 goods and services of the basic food basket, which in its cost structure makes an intensive use of products derived from oil. The estimation of the same is possible due to statistical information derived from the national 48

49 accounts prepared based on the National Accounts System 1993 (SNA93) that allows counting on a production cost structure of such goods and services. On the other hand, indirect imported inflation (second round effect) refers to the increase of the prices of the goods and services that in their cost structure do not include oil derivatives, but that are indirectly affected by the increase in the prices of transportation, electricity, and propane gas. In 2008, imported inflation explained 0.91 percentage points of the total inflationary rate (9.40%), of which 1.50 percentage points correspond to direct imported inflation and 0.59 percentage points to indirect imported inflation, as shown below GRAPH 6 IMPORTED INFLATION INCIDENCE IN THE INFLATIONARY RHYTHM CPI BASE DECEMBER 2000=100 YEARS Percentages 2007 F M A M J J A S O N D 2008 F M A M J J A S O N D p.p. = Percetnage points. Direct Imported Indirect Imported Domestic 9.40 % 8.49 p.p p.p p.p p.p. Last, during the period, as an average, 0.64 percentage points of inflation were due, not only to the direct but also indirect imported inflation. In those years, the international oil price and its derivatives, oil and wheat were stable; therefore, the referred average can be considered as a normal historical rate. Based on that, if the referred average is deducted from the imported inflation data to December 2008 (0.91 percentage points), an imported inflation surplus of 0.27 percentage points is obtained. In that sense, as shown in the following graph, 49

50 if the imported inflation surplus is deducted from the total inflation (9.40%), the inflationary rhythm to December would have been of 9.13%. Graph 7 Composition of the Incidence in Imported Inflation in the Inflatioanry Rhythm to December

51 IV. INTERNATIONAL PAYMENTS BALANCE A. GENERAL ASPECTS At the end of 2008, the payment balance 20 registered an increase of net international monetary reserves (NIMR) for US$338.5 million, which meant an increase of US$332.7 million in the Reserve Assets of the Banco de Guatemala 21. This result was determined by a surplus of US$1,596.1 million in the capital and financial accounts that allows funding the deficit in the current account of US$1,862.7 million. The balance in the current account was explained by the combination, on one hand, of the deficit of the balance of goods, balance of services and rent balance of US$5,573.9 million, US$369.9 million and US$929.3 million, respectively; and, on the other hand, the surplus in the net current transfers of US$5,010.4 million. On the other hand, the balance of the capital and financial account was determined by the increase in direct investment and by the increase of other investments, associated to positive expectations derived from macroeconomic stability. Regarding the nominal exchange rate of the quetzal regarding the US dollar, it registered a depreciation of 2.0%, from Q per US$1.00 on December 28, 2007 to Q per US$1.00 on December 30, Regarding foreign public debt, to December 31, 2008, it was US$4,382.4 million, higher by US$156.4 million than the balance registered to December 31, 2007 (US$4,226.0 million). This result was due to the higher debt of the nonfinancial public sector. 20 The payments balance was compiled according to the guidelines of the Fifth Payments Balance Manual (BPM5) of the International Monetary Fund (IMF). For further information regarding the implementation of the referred manual visit: 21 According to the BPM5 of the IMF, the transactions of Reserve Assets of the Central Bank registered in the payments balance does not include variations in the value of foreign assets tenure due to revaluations or devaluations due to changes in the market. In 2008, these variations were due to the revaluation of Gold tenure of US$6.4 million and to the devaluation of DEG tenure of US$0.8 million. 51

52 B. PAYMENTS BALANCE 1. Current Operations The current account of the payments balance, as indicated, registered a deficit of US$1,862.7 million, higher by US$76.8 million than the amount registered in 2007 (US$1,785.9 million) which meant that the current account/gdp relation was of 4.8% (5.2% in 2007). This result was explained by the deficits registered in the Goods Balance of US$5,573.9 million, in the Services Balance of US$369.9 million and in the Revenue Balance of US$929.3 million, higher by US$86.8 million and US$59.9 million, respectively, than the amounts registered in The referred deficits were compensated, in part, by the surplus registered in the net current transferences, which were of US$5,010.4 million, higher by US$156.5 million than the amount registered in a) Exportations 22 The export FOB value was of US$7,848.1 million, higher by US$865.0 million (12.4%) than the registered in In this result, the increase of US$842.6 million (12.2%) in the exportation of the General Merchandise category was determining. The dynamism of the General Merchandise categor, in 2008, obeyed to the increase in the exportation of Main Products (18.7%) and Other Products (10.2%). It is important to mention that the increase in the latest was determined by the increase of the exports to Central America (20.1%) and by the increase of the exportation of goods to the rest of the world (4.3%). The value of coffee exports was of US$646.3 million, higher by US$69.0 million (12.0%) than the registered in This result was caused by the increase of 12.2% in the average export price per quintal, from US$ in 2007 to US$ in According to the International Coffee Organization (ICO), the behavior of the international price of the grain was caused by the reduction of the production in countries like Colombia and Vietnam, associated to strong rains and low yields. In addition, another factor that collaborated with the increase in the 22 The exports in the balance of payments differ from the ones consigned in foreign commerce, derived from the adjustments carried out due to coverage and valuing, in the following categories: sale of electricity service abroad and acquisition of goods in the country s ports through transport means. 52

53 international price of coffee was that the consumption by importing countries was not affected by the international economic crisis; therefore, the worldwide demand of this product remained stable during Regarding the export value of sugar, it was of US$378.0 million, higher by US$19.9 million (5.6%) than the registered in This increase was determined by the increase in the export average price per quintal, from US$12.72 in 2007 to US$13.41 in The increase in the price of the sweetener in the worldwide market was mainly caused by the reduction in the offer by Brazil, because of a lower sugar cane harvest and to a higher use of the same to produce ethanol. On the other hand, India, second worldwide producer, reduced the production of sugar because of the lower pluvial precipitations in the main sugar regions. Regarding the banana export value, this was of US$317.7 million, higher by US$18.9 million (6.3%) than the observed in This result was caused by the increase in the average export price, from US$10.33 in 2007 to US$11.21 in The increase registered in the international price of banana was mainly caused by the fall in the production of Costa Rica, second worldwide exporter, because of the floods that affected the Costa Rican Atlantic coast. The cardamom export value reached US$208.0 million, higher by US$70.9 million (51.7%) than the registered in This behavior was caused by the increase of 93.1% in the average export price per quintal, from US$ in 2007 to US$ in According to the Asociación de Cardamomeros de Guatemala (Cardegua), the behavior of the international price of the spice was explained by the reduction of Guatemala s production, main worldwide cardamom producer, due to neglect and reduction of the planting areas of some plantations located in the Verapaces region during previous years; this situation was caused by the low international prices of this spice during the period. Regarding the oil export value, it was of US$373.7 million, higher by US$124.6 million (50.0%) than the observed in Such increase was mainly determined by the increase in the average export price per barrel, from US$47.21 in 2007 to US$78.25 in According to Bloomberg, the increase in the international price of oil was caused by the volatility and speculation in the financial 53

54 markets, by the reduction of oil production in the North American Gulf Coast, due to damage caused by hurricane Ike and by Nigeria s political problems, which caused a reduction in the oil production of that country. Regarding the export value of the Others Products category, this was of US$5,826.4 million in 2008, higher by US$539.3 million (10.2%) than the registered in 2007 (US$5,287.1 million). This result was explained by the increase of the exports to Central America and the Rest of the World, which registered increases of 20.1% and 4.3%, respectively. In effect, regarding the exports to Central America, the ones destined to El Salvador were of US$974.5 million, to Honduras, US$737.1 million, to Nicaragua, US$336.0 million and to Costa Rica, US$318.9 million. Regarding the goods exported to such region, the following can be highlighted: chemical products for US$556.6 million; food products for US$326.5 million; construction materials for US$231.6 million; plastic articles for US$164.3 million; fabrics, threads and yarn for US$156.4 million; fruits and preserves for US$134.2 million; paper and cardboard articles for US$95.7 million; cosmetics for US$93.4 million; metallic products for US$61.2 million; and, clothing articles for US$59.1 million. Regarding the exports of Other Products to the Rest of the World, the following categories can be highlighted: clothing articles for US$1,189.2 million, food products for US$307.0 million; fruits and preserves for US$296.2 million; chemical products for US$282.3 million; minerals for US$270.0 million; natural rubber for US$184.1 million; vegetable and legumes for US$137.5 million; metallic products for US$79.8 million; and fabrics, threads and yarn for US$67.2 million. Below is a graph that shows the percentage composition of the FOB exports per product in 2007 and

55 GRAPH 8 FOB EXPORTS (Percentage Composition) million million Coffee Banana Oil Others to the Rest of World Sugar Cardamom Others to Central America Goods acquired in the country s ports through transport means In 2008, the exports were destined to 130 countries, from which the following stand out: United States of America, 39.0%; El Salvador, 12.6%; Honduras, 9.5%; Mexico, 6.6%; Nicaragua, 4.2%; Costa Rica, 4.1%; Panama, 2.1%; Dominican Republic, 1.5%; Japan, 1.5%; Canada, 1.4%, Low Countries 1.4%; Chile, 1.3%; Saudi Arabia, 1.0%; Germany, 1.0%; and, Italy, 0.9%. b) Imports 23 In 2008, the FOB 24 import value was of US$13,422.0 million, higher by US$951.8 million (7.6%) than the registered in Such behavior was mainly associated, on one hand, to the increase of the economic activity in 2008, which generated a higher demand of imported products for the national productive process and, on the other hand, to the increase in the international price of oil and derivatives, as well as of other raw materials. The imports registered in the General Merchandise category were of $13,420.3 million, showing an increase of 7.6% compared with On the other 23 The exports in the balance of payments differ from the ones consigned in foreign commerce, because of adjustments carried out due to coverage and valuing, in the following categories: sale of electricity service abroad and acquisition of goods in the country s ports through transportation. 24 With the implementation of the BPM5, the import value is consigned as FOB. The FOB value of the imported goods is the price paid up to the customs border of the exporter economy, in other words, does not include expenses due to insurance and freight. 55

56 hand, the import of foreign goods acquired in ports through transportation, registered a growth of 54.5%, from US$1.1 million in 2007 to US$1.7 million in Regarding the imports per type of good, classified within the General Merchandise category, the imports of the Consumption Goods category stand out, registering an amount of US$3,390.4 million, higher by US$121.1 million (3.7%) than the observed in It is important to mention that within this category, the imports of Non-durable consumption goods also stand out, registering an amount of US$2,708.1 million, higher by US$186.8 million (7.4%) than in Regarding the import of Raw material and Intermediate Products, they were of US$4,841.4 million, higher by US$473.7 million (10.8%) than in the previous year. Such behavior was mainly due to the growth of the imports destined to this industry, which were increased by US$357.5 million (8.8%). On the other hand, the imports of Fuels and Lubricants were of US$2,677.7 million, higher by US$397.7 million (17.4%) than the registered in It is important to indicate that the increase in the import value of these products was caused by the increase of the international price of oil and its derivatives. In this category, the most important increases were registered in the following products: bunker, 30.2%; diesel, 17.7%; and, gasoline, 7.5%. On the other hand, the imports of Construction materials registered an increase of 16.4%, from US$286.1 million in 2007 to US$333.0 million in 2008; while the imports of Machinery, Equipment and tools showed a reduction of 3.9% compared with 2007, being of US$2,177.2 million in Below is a graph that shows the percentage composition of the FOB imports per use or economic destination in 2007 and 2008, respectively. 56

57 GRAPH 9 FOB IMPORTS / CUODE* ECONOMIC GROUP (Percentage Composition) million million Machinery, Equipment and Tools Consumption goods Raw materials and Interm. products Fuels and Lubricants Construction Materials. Foreign goods acquired in ports through transport means *Uniform Classification per Origin and Economic Destination (Acronym in Spanish) Regarding the relative import structure per country, in 2008, this was similar to the one from the previous year. In effect, 35.4% corresponded to the United States of America, 9.8% to Mexico, 9.2% to the People s Republic of China, 3.6% to El Salvador, 3.2% to Japan, 3.2% to Curacao, 2.7% to South Korea, 2.3% to Costa Rica, 2.2% to Brazil, 2.0% to Colombia, 1.7% to Chile, 1.7% to Germany, 1.5% to Canada, 1.2% to Spain, 1.0% to Argentina, 1.0% to Honduras and 18.3% to other countries. c) Balance of goods In 2008, the balance of goods registered a deficit of US$5,573.9 million, higher by US$86.8 million (1.6%) than the observed in 2007, because the increase of US$951.8 million in imports was higher than the increase of US$865.0 million in exports. The deficit observed represented 14.2% of the GDP, lower than the percentage registered in 2007 (16.1%). 57

58 Million of US dollars GRAPH 10 BALANCE OF GOODS Years FOB Exports FOB Imports Balance d) Services In 2008, the services registered a deficit of US$369.9 million, higher by US$59.9 million (19.3%) than the deficit observed in 2007, as a result of the increase of US$81.6 million in the deficit of the Transportation category, which was not compensated by the increases in the surplus of Travel (US$4.7 million) and Other Services (US$17.0 million) categories. Regarding the Transportation category, it registered an increase in the deficit, as a result of the increase in the international trading of goods. On the other hand, the Travel category registered an increase in the surplus, which was associated to the increase in the number of tourists from North America, Central America, Europe and South America. The behavior of the Other Services category was mainly influenced by the surplus shown in the Communications, Government Services and Other Entrepreneurial and Personal Services categories, because the Insurance and Royalties and License Rights showed deficits. In effect, the surplus in the Communications category was of US$239.8 million, while the Government Services and Other Entrepreneurial and Personal Services categories registered a surplus of US$107.2 million and US$37.8 million, respectively. On the other hand, 58

59 the Insurance and Royalties and License Rights categories showed deficits of US$182.2 million and US$68.0 million, respectively. e) Rent Regarding the Rent category, it registered a deficit balance of US$929.3 million, higher by US$86.6 million than the observed in 2007 (US$842.7 million), which was mainly associated with the higher expenditures on account of Direct Investment Rent 25 and Other Investment Rent. In effect, the deficit in the Direct Investment Rent was of US$834.0 million, which represented an increase of US$82.2 million compared with In addition, the deficit balance of the Other Investment Rent category was of US$46.9 million, which represented an increase of US$30.2 million compared with the deficit registered the previous year. f) Net Current Transferences Regarding the Net Current Transferences category, it continue showing a surplus, being of US$5,010.4 million, higher by US$156.5 million (3.2%) than the registered in In this category, the net income from family remittances stands out, which was of US$4,403.3 million, higher by US$203.3 million (4.8%) than the registered in 2007 (US$4,200.0 million). 2. Operations of the capital and financial account The Capital and Financial Account of the balance of payments registered a surplus of US$1,596.1 million, lower by US$17.8 million than the registered in This result was explained by the reduction in the surplus of the Financial Account, mainly derived from the lower surplus balances of the Other Investment category, because the Portfolio Investment and the Direct Investment registered increases of US$222.8 million and US$101.8 million, respectively, compared with the observed in It refers to the capital yields obtained by direct investment companies abroad and direct investment companies in Guatemala. 59

60 In 2008, the Capital Account registered a zero balance, because there was no condoning or trading of the foreign public debt; also, no capital transferences were registered, as in On the other hand, the Financial Account registered a surplus balance of US$1,596.1 million, higher by US$17.8 million compared to that observed in 2007 (US$1,613.9 million). While disaggregating such account, the Direct Investment category was of US$821.5 million, higher by US$101.8 million than the registered in 2007, as a result of the higher direct foreign investment carried out in the country, which reached US$837.8 million, higher by US$92.7 million (12.4%) than the observed in Such result is an indicator that shows the best business environment in the country. On the other hand, the Portfolio Investment registered a surplus of US$38.0 million (deficit of US$184.8 in 2007), which was mainly explained by a reduction in the holding of bonds issued by banks and non-resident financial societies. Regarding the Other Investment category, it was of US$736.6 million, lower by US$342.4 million (31.7%) than the registered in 2007, because the net income of the Non-Financial Public Sector was of US$121.7 million, while the net income of the Private Sector and Banking Sector were of US$618.0 million. Regarding the Non-Financial Public Sector, it was mainly explained, in terms of income, by the loan disbursements of US$381.9 million and, in terms of expenses, by the amortizations of the non-subsidized foreign debt of US$260.2 million. Regarding the behavior of the net income from the Private Sector and Banking and Financial Societies, they were mainly explained by the higher flow due to foreign net loans and commercial credits. Below is a graph that shows the main categories of the capital and financial account of the payments balance. 60

61 Million of US dollars GRAPH 11 CAPITAL AND FINANCIAL ACCOUNT Years Direct Investment Portfolio Investment Other Investment 3. Net international monetary reserves As a result of the current, capital and financial operations of the balance of payments, the NIMR were of US$4,658.8 million; amount higher by US$338.5 million than the rate observed to December 31, 2007 (US$4,320.3 million), which meant an increase of US$332.7 million in the Reserve Assets of the Banco de Guatemala. The increase in the NIMR was mainly caused by the yields obtained by the investment of such reserves abroad, royalties due to oil exploitation, purchase of foreign currency associated with the participation of the Central Bank in the exchange market and by the foreign funding of the non-financial public sector. The level of the net international monetary reserves in 2008 is equivalent to 4.4 months of goods imports (3.6 months in 2007), which indicates that the foreign position of the country is still favorable. 61

62 Million of US dollars GRAPH 12 NET INTERNATIONAL MONETARY RESERVES Years Dec/07 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec/08 C. NOMINAL EXCHANGE RATE To December 30, 2008, the weighted average nominal exchange rate in the institutional foreign currency market registered a depreciation of 2.0%, from Q per US$1.00 on December 28, 2007 to Q per US$1.00 on December 30, 2008, as shown in the following graph. Quetzals per US$1.00 i i f S GRAPH 13 BEHAVIOR OF THE NOMINAL EXCHANGE RATE WEIGHTED AVERAGE Years

63 The behavior of the nominal exchange rate throughout 2008 was, on average, congruent with its seasonality; however, volatility episodes were registered throughout the year, encouraging the participation of the Banco de Guatemala in the exchange market, carrying out purchases of US$237.4 million and sales of US$58.3 million, based on the baselines approved in the Monetary, Foreign Exchange Rate and Credit Policy for 2007, amended through resolution JM of the Monetary Board, dated June 11, 2008, regarding the exchange rule. D. INDEX OF THE REAL EFFECTIVE EXCHANGE RATE This index measures the relationship between domestic inflation and the main commercial associates of the country, adjusted by their corresponding nominal exchange rates and their variation represents an approximate measure of the export competitiveness trajectory. As a result of the behavior that the nominal exchange rate, the domestic inflationary rate and the inflationary rate of the main commercial associates of Guatemala showed throughout the year, the Index of the Real Effective Exchange Rate (IREER) registered an appreciation of 8.14% at the end of 2008, higher than the observed in 2007 (2.09%). In effect, the appreciation in the real effective exchange rate observed in 2008 was mainly caused by higher inflation in the country, compared with the inflation observed in the United States of America, Japan, the Euro Zone, El Salvador and Mexico (main commercial associates). Another major factor that influenced the referred behavior was the appreciation of the quetzal regarding the Mexican peso, the Costa Rican colon and the Euro. 63

64 Index GRAPH 14 INDEX OF THE REAL EFFECTIVE EXCHANGE RATE 1/ Years Jan-07 Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan-07 Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dic-08 1/ Calculation base Dec. 2000= 100 An increase of the index means appreciation A reduction of the index means depreciation E. FOREIGN PUBLIC DEBT To December 31, 2008, the balance of the foreign public debt was of US$4,382.4 million, higher by US$156.4 million (3.7%) than the registered on the same date of 2007 (US$4,226.0 million). This result, as indicated, was due to the increase of US$156.7 million in the balance of the debt of the Non-Financial Public Sector. Regarding the income of the Non-Financial Public Sector, on account of reimbursements, it was of US$381.9 million, from which US$377.5 million were derived from multilateral organisms and US$4.4 million from bilateral organisms and governments. From the total of disbursements received, it is important to highlight those from the following multilateral organisms: US$101.0 million from the Central American Bank for Economic Integration (CABEI); US$139.1 million from the Inter-American Development Bank (IDB); US$132.7 million from the International Bank for Reconstruction and Development (IBRD); and, US$4.7 million from the International Fund for Agricultural Development (IFAD). Regarding the amortizations carried out by the Non-Financial Public Sector, these were of US$260.2 million, the following being the most significant: US$

65 million to CABEI; US$89.5 million to IDB; US$66.5 million to IBRD; and US$8.4 million to the Agency for International Development (AID). Below is a graph that shows the composition of the foreign public debt of the country. GRAPH 15 FOREIGN PUBLIC DEBT (Percentage Composition) million million Multilateral Organisms Bilateral and Gov. Organisms Eurobonds F. SUSTAINABILITY OF THE FOREIGN PUBLIC DEBT The sustainability of the foreign public debt can be measured according to the parameters established by the international financial organisms, in which critical levels are indicated for the relationships between the foreign public debt and other significant variables 26. In that sense, for the relation of the foreign public debt balance regarding the GDP, a critical value of 35% is established. For Guatemala, in 2008, this relation was of 11.2%, lower than in 2007 (12.4%). Another significant indicator is the relation between the balance of the foreign public debt and the total of goods and services exports, the critical value of which, according to the mentioned parameters, was of 150%. In that regard, the result of the aforementioned relation, in 2008 was of 43.1%, lower than the percentage registered in 2007 (45.6%). Also, 26 According to these parameters, the level of net international monetary reserves and the foreign position of a country are committed when the relations of the foreign debt balance regarding the gross domestic product, the balance of the foreign debt regarding the exports of goods and services and, service of the public debt regarding the taxable income, exceed the established critical levels. 65

66 a third indicator used internationally makes reference to the relation between the service of the total foreign public debt as a percentage of the taxable income, which, in 2008 was of 11.4%, lower than the registered in 2007 (14.6%). It is important to indicate that for the referred indicator there is no critical value accepted internationally that allows establishing from which percentage a country is considered to be at risk for default for the payment of its obligations, because the interpretation of the same may vary from one country to another, depending on the consistency and stability in the long-term application of healthy fiscal policies. The behavior of the aforementioned indicators is shown below. Graph 16 Balance of the Total Foreign Public Debt regarding the GDP YEARS: Percentage Critical value Graph 17 Balance of the Total Foreign Public Debt regarding the export of goods and services YEARS: Percentage Critical value Preliminary data Preliminary data Graph 18 Servie of the Total Foreign Public Debt regarding the Taxable Income YEARS: Percentage Preliminary data Estimated data Regarding the indicators of the referred foreign public debt, in general terms, it is worth highlighting, on one hand, that economic literature states that the 66

67 simultaneous damage of all the referred indicators represent a sign of alarm regarding a possible payment crisis and, on the other hand, that the damage of only one indicator, though it is not an imminent crisis alert, should be an alert sign in the future management of the country s debt policy. Consequently, something important in the sustainability of the public debt of a country (and on its consecutive effects on macroeconomic stability) is to adopt and maintain a disciplined fiscal policy in the long term, mainly focused on strengthening the taxable income of the State, complemented with a rational expenditure execution. According to the international standards for the sustainability of foreign debt and the analysis of the levels registered for Guatemala in 2008, compared with 2007, though the balance of the foreign public debt was increased, the mentioned indicators were slightly strengthened and were placed at reasonable levels. 67

68 V. MONETARY AND FINANCIAL STATUS A. GENERAL OUTLINES OF THE MONETARY POLICY The Monetary Board, in resolution JM dated December 27, 2007, determined the Monetary, Foreign Exchange Rate and Credit Policy for 2008, in which it established an inflation target of 5.5% with a tolerance margin of +/- 1.5 percentage points for December 2008 and of 5.5% with a tolerance margin of +/- 1 percentage point for December The execution of the monetary policy is supported by explicit inflation targeting, which is based on the selection of an inflation target as a nominal anchor of such policy, and is consolidated by the enforcement of a flexible exchange rate regimen, using indirect monetary control tools (monetary stabilization operations, privileging the market s decisions), as well as by strengthening the transparency of the Central Bank s activities. In the second semester of the year, the Central Bank, without dismissing its main objective, taking into account the international financial situation, implemented temporary mechanisms that allowed providing additional liquidity to the market. In effect, during the last quarter of the year, before the intensification of the foreign problems that were shown in the restriction of credit conditions, mainly regarding credit lines abroad and taking into account that such restriction and uncertainty would have induced the banking entities to keep a higher availability of credit operations, the Monetary Board temporarily implemented a set of measures to provide additional liquidity in national and foreign currency to the banking institutions. Regarding inflation, the continuous increase in the international prices of oil, corn and wheat, somehow caused the inflationary rhythm to accelerate from 8.39% in January to 14.26% in July. In effect, in the indicated period, the increase in the price of domestic goods and services was intensified, associated with such raw materials and supplies. Nevertheless, as of August a significant reduction was observed in the international price of oil and corn, the fall of which influenced a reduction in the total inflationary rhythm, since August. In effect, to December 2008, the total inflationary rhythm was of 9.40%, higher by 0.65 percentage points 68

69 than the observed in December 2007 (8.75%). On the other hand, the impact of the measurable imported inflation 27, after reaching a maximum of 5.84 percentage points of the total inflation in June 2008 started falling; in December it was 0.94 percentage points of the total inflationary rhythm. It is worth highlighting that before supply shocks, the monetary policy can only moderate the inflation expectations of the economic agents and the second round effects of the referred shocks; in other words, those produced when the prices for the final consumer proportionally increase more than the increase derived from the offer shocks. For that reason, the Monetary Board, when making decisions regarding the leading interest rate of the monetary policy, carries out an integral analysis of the country s macroeconomic situation, taking into account not only the trends but also the short and middle-term perspectives of the most important variables of the monetary, fiscal, real and foreign sectors. During the first semester of the year, in addition to the presence of inflationary pressures associated with foreign shocks, the inflation expectations were unanchored and the product s gap was showing inflationary pressures in terms of aggregate demand; for that reason, the Monetary Board decided to increase such interest rate in March from 6.50% to 6.75% and in July from 6.75% to 7.25%, in order to moderate the inflation expectations of the economic agents and to counteract the second round effects of imported inflation. TABLE 1 MAIN ASPECTS OF THE INTERNATIONAL FINANCIAL CRISIS During the first semester, the worldwide economy was characterized by the occurrence of a set of foreign shocks related to the increase in the international price of oil and other raw materials and supplies that generated inflationary pressures in industrialized countries and in countries with emerging markets, because of the late effects of the financial instability generated by the high-risk mortgage crisis (subprime); and, by the expectations of the economic deceleration in industrialized countries, mainly in the United States of America. In the second semester of the year, a deepening of the international financial crisis was observed, causing a trust crisis that damaged worldwide economic growth expectations even more and the behavior of the credit and exchange markets. 27 It does not include the indirect effect from the wheat and corn derivatives like tortilla products, flour, bread and pasta, among others. The analysis of the imported inflation was started since 2004, year in which the international prices of oil and its derivatives started increasing significantly. 69

70 Among the main elements that damage the foreign environment, the following can be highlighted: a) The strong deceleration expectations in worldwide economic growth, as a result of the decrease in the economic growth of the United States of America, associated, among other factors, to the fall in the real estate market, to the intensification of the misbalances in the financial system of such country, to the rigorous reduction of the industrial production and to the reduction of the investment and private consumption. b) Worsening of the financial crisis in the United States of America and Europe and the extension of its effects on Asia and on some Latin American countries, situation that has been observed in the high volatility in the main worldwide stock markets and in the international exchange markets, as well as in the significant detriment to the trust in financial markets. c) Inflation rates higher than in 2007, mainly, in emerging markets and in those of developing countries, which show the inflationary pressures in the increases in the international prices of oil and food had during the first semester of 2008 and the reductions of which in the second semester of the year were still not completely transferred to domestic prices. Within the indicative or reference monetary policy variables, it was estimated that at the end of 2007 the total payment means (M2) would grow between 8% and 11% in inter-annual terms in 2008; while the total banking credit to the private sector would grow between 14% and 17%. At the end of 2008, the inter-annual growth rate of M2 (that includes national and foreign currency) was of 7.6%, while the banking credit to the private sector showed an inter-annual increase of 11.0%, variables that were below the lower limit of the estimated tolerance margin for each of them. B. EVOLUTION OF THE MAIN MONETARY AGGREGATES To December 31, 2008, the total payment means were of Q104,192.6 million, which meant an increase of 7.6% compared to the level registered at the end of

71 Million of quetzales GRAPH 19 TOTAL PAYMENT MEANS YEARS BALANCES Percentages GRAPH 20 TOTAL PAYMENT MEANS INTER-ANNUAL RELATIVE VARIATION YEAR 2008 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Regarding the payment means in national currency, at the end of the year, they were of Q89,906.1 million, higher by Q5,425.0 million (6.4%) than the registered in December Million of quetzales GRAPH 21 PAYMENT MEANS IN N/C YEARS BALANCES Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec The percentage structure of the payment means in national currency was similar to the one of previous years, representing the circulating means 51.0% and the quasi-money 49.0%. The inter-annual growth of both components was of 3.2% and 10.0%, respectively (14.7% and 1.9%, respectively, in 2007). Regarding the components of the circulating means, the numerary in circulation registered an 71

72 inter-annual variation of -1.4% and the monetary deposits registered an interannual growth rate of 6.0% (15.8% and 14.1%, respectively, in 2007). The reduction in the inter-annual growth rate of the main monetary aggregates in 2008, compared with those observed in 2007, showed a reduction in the primary liquidity surplus. In that regard, it is important to indicate that the numerary in circulation decreased by Q231.2 million, from Q16,976.7 million in 2007 to Q16,745.5 million in Percentages GRAPH 22 MAIN MONETARY AGGREGATES IN N/C INTER-ANNUAL GROWTH RATE YEAR 2008 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Payment means Quasimoney Circulating means On the other hand, the payment means in foreign currency, at the end of 2008, were of Q14,286.5 million, which meant an inter-annual growth rate of 15.3% (equivalent to Q1,900.4 million). Regarding its percentage structure, the monetary deposits represented 46.0% and the quasimoney 54.0%. Regarding the monetary issue, according to the monetary program for , it would increase at the end of the year by about 10.9% regarding the level observed December 31, 2007 (equivalent to an increase of Q1,939.6 million), percentage that was consistent with the growth rate expected in the economic activity (4.3%) and inflation target (5.5% +/- 1.5 percentage points). 28 Approved in resolution JM dated September 12,

73 The programmed and observed behavior of the monetary issue in 2008 can be observed in the following graph. GRAPH 23 PROGRAMMED AND OBSERVED MONETARY ISSUE YEAR 2008 Million of quetzales To December 31 UPPER LIMIT LOWEST LIMIT OBSERVED During January, and up to the third week of May 2008, the trajectory of the monetary issue remained above the upper limit of the programmed runner, registering an average deviation of Q738.8 million to May 22; such surplus was associated, in terms of supply, to the fact that during the referred period, the MSO balance with the private sector was lower by about Q982.0 million regarding the foreseen in the monetary program. Since the third week of May 2008, the monetary issue started converging with its programmed values, which were observed in the behavior of its components (numerary in circulation and bank cashier), because of a lower liquidity preference by the public. Regarding primary liquidity, it is important to indicate that the Monetary Board in resolution JM decided, among other aspects, to complement the tracking of primary liquidity, that is carried out through the monetary issue with an indicator that includes the behavior of the legal banking reserve and monetary stabilization operations (MSO) that have incidence on the banking liquidity, called wide monetary basis. In that sense, the orientation that the primary liquidity 73

74 provides as an indicative variable of the monetary policy is obtained through the weighting of the deviation not only of the monetary issue but also of the wide monetary base, considering for such effect 50% deviation of each variable 29. Regarding the wide monetary base, it is calculated through the sum of the hard numerary in circulation, legal banking reserve and balance of short-term MSO with the banking sector (with expiration up to 91 days) 30. As in the case of monetary issue, the follow up of the wide monetary base can be carried out through a runner that is consistent with such range and that incorporates possible liquidity transitory fluctuations. It is important to indicate that the tolerance margin of such runner was established in a standard deviation. In the above context, it was estimated that at the end of 2008, the wide monetary base would increase by about 3.9% regarding the level observed on December 31, 2007, which represents an increase of Q1,134.8 million. GRAPH 24 PROGRAMMED AND OBSERVED WIDE MONETARY BASE YEAR 2008 a/ Million of quetzales FIRST TRIMESTER SECOND TRIMESTER THIRD TRIMESTER FOURTH TRIMESTER UPPER LIMIT LOWER LIMIT OBSERVED Monetary basis observed to 12/31/08 = Q35,892.8 million Upper limit to 12/31/08= Q30,117.4 million Lower limit to 12/31/08 = Q28,917.4 million Deviation = (-) Q5,775.4 million 29 An amount above the upper limit of the programmed runner for each variable suggests a restrictive monetary policy; a deviation below the lower limit suggests a relaxed monetary policy, while a value within the runner indicates an invariable monetary policy. 30 This wide version of monetary base is consistent with the foreseen in the Monetary and Financial Statistics Manual (Edition 2000) of the International Monetary Fund. It is important to indicate that the restricted version of such variable is only integrated by the numerary in circulation and legal banking reserve. 74

75 Throughout 2008, the wide monetary base was above the programmed runner, registering an average deviation of about Q1,890.6 million, mainly associated with the increase registered in the balance of the monetary stabilization operations up to a term of 91 days for Q6,418.2 million, from Q834.7 million on January 3 to Q7,252.9 million on December 31, The referred deviation was mainly associated to the increase in the liquidity of the banking system and, on the other hand, to the investment increase in the Banco de Guatemala (mainly to a 7- day term), which to December 31, 2008 registered a balance of Q7,022.0 million, higher by Q6,192.5 million than the balance registered at the beginning of the year (Q829.5 million), situation that showed a trend to rise in the available liquid resources of the banking entities. Taking into account the behavior of the two referred variables, to December 31, 2008, the monetary issue was within the programmed runner, while the wide monetary base was of Q5,775.4 million, above the upper limit of the programmed runner; therefore, to the referred date, the deviation of the primary liquidity was of Q2,887.7 million. The following graph shows the behavior of the deviation of the primary liquidity in 2008, which showed an average deviation of Q1,084.9 million, suggesting a restrictive monetary policy for the entire period, except on June 26, in which such variable provided a monetary policy orientation with no change. 75

76 GRAPH 25 PRIMARY LIQUIDITY OBSERVED DEVIATIONS YEAR 2008 Million of quetzales Average deviation to Monetary issue: Q279.2 million Wide Monetary Base: Q1,890.6 million Primary Liquidity: Q1,084.9 million Average = Q1,084.9 million Regarding the multiplier of the payment means in national currency during 2008; it increased gradually, starting in January with a value of 3.03, until reaching in December In terms of its components, the liquidity preference coefficient from the public considerably decreased from in January to in December; aspect that showed a contraction of the liquidity surplus that the nonbanking private sector maintained. Regarding the coefficient of banking retention, it registered an increase from in January to in December, which was shown by an increase in the legal banking reserve. 76

77 MULTIPLIER OF THE PAYMENT MEANS YEARS Table 14 YEARS NUMERARY IN CIRCULATIÓN LEGAL BANKING RESERVE Million de Quetzales MONETARY BASE DEPÓSITS, MORTGAGE BONDS AND SECURITY BONDS PAYMENT MEANS COEFFICIENT OF LIQUIDITY PREFERENCE BY THE PÚBLIC COEFFICIENT OF BANKING RETENTION MULTIPLIER A B C = A + B D E = A + D F = A / E G = B / D 1 / (G + F( 1 -G )) DEC , , , , , DEC , , , , , DEC , , , , , DEC , , , , , JANUARY 15, , , , , FEBRUARY 15, , , , , MARCH 15, , , , , APRIL 15, , , , , MAY 15, , , , , JUNE 15, , , , , JULY 15, , , , , AUGUST 15, , , , , SEPTEMBER 15, , , , , OCTOBER 15, , , , , NOVEMBER 15, , , , , DECEMBER 15, , , , , C. NET CREDIT ACTIVITY OF THE BANCO DE GUATEMALA In 2008, the net position of the non-financial public sector with the Banco de Guatemala only showed variations in the deposits of the Central Government and in the rest of the public sector. In effect, the deposits of the non-financial public sector in the Banco de Guatemala, to December 31, 2008, registered a rate of Q8,342.3 million, lower by Q1,407.3 million than the observed on the same date of the previous year. Such variation was caused by the reduction observed in the deposits of the Central Government of Q1,431.8 million and by the increase of the deposits of the rest of the public sector of Q24.5 million. The referred reduction in the deposits of the Central Government in the Banco de Guatemala was mainly caused by the expenditure executed by the Central Government and to the fewer resources received, not only due to the net domestic funding but also due to the net foreign funding. Regarding credit to financial institutions, through article 48 of the Organic Law of the Banco de Guatemala, they authorize the same to grant credit to the system s 77

78 banks according to the terms and conditions referred to by said norm, during 2008, the financial system did not require last instance funding from the Central Bank. Regarding the balance of the credit to the system s banks, at the end of the year, it was reduced by Q2.2 million, from Q2,056.9 million in 2007 to Q2,054.7 million in 2008, amount that corresponds to the resources received by the Banco de Guatemala, as a result of the amortizations of credits granted by the Central Bank, up to 2001, of Q1.8 million and of the reduction in the ownership portfolio issued by banking institutions 31 of Q0.4 million. E. CREDIT FROM BANKS AND FINANCIAL SOCIETIES TO THE PRIVATE SECTOR To December 31, 2008, the total credit that banks granted to the private sector was of Q87,209.4 million, higher by Q8,642.4 million than the observed to December of the previous year, which represented an inter-annual increase of 11.0%; percentage below the range between 14% and 17% established in the Monetary, Foreign Exchange Rate and Credit Policy. Regarding the credit granted in national currency, it was of Q61,857.4 million, amount higher by Q6,614.7 million than the observed at the end of 2007, which meant an inter-annual growth of 2.0%. On the other hand, the credit granted in foreign currency at the end of the year was of Q25,352.1 million, higher by Q2,027.8 million than the observed at the end of 2007, which meant an interannual growth of 8.7%. 31 This portfolio is integrated in its entirety by the banking bonds acquired by the Banco de Guatemala prior to The mentioned reduction is due to payments to capital that correspond to bonds guaranteed by mortgage certificates issued by system s banks. 78

79 Percentages GRAPH 26 BANKING SYSTEM TOTAL CREDIT TO THE PRIVATE SECTOR INTER-ANNUAL RELATIVE VARIATION YEAR 2008 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec On the other hand, the total credit of the financial societies to the private sector was of Q2,501.4 million at the end of December 2008, higher by Q734.4 million regarding the balance registered in December 2007, which represented a growth in inter-annual terms of 41.6%. SYSTEM BANKS AND FINANCIAL SOCIETIES CREDIT TO THE PRIVATE SECTOR TO DECEMBER 31, 2007 AND 2008 (million of quetzales) Table 15 Description Variation Absolute Relative TOTAL 80, , , System banks 78, , , In national currency 55, , , In foreign currency 23, , , Financial societies 1, , In national currency 1, , In foreign currency

80 Regarding the banking credit to the private sector per type of instrument, it maintained the structure observed in previous years, representing the loans category about 72.9% of the total, while the remaining 27.1% corresponded to the following categories: investment in FHA mortgage certificates, credit cards, credit in monetary deposits, documents receivable and other credits. During 2008, the banking system granted loans for Q44,176.8 million (includes extensions and renewals for Q38,197.4 million), lower by Q4,469.0 million than the granted the previous year. The economic destinations assisted were: commerce, Q11,939.3 million (27.0%); consumption 32, Q10,587.3 million (24.0%); services 33, Q6,641.2 million (15.0%); manufacturer industry, Q7,544.9 million (17.1%); construction, Q4,242.4 million (9.6%); agriculture, livestock, forestry, hunting and fishing, Q2,594.2 million (5.9%); and, other destinations 34, Q627.5 million (1.4%). E. LEGAL BANKING RESERVE The Monetary Board in resolution JM dated June 1, 2002, issued the Regulations of the Legal Banking Reserve. Such regulations establish that the percentage of the legal banking reserve not only in national but foreign currency will be of 14.6% calculated on the total of banking deposits; being the computing period of the legal banking reserve of one calendar month. Regarding the legal banking reserve in national currency, at the end of 2008 it was of Q11,896.3 million, while the legal banking reserve in foreign currency was of US$195.9 million (equivalent to Q1,524.1 million). On the other hand, the average position of the legal reserve in national currency of the banking system was positive during the whole year, showing its highest level of Q356.6 million in December. It is important to indicate that the Banco de Guatemala, taking into account the international financial situation, during the second semester of It is integrated by consumption, 90.9%; transferences, 6.5%; and, other destinations, 2.6%. 33 It is integrated by financial institutions, 67.5%; communal, social and personal services, 20.3%; electricity, gas and water, 12.2%. 34 It is integrated by transport, 77.5% and mining, 22.5%. 80

81 implemented temporary mechanisms that allowed granting additional liquidity to the banking system. In effect, the Monetary Board, in resolution JM , decided to make the digital legal banking reserve temporarily flexible and moderate, effective from December 1, 2008 to March 31, In this sense, the system s banks can include, Certificate of Term Deposits issued by the Banco de Guatemala, Treasury Bonds of the Republic of Guatemala and FHA mortgage certificates in the legal banking reserve computing. The maximum amount accepted to use those documents in the computer legal reserve, all together, is of Q25.0 million per every banking institution. In addition, it was established that the proportion of cash funds that the entities can add within the digital legal reserve should be increased from 25% to 100%. To December 31, 2008, the referred measure allowed the banking institutions to have additional liquid resources for an amount of about Q742.2 million. F. INTEREST RATES 1. In national currency During 2008, the asset and liability weighted average interest rates of the banking system continue showing stable behavior and a slight trend to rise. In effect, the asset weighted average interest rate at the end of 2008 was of 13.84%, higher by 0.95 percentage points than the registered on the same date of the previous year. On the other hand, the liability weighted average interest rate was of 5.47%, higher by 0.56 percentage points than the observed in December Regarding the gap between both rates, it was of 8.37 points, higher by 0.39 percentage points than the observed in December

82 GRAPH 27 BANKING SYSTEM WEIGHTED AVERAGE INTEREST RATES IN N/C YEAR 2008 Percentages percentage points percentage points ASSET LIABILITY Regarding the weighted average interest rate of the repurchase agreement operations, it was of 6.11% at the end of December 2008, percentage lower by 1.34 percentage points than the observed on the same date of the previous year (7.45%). It is important to mention that during most of the year, such rate remained around 7%, which is associated to the fact that the Central Bank, according to the Monetary, Foreign Exchange Rate and Credit Policy determined by the Monetary Board for such year, lead its efforts to maintain liquidity levels according to the stability in the general price level. Percentage GRAPH 28 REPURCHASE AGREEMENT OPERATIONS WEIGHTED AVERAGE INTEREST RATES YEARS Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec 82

83 Regarding the weighted average interest rate of the balance of the Monetary Stabilization Operations (MSO), it registered a slight trend to the rise, from 7.50% in December 2007 to 7.54% in December 2008, as a result, on one hand, of the increase in the leading interest rate of monetary policy, and on the other hand, of transfers of one part of the operations to terms of more than one year towards shorter terms 35. Percentage GRAPH 29 MONETARY STABILIZATION OPERATIONS WEIGHTED AVERAGE INTEREST RATE IN N/C YEARS Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Regarding the interest rate of term deposits of the Banco de Guatemala expressed in dollars from the United States of America 36, this was of 0.07%, 0.06% and 1.17% for terms of 14, 28 and 182 days, respectively, applied in the placements through the window mechanism, because no bids were awarded in the bidding carried out in Regarding the interest rates applied to advance payments granted by the Central Bank prior to 2001, the same, while carrying out periodical reviews during 2008, registered a minimal rate of 7.90% and a maximum of 8.47%. On the other 35 To December 31, 2007 the operations of monetary stabilization to terms of less than one year represented 28.19% del total of the total and to terms of more than one year represented 71.81% of the total; while to December 31, 2008, such operations represented 60% and 40%, respectively. 36 The reception of such term deposits was authorized through resolution JM dated September 8,

84 hand, the interest rates applied to the contingent credit lines granted with internal resources to the three banks intervened administratively in 2001 registered a minimal percentage of 3.54% and maximum of 5.47%. 1. In foreign currency The asset weighted average interest rate of the banking system in foreign currency showed an increase from 7.63% in December 2007 to 8.46% in December On the other hand, the liability weighted average interest rate was increased, being of 3.82% at the end of December 2008 (3.63% in 2007). Regarding the gap between both rates, it was of 4.64 percentage points, higher than the observed in December 2007 (4.00 percentage points). Percentage GRAPH 30 BANKING SYSTEM WEIGHTED AVERAGE INTEREST RATE IN F/C YEAR 2008 percentage points percentage points ASSET LIABILITY Regarding the weighted average interest rate of the repurchase agreement operations in such currency, it showed a trend to drop, from 5.50% in December 2007 to 1.52% at the end of

85 G. MONETARY STABILIZATION OPERATIONS One of the relevant instruments of key monetary policy in a scheme of explicit inflation targets are the monetary stabilization operations (MSO), which consist of negotiating public certificates or titles at market prices by the Central Bank with the different financial institutions and with the public and private sectors, in order to expand or shorten the monetary offer, so that, on one hand, the behavior of the economy s aggregate demand is moderated and, on the other hand, to influence the evolution of the interest rates and to contribute in that way in achieving the final monetary policy objective, which is the stability in the general level of prices. 1. In national currency The Monetary Board, within the 2008 Monetary, Foreign Exchange Rate and Credit Policy framework, the leading interest rate increased twice: on March 27, from 6.50% to 6.75% and on July 24, from 6.75% to 7.25%. The referred increases in the leading interest rate searched to moderate the inflation expectations of the economic agents, to guarantee the commitment of the Central Bank regarding the stability in the general level of prices and to consolidate the credibility of the monetary policy, taking into account that the country s economy was exposed to foreign shocks that had significant impact on the general level of prices during the first semester of the year, mainly associated with the continuous increase in the international price of oil-derivatives, corn and wheat. Per term The Execution Committee, taking into account the analyzed in terms of coordination with the fiscal policy for the participation in the money market, decided that in January, the Banco de Guatemala will continue calling for bids of Term Deposits (TD) to terms of 3, 8 and 10 years, every Friday, without a preestablished quota. Later, due to the participation of the Ministerio de Finanzas Públicas [Equivalent to the Department of Treasury.] in the long-term money market, the 85

86 Execution Committee decided that the Banco de Guatemala should suspend the bidding of Term Deposits to terms of more than 3 years as of February 8 th. Such measure was taken in order to avoid competency with the placements of the Ministerio de Finanzas Públicas [Equivalent to the Department of Treasury.] for 6, 10 and 12 year terms. Since May 12, the Execution Committee decided to suspend TD bids to 3-year terms and to start participating per due date for residual terms of more than one year, agreeing, for that purpose, to carry out such bids without a pre-established quota and that the interest rates should be determined by the market conditions. Per due date In order to reduce the fragmentation of the market of public financial instruments, to help the development and strengthening of the secondary market and to promote the formation of a yield curve of term deposits, the Execution Committee agreed to continue with the TD bids per due date, through the stock exchange, every Monday, awarding bids per price and with standardized nominal values of Q100.0 thousand, of Q1.0 million and Q10.0 million. Regarding the due dates for the bids carried out from January 2 to February 25, the following were established: March 10, 2008, June 9, 2008, September 8, 2008 and December 8, Regarding the bids carried out from March 3, the due date set on March 10, 2008 was substituted by that set on March 9, 2009; meanwhile, regarding the bids carried out from June 2, the due date set on June 9, 2008, was substituted by that set on June 8, 2009 and, finally, regarding the bids carried out from September 1, the due date set on September 8, 2008 was substituted by that of September 7, Such dates were determined according to the monetary spaces indicated by the monetary and fiscal program. The Execution Committee of the Banco de Guatemala continued applying maximum limits (quotas) for each of the due dates, which were set taking into account the due dates of the TD initially placed through bids, the liquidity surplus foreseen in the monetary and fiscal program, in an environment that helps gradually reduce the balance of the short-term MSO (7 days). 86

87 On the other hand, regarding the TD bids directly with public entities, the Execution Committee established that bids will be carried out on a weekly basis, per due date and per price, without pre-established quotas and without standardized nominal values. The awarding prices were determined according to the market conditions, shown in the bids received. Since May 12, the participation per due date for residual terms of more than one year were started, without pre-established quotas and at interest rates determined by market conditions, setting June 7, 2010 as a due date. The Execution Committee of the Banco de Guatemala, as of November 19, 2008, decided to temporarily suspend the biddings of TD to terms of more than 7 days. Such measure was adopted considering the high volatility that was prevailing in the international financial markets; it promoted a higher preference for liquidity in the entities of the banking system. The increase observed in the MSO during 2008 mainly took place since July, coinciding with the increase of liquidity from public expenditure. The increase of MSO was focused on a 7-day term, mainly since September 2008, on one hand, because in such month the international crisis was intensified, which might have caused a greater preference for liquidity resources in the system s banks and, on the other hand, that in the fourth quarter of 2008 the Central Government accelerated the use of cash resources and the Central Bank implemented mechanisms to provide additional liquidity to the banking entities. At the end of 2008, the amount of operations to 7-day terms represented 48.3% of the total amount of MSO, compared with 13.5% at the end of The MSO to other terms decreased, congruent with the placement per due date (standardization of the same), and with the generation of liquidity points, coherent with the development of the secondary market. On the other hand, in the Monetary, Foreign Exchange Rate and Credit Policy for 2008, it was established that the Banco de Guatemala should supervise that the short-term interest rates do not fluctuate abruptly, therefore, it can participate in the Electronic Money Banking Table (MEBD) or in the stock exchange, injecting or withdrawing liquidity when volatility is observed in the money market. 87

88 In that context, the Execution Committee agreed to keep bids of liquidity offer to 7-day terms, at the interest rate that keeps the margin of 1.50 percentage points above the leading monetary policy rate. The operations of liquidity injection are guaranteed with Term Deposits Certificates of the Banco de Guatemala or with public titles, expressed in quetzales or in US dollars. Because of the increase to the leading interest rate of the monetary policy, decided by the Monetary Board, from 6.75% to 7.25%, enforced as of July 24, 2008, the interest rate for liquidity injectinh operations for 7-day terms was of 8.75%. To December 31, the balance of such operations was of Q111.9 million. Regarding the execution cost of the Monetary, Foreign Exchange Rate and Credit Policy, derived from the liquidity neutralization through monetary stabilization operations, it was of Q1,024.1 million (equivalent to 0.3% of the Gross Domestic Product), higher than the registered at the end of 2007, which was of Q985.2 million (equivalent to 0.4% of the Gross Domestic Product). It is important to indicate that in 2008 the net surplus of the Banco de Guatemala was of Q638.4 million, higher than the registered the previous year (Q209.6 million). 2. In foreign currency Regarding the TD biddings in US dollars, the Execution Committee agreed that in case of observing volatility in the nominal exchange rate, it will be called for TD bids in US dollars to terms of 91, 182 and 364 days, without pre-established quota. To award bids, the yield rate of the US Treasury Bonds to similar terms will be taken as a reference. It is important to indicate that during the period from January to December 2008, it was not necessary to call for TD bids in the mentioned currency. The Execution Committee also agreed to continue accepting the constitution of TD in US dollars from public entities, directly in at the window, to terms it considers convenient. To December 31, 2008, the balance of MSO in US dollars was of US$2.6 million, lower than the amount registered to December 2007 (US$46.7 million). 88

89 H. BALANCE ACCOUNT OF THE SYSTEM BANKS The consolidated balance of the system banks, to December 31, 2008, shows that the total assets were of Q130,614.2 million, higher by Q12,056.8 million than that of the same date of the previous year, equivalent to an inter-annual growth of 10.2%. Such growth is mainly explained by the increase in the credit portfolio categories, mainly loans in national and foreign currency, which were increased by Q4,292.8 million (7.2%), as well as by the increase in the value investment, mainly the state values and other values, which were expanded by Q3,780.8 million (24.3%) and Q1,170.2 million (59.2%), respectively. The referred increase was partially compensated by the reduction in foreign values of Q1,008.7 million (36.9%), as well as the credit portfolio, mainly in the following categories: documents receivable in national and foreign currency and documents discounted in national and foreign currency, which were reduced by Q575.1 million (16.7%) and Q346.8 million (26.2%), respectively. Regarding total liabilities to December 31, 2008, these were of Q117,351.8 million, higher by Q9,965.1 million than the observed at the end of December 2007, which means an inter-annual growth of 9.3%, which is explained by the increase in the obligations in the country categories, mainly regarding deposits of Q11,200.7 million (12.9%) and other obligations Q402.5 million (48.8%). The mentioned increase was partially compensated by the reduction of loans abroad of Q770.6 million (5.7%), bonds in circulation of Q695.8 million (31.2%) and accounts payable of Q120.9 million (3.8%). Regarding the accountable capital, to December 31, 2008, it was of Q13,262.5 million, higher by Q2,091.8 million (18.7%) than the registered to December 2007; result explained by the increase in the following categories: capital reserves of Q703.6 million (44.4%), permanent contributions of Q528.1 million (127.2%) and paid capital of Q486.1 million (8.9%). 89

90 I. LEGAL AND IMMEDIATE CAPACITY FOR CREDIT EXPANSION OF THE SYSTEM S BANKS Article 64 of the Law of Banks and Financial Groups establishes that the banks and financial societies should permanently maintain a wealth minimum amount regarding the credit and market risks and others, according to the stipulations of general character that the Monetary Board issues for such effect. In the same regulations, it is foreseen that the referred minimum wealth amount required for the exposition of the indicated risks and corresponding weightings, should be set by the Monetary Board, at the request of the Superintendencia de Bancos. In that regard, article 2 of the Regulations for the Determination of the Wealth Minimum Amount Required for the Risk Exposition, applicable to Banks and Financial Societies, approved by the Monetary Board in resolution JM dated May 12, 2004, establishes that the referred amount will be equivalent to: a) the equivalent to ten per cent (10%) of the assets and weighted contingencies according to its risk category; and, b) one hundred per cent (100%) of the amount of deferred expenses payable to be registered accountably as of July 1, 2004, date in which such regulations were enforced. On the other hand, according to article 65 of the mentioned law, the computable wealth of the banking institutions is integrated by the primary capital plus the complementary capital, deducting from that amount the investment on assets of national and foreign banks, financial societies, insurance companies, surety companies, general deposit warehouses, specialized companies of financial services, as well as the capital assigned to branches abroad. To December 31, 2008, the computable wealth of the banking system was of Q12,302.6 million, while the amount of wealth required was of Q9,108.0 million, therefore, the wealth stability position at the end of 2008 was positive by Q3,194.6 million, amount that, in case the banking system expands its assets with a weighting of one hundred per cent (100%), from ten percent (10%) of risk, would allow an increase in its asset and contingent operations up to Q31,946.0 million. It is important to mention that the credit expansion capability of the banks is 90

91 associated to the availability of resources that such institutions have, highlighting that to December 31, 2008, they had Q647.6 million of surplus liquidity to carry out new investments. J. DUE PORTFOLIO The due portfolio, as a proportion of the total portfolio, showed an important reduction. In effect, to December 31, 2008 such portfolio was of Q1,789.1 million, amount that represented 2.3% of the total portfolio of the banking system, lower by 1.6 percentage points than the observed on the same date of the previous year (3.9%). Percentage GRAPH 31 BANKING SYSTEM CONTAMINATED PORTFOLIO REGARDING THE TOTAL PORTFOLIO 1/ To December 31 of every year While assessing the proportion represented by each of the categories that integrate the due portfolio regarding the total portfolio; it can be observed that from December 2007 to December 2008, only the portfolio in administrative collection showed an increase, from 0.3% to 1.1%; in contrast, the portfolio in the expansion process decreased from 0.3% to 0.2%; while the portfolio in judicial collection remained at 1.0%. 91

92 Percentage GRAPH 32 BANKING SYSTEM PROPORTION OF THE PORTFOLIO IN RECOVERY PROCESS REGARDING THE TOTAL PORTFOLIO 1 / To December 31 of every year Judicial collection Administrative collection In extension 1/Since January 2008, the new Accounting Instructions for Banks and Financial Entities Manual only considers the due portfolio, distributed in the following components: In extension process, in judicial collection and in administrative collection. K. UNPRODUCTIVE ASSETS The unproductive assets of the banking system 37, as a proportion of the total assets, continued their trend to the fall, being of 4.2% in December 2008 (5.2% in December 2007). Percentage GRAPH 33 BANKING SYSTEM PROPORTION OF THE UNPRODUCTIVE ASSETS REGARDING THE TOTAL ASSETS OF THE SYSTEM To December 31 of every year Fixed assets Contaminated portfolio Net extraordinary assets 1/In 2007, the due and default portfolio are included. Since January 2008, due to amendments to the Accounting Instructions for Banks and Financial Entities Manual only the due portfolio is considered. 37 Integrated by the contaminated portfolio, net extraordinary assets and fixed assets. 92

93 The reduction in the level of the unproductive assets is mainly associated with the higher dynamism shown by the productive assets, because these increased 13.1%, in contrast with the unproductive assets that were reduced by 10.6%. It is important to highlight that the evolution of the productive assets is associated with the higher dynamism shown by the value investment category, which registered a growth rate of 20.9%. Regarding the structure of the unproductive assets, it is important to indicate that from December 31, 2007 to December 3, 2008 the contaminated portfolio and extraordinary assets reduced their participation regarding the total of such assets, from 44.7% to 32.6% and from 7.7% to 7.5%, respectively. In contrast, the fixed assets increased their participation, from 47.6% to 59.9%. Percentage GRAPH 34 BANKING SYSTEM STRUCTURE OF THE UNPRODUCTIVE ASSETS To December 31 of every year Fixed assets Net extraordinary assets Contaminated portfolio 1/In 2007, the due and default portfolio are included. Since January 2008, due to amendments to the Accounting Instructions for Banks and Financial Entities Manual only the due portfolio is considered. The reduction in the contaminated portfolio is explained by the accounting restructuring of the portfolio based on the baselines of the new Accounting Instructions Manual applicable to banks and financial societies, while the reduction in the extraordinary assets is associated with the lower execution of assets ceded as guarantees to the credits granted. 93

94 Regarding the increase of the fixed assets, this is mainly explained by the increase of the maintenance expenditures, improvements and reevaluations of the real estate that belong to the banking institutions. L. BANKING INSTITUTIONS At the end of 2008, 18 national banks and a branch of a foreign bank were operating. Regarding the number of agencies and branches, during the same date, 2,536 were operating from which 2,534 correspond to national banks and two to a branch of a foreign bank. From the total of branches, in the metropolitan region 45.3% (1,148) were operating; in the South Western region 15.2% (384); in the Central region 10.2% (259); in the North Eastern region 10.1% (257); in the South Eastern region 6.6% (167); in the North Western region 6.0% (152); in the North region 4.2% (107); and, in Petén 2.4% (60). M. BALANCE ACCOUNT OF FINANCIAL SOCIEITES To December 31, 2008, there were 15 private financial societies and one governmental financial society. On that date, the asset of the private financial societies was of Q5,708.1 million, higher by Q815.7 million, than the registered in December of the previous year. Said increase is mainly explained by the increase in the following categories: investment in net securities of Q428.0 million (15.0%), other investments of Q245.6 million (69.0%) and net credit portfolio of Q154.9 million (11.7%). The accounts with higher participation in the total asset were the net security investment (57.6%) and the net credit portfolio (25.9%). Regarding the liability, to December 31, 2008, it was of Q4,796.1 million, higher by Q745.7 million regarding the amount registered to December 31 of the previous year. Such result is mainly caused by the increase in the outstanding bonds in national currency of Q708.9 million (18.7%) and other obligations of Q23.6 million (34.4%). The most significant category, in relative terms, in the total liability was of the outstanding bonds in national currency, with a participation of 94.0%. 94

95 Regarding the accounting capital, it registered an increase of Q69.8 million, from Q842.2 million in 2007 to Q912.0 million in 2008, because of the increase in the paid capital category of Q80.0 million and in the capital reserves of Q7.5 million. Regarding the assets of the governmental financial society, Corporación Financiera Nacional (CORFINA), to December 31, 2008, was of Q157.8 million, lower by Q64.6 million than the registered to December 31, On the other hand, the liability was reduced by Q13.8 million, mainly due to the reduction in other creditor accounts in national currency of Q16.1 million, which decreased from Q117.1 million in 2007 to Q101.0 million in The accounting capital was negative, being of Q1,391.4 million, lower by Q50.7 million than the observed the previous year. To December 31, 2008, the liable amount plus the capital was reduced by Q64.6 million, regarding the rate observed to December 31, N. FINANCIAL GROUPS Article 27 of the Law of Banks and Financial Groups, considers a financial group as the group of two or three legal persons that carry out financial activities, one of which should be a bank, having common control due to property, administration or use of corporate image, or without these relationships, according to agreement, decide on common control. In addition, it indicates that it is the responsibility of the Monetary Board to authorize the conformation of financial groups, prior to the decree issued by the Superintendencia de Bancos. In that sense, based on article 116 of the Law of Banks and Financial Groups, to December 31, 2008, there were 10 financial groups authorized by the Monetary Board. The administrative structure, which covers 63 entities, that included 15 Stock Exchanges, 9 banks, 7 off-shore entities, 8 financial societies, 7 companies that issue or administrate credit cards, 5 financial leasing and factoring companies, 4 insurance companies, 3 bonded warehouses, 2 guarantee companies, 1 company that operates family remittances, 1 company that supports consumption credits and 1 single credit center. 95

96 The following table shows the detail of the entities that integrated such financial groups: 96

97 97

98 Ñ. OFF-SHORE ENTITIES Article 112 of the Law of Banks and Financial Groups defines as off-shore entities those mainly dedicated to financial intermediation, constituted or registered under the laws of a foreign country, which usually carry out their activities outside of the country. According to the above, the Regulation for the Authorization of the Off-shore Entities Operation, approved by the Monetary Board in resolution JM , dated November 15 th, 2002, establishes in article 12 that off-shore entities can carry out the operations, only in foreign currency, established in the license issued by the country in which they are constituted and that are legally allowed in Guatemala. In addition, it foresees that the entire fund-raising operations, all of them, should be constituted and maintained out of Guatemalan territory and the off-shore entity should inform the depositor or investor, in writing in the corresponding contract, that the legal regimen that applies will be the one from the country that granted the authorization and, besides, that said deposits are not covered by the Savings Protection Fund. To December 31, 2008, the Monetary Board had authorized the operation of 7 off-shore entities, which are detailed in the following table: 98

99 Table 17 OFF-SHORE ENTITIES AUTHORIZED BY MONETARY BOARD To December 31, 2008 No. DENOMINATION RESOLUTION FINANCIAL GROUP 1 Westrust Bank International Limited JM dated Corporación BI 2 Occidente International Corporation JM dated De Occidente 3 Mercom Bank Ltd. JM dated Agromercantil 4 Cuscatlan Bank & Trust Limited JM dated Citibank de Guatemala 5 Bac Bank Inc. JM dated Bac Credomatic 6 GTC Bank Inc. JM dated G&T Continental 7 Transcom Bank (Barbados) Limited JM dated Reformador With illustrative purposes, regarding the percentage participation of each offshore entity and the main categories of the total asset and liability, the amounts of the general consolidated balance that the off-shore entities reported to the Superintendencia de Bancos to December 31, 2008 were taken into account. In that sense, it was established that the consolidated asset of the 7 entities was of US$2,710.9 million, equivalent to Q21,095.2 million 38. Such asset was distributed in the following way: GTC Bank Inc., 29.97%; Westrust Bank International Limited, 26.40%; Mercom Bank Ltd., 14.53%; Cuscatlan Bank & Trust Limited, 12.04%; Transcom Bank (Barbados) Limited, 7.18%; BAC Bank Inc., 6.36%; and, Occidente International Corporation, 3.52%, as shown in the following graph. 38 According to the reference exchange rate effective on December 31, 2008, of Q per US$

100 GRAPH 35 OFF-SHORE ENTITIES PARTICIPATION OF EACH ENTITY IN THE CONSOLIDATED ASSET TO DECEMBER 31st, 2008 TOTAL ASSET US$2,710.9 million (Q21,095.2 million) Regarding the structure of the main accounts that integrate the asset of the off-shore entities, to December 31, 2008, the credit portfolio represented 72.28%; the investments 16.66%; the availabilities 9.87%; and, other asset accounts %, as shown in the following graph: GRAPH 36 OFF-SHORE ENTITIES PARTICIPATION OF EACH ENTITY IN THE CONSOLIDATED ASSET TO DECEMBER 31st, 2008 TOTAL ASSET US$2,710.9 million (Q21,095.2 million)* CREDIT PORTFOLIO AVAILABILITIES REAL ESTATE AND MOVABLES (Net) ACCOUNTS RECEIVABLE (Net) DEFFERED CHARGES (Net) INVESTMENTS FINANCIAL PRODUCTS RECEIVABLE LIQUID GOODS (Net) PERMANENT INVESTMENTS (Net) 39 It mainly includes financial products, real estate and movables, liquid goods and accounts receivable. 100

101 On the other hand, to December 31, 2008, the consolidated liability was of US$2,425.4 million, equivalent to Q18,873.4 million 40 ; from which 96.0% correspond to deposits; 1.93% to credits obtained; 1.07% to financial expenses payable; and, 1.0% to other liabilities 41, as shown in the following graph. GRAPH 37 OFF-SHORE ENTITIES PARTICIPATION OF EACH SECTOR IN THE CONSOLIDATED LIABILITY TO DECEMBER 31st, 2008 TOTAL LIABILITY US$2,425.4 million (Q18,873.4 million) DEPOSITS FINANCIAL EXPENSES PAYABLE DEFFERED CREDITS CREDITS OBTAINED ACCOUNTS PAYABLE PROVISIONS O. ADVANCES IN THE STRENGTHENING PROCESS OF THE NATIONAL FINANCIAL SYSTEM 1. Strengthening of the financial system In resolution JM dated January 16, 2008, the Monetary Board modified the Accounting Instructions Manual for Entities subject to Surveillance and Inspection from the Supervisory of Banks, issued in resolution JM , which, among other issues, incorporated an account to register the contributions that the entities received for the acquisition of shares, in cases in which it is demonstrated that it is not possible to issue the corresponding titles, and therefore, to carry out the immediate registration in the paid capital accounts; also within the 40 According to the reference exchange rate effective on December 31, 2008, of Q per US$ It includes accounts payable, deferred credits and provisions. 101

102 "values and assets granted as guarantee group, a group of accounts and divisionary was included to register the specific guarantees granted by the agencies in favor of third parties, derived from outstanding financial obligations, as well as accounts to register the admissible bonds for the calculation of the computable patrimony, referred in the General Regulation for the Issue of Admissible Bonds for the Calculation of Computable Patrimony issued in resolution JM In resolution JM dated February 27, 2008 the Monetary Board modified article 12 of the Regulation of Asset and Liability Exclusion Board, in the sense that despite the Asset and Liability Exclusion Board of the referred entity has stopped operating, the Banco de Guatemala will be entitled to grant, together with the trustee, the necessary instruments to clarify, extend or modify the instruments regarding the transfer of assets to the trust, until the completion of the same. In resolution JM of April 2, 2008, the Monetary Board modified article 10 of the Regulations for the Determination of the Minimum Amount of the Patrimony required for Risk Exposure that apply to Banks and Financial Societies, so that the organization expenditure of new institutions and the payable deferred expenses derived from approved mergers, will have a minimum amount of required patrimony over such expenses, which will be of 12.5% semiannually, since the beginning of the first four semesters, and 12.5% quarterly, since the beginning of the next four quarters, to accumulate to 100%. This percentage should remain until paying 100% of the expenditures, the computing of the initial period will start, in case of new institutions, since the beginning of operations and, in the case of mergers, since its registration in the Mercantile Registry. The Congress of the Republic, in Decree Number approved the Law for the Acknowledgement of Communications and Electronic Signatures. Such law will apply for all type of electronic communication, transaction or legal act, public or private, national or international, except in the cases indicated, establishing for that the relative to the application of legal requirements to the electronic communciations; electronic communications and creation of contract through 102

103 electronic means; transportation of merchandise; advanced electronic signature and servers for certification services; and, registry of servers for certification services. The Congress of the Republic, in Decree number amended Decree number of the Congress of the Republic, Law of Value and Merchandise Market, regarding the inclusion of criminal and penalization figures for mercantile societies that, without being legally authorized, carry out fundraising operations; this, to avoid the public s investments to fall into risk and to discourage that type of operations. The Congress of the Republic, through Decree number amended Decree number of the Congress of the Republic, Penal Code, adding article 342 B regarding Financial Panicking, in which a legal measure that sanctions people that tend to disseminate false or inaccurate information, damaging the trust of customers, users, depositors or investors of an institution subject to surveillance and inspection from the Supervisory of Banks. In resolution JM , dated December 30, 2008, the Monetary Board modified the Regulations for the Administration of Credit Risk, issued in resolution JM , regarding the following aspects: deferral of improvement in the classification of extended, restructured or renewed credit assets (article 27); permanence of the classification in case of delays or payment deferrals (article 27 bis); inclusion of the specific supplies term (articles 33 and 35); rearrangement of guarantees to be deducted (article 34); reduction of the term in which guarantees can be deducted (article 34 bis); and, creation of reserves or generic supplies (article 38 bis). In resolution JM , dated December 30, 2008, the Monetary Board amended section IV: Description of Accounts and Registration Procedures of the Accounting Instructions Manual for Entities subject to Surveillance and Inspection from the Supervisory of Banks issued in resolution JM , the description and registration process of the following accounts: investments, credit portfolio, accounts receivable, liquid assets, permanent investments, other investments, 103

104 capital reserves, other reserves, valuation of assets of doubtful recovery and earnings to be applied of previous exercises. 2. Banking consolidations In resolution JM , dated February 27, 2008, the Monetary Board authorized, on one hand, the merge by take-over of Banco Uno, S. A., by Banco Cuscatlán de Guatemala, S. A., and on the other hand, the amendment of its public deed of settlement, in the sense of changing its denomination to Banco Citibank de Guatemala, S. A., and to enlarge its authorized capital, maintaining all the other characteristics attributed by law and social pacts, according to the minute accepted by the Supervisory of Banks. In resolution JM , dated October 22, 2008, the Monetary Board authorized Banco de los Trabajadores to acquire 1,047,117 assets from Banco de la República, S. A., for an amount of Q159,952.0 thousand, in order to carry out the merger by take-over of Banco de la República, S. A. 3. Complementary reform In Governmental Agreement number of the Regulations for the Registration of Movable Guarantees was approved, which regulates the functioning and operations of the Registry of Movable Guarantees, as well as the functions of the Registrar and Sub-registrar or sub-registrars. V. PUBLIC FINANCE A. GENERAL ASPECTS OF THE BUDGET The 2008 tax year General Budget of Income and Expenditure of the State was approved by the Congress of the Republic through decree number for an amount of Q42,535.5 million, while its analytical distribution was approved in Governmental Agreement number According to the considerations of the referred decree, the budget prepared in order to promote the Guatemalan population s welfare within the Peace 104

105 Agreements framework, to assist the commitments of the Fiscal Pact and support the social sectors, in areas of education, health, citizen security and justice. In 2008, the budget was extended once, through Decree number of the Congress of the Republic, for an amount of Q1,400.0 million, as a result, it reached an amount of Q43,935.5 million, higher by 9.3% than the adjusted budget of It is important to indicate that the total budget of 2008 represented 14.9% of the GDP (15.4% in 2007). It is worth highlighting that the budget extension was because, at the beginning, resources from loans, donations and financial balances destined to fund programs and projects for social benefit were not included. In this context, in the extended budget, Q34,571.0 million of current income were estimated, Q31.1 million of capital income, Q1,150.8 million of foreign donations, Q2,350.0 million of public domestic indebtedness through the placement of Treasury Bonds, Q3,730.1 million of public foreign indebtedness and Q2,102.5 million of utilization of cash resources. On the other hand, in the expenditure budget, that includes the mentioned extension, Q27,617.4 million were allocated for operation expenditures (includes Q4,098.6 million to pay interest and commission of foreign and domestic public indebtedness), Q13,991.8 million for investment expenditures and Q2,326.2 million for capital payment of the public debt. B. BUDGETARY EXECUTION According to the Settlement of the Income and Expenditure of the State Budget for the 2008 Tax Year, the tax income reached an amount of Q35,578.0 million (higher by 5.9% than that of 2007), whereas the total expenses increased to Q40,355.4 million (higher by 8.0% than the registered in 2007). The greater dynamism registered in governmental expenditures regarding fiscal incomes cause the budgetary execution of the Central Government to close at the end of 2008 with a fiscal deficit of Q4,777.4 million, amount higher by Q1,005.8 million (26.7%) than that registered in Because of the above, the fiscal deficit relation over the GDP increased from 1.4% in 2007 to 1.6% in

106 Million of quetzales GRAPH 38 CENTRAL GOVERNMENT BUDGETARY EXECUTION YEARS , , , , , , , , , , , , , , , INCOMES EXPENDITURES DEFICIT It is important to indicate that the tax income level of 2008 cause the tax load to be of 11.3%, lower by 0.8 percentage points than the observed in 2007, because the tax incomes registered a lower growth rhythm regarding the GDP. The collection of indirect taxes in 2008 had a relative weight of 70.9% (72.5% in 2007), whereas that of direct taxes was of 29.1% (27.5% in 2007) in the total. On the other hand, the tax buoyancy 42 in 2008 was of 0.4, lower by 0.7 than the registered in 2007, which indicates lower dynamism of tax income regarding the growth shown by the economic activity. Such dynamism is mainly explained by the shrinkage in the collection of indirect taxes. It is important to mention that such buoyancy is the lowest registered throughout the decade. 42 Relation that proportionally measures the relative variation of the tax income regarding the relative increase of the gross domestic product. 106

107 CENTRAL GOVERNMENT FISCAL INDICATORS YEARS TABLE 18 Tax Fiscal Nominal Tax Tributary Fiscal YEARS Income Deficit GDP Buoyancy Load deficit to -Million of quetzales- (%) GDP (%) , , , , , , , , , , , , , , , , , , , , , , , , SOURCE: Ministerio de Finanzas Públicas and Banco de Guatemala. Regarding the index perception and budgetary execution, the total income perceived represented 99.5% of the budgeted, whereas the total expenses were executed in 97.0%, as a result that the operation expenses and capital executed 98.3% and 94.5%, respectively, as shown in the following table. CENTRAL GOVERNMENT INDEXES OF INCOME AND EXECUTION PERCEPTION OF EXPENSES REGARDING THE BUDGET YEARS TABLE 19 Total Operation Years Incomes Total Expenditures Capital Budgeted Perceived Index Budgeted Executed Index Budgeted Executed Index Budgeted Executed Index Million of quetzales % Million of quetzales % Millin of quetzales % Million of quetzales % , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , SOUCE: Ministerio de Finanzas Públicas [Equivalent to the US Department of Treasury] In 2008 the current income was higher than the current expenses, which generated savings in current accounts of Q8,050.2 million, amount higher by Q333.3 million than the reached in In terms of GDP, this variable represented 2.7%, percentage lower by 0.5 percentage points than that of The savings in current account, in accounting terms, allowed funding 60.9% of the investment expense (66.5% in 2007). 107

108 Regarding the total financing of the Central Government, this was of Q4,777.4 million, higher by Q1,005.8 million (26.7%) than that of The net internal financing was positive by Q1,625.6 million, as a result of net negotiations of Treasury Bonds of Q2,018.9 million (placements for Q3,850.6 million and repurchase agreements for Q1,831.7 million) and of the amortizing of the cost of monetary policy for Q393.3 million. It is worth indicating that in fulfillment of the established in clause b) of article 9 of the Organic Law of the Banco de Guatemala, the State, through the Ministerio de Finanzas Públicas [Equivalent to the US Department of the Treasury], on August 24, 2008 issued Representative Treasury Bond Certificates of the Republic of Guatemala in favor of Banco de Guatemala for Q393.3 million to cover the net defficiency of the Central Bank that corresponds to the 2006 tax year, amount that was included in the referred financing. Regarding net foreign financing, this was of Q849.7 million, as a result of disbursements of Q2,762.5 million and loan amortizations of Q1,912.8 million. Among the disbursements received by the Central Government, the ones that stand out are those received from the Inter-American Development Bank (IDB), from the International Bank for Reconstruction and Development (IBRD) and from the Central American Bank for Economic Integration (CBEI) that, together, add up to around Q2,694.0 million. Given that the resources coming from internal and foreign financing were not sufficient to cover the fiscal gap, a financial deficit of Q2,302.1 million was generated, which was covered through the reduction of the availability of cash till for the same amount. C. INCOME Total income, including donations, was of Q35,578.0 million, higher by 5.9% than the registered in 2007, which meant a deceleration of total collection (14.9% in 2007). In this total, income tax was of Q33,358.1 million, higher by Q1,814.7 million (5.8%) than that of the previous year, while the non-tax income reached Q1,826.5 million, amount higher by Q205.9 million (12.7%) than that in

109 Regarding the deceleration of the tax collection in 2008, it is explained by the effect of the worldwide economic crisis, which affected at a domestic level, not only in consumption but also in imports. In effect, the taxes that showed a significant deceleration were the following: Value Added Tax; Distribution of Crude Oil and Fuel derived from the Oil Tax (IDP, for its acronym in Spanish); Tax to Cigarettes and Tobacco; and Tax to Cement Distribution. In addition, it is worth highlighting the lower collection registered by the Import tax. Regarding the collection of direct taxes, it was of Q9,714.3 million, amount higher by Q1,045.8 million (12.1%) than the collected in 2007, which was mainly determined by the greater income derived from Income Tax (ISR, for its acronym in Spanish) that was of Q7,351.9 million, amount higher by Q753.8 million (11.4%) than the collected in The increase in the collection of ISR was mainly determined by the higher collection of ISR from companies, which was higher by Q685.7 million (12.0%) than that of 2007; while the tax collected from individuals grew by Q68.1 million (7.8%) compared to On the other hand, regarding Extraordinary and Temporary Support Tax for the Peace Agreements (IETAAP, for its acronym in Spanish), Q2,335.8 million was collected, amount higher by Q288.9 million (14.1%) than the registered the previous year. Regarding indirect taxes, the collection was of Q23,643.8 million, amount higher by Q768.9 million (3.4%) compared to Said result was mainly determined by the income derived from the Value Added Tax (IVA, for its acronym in Spanish), which was of Q16,155.2 million (Q10,324.4 million on imports and Q5,830.8 million on goods and services), amount higher by Q778.2 million (5.1%) than the registered in Regarding the import tax, this was of Q2,427.2 million, amount lower by Q226.7 million (8.5%) compared to the collected in 2007; while the Crude Oil and Fuels derived from Crude Oil Distribution Tax (IDP, for its acronym in Spanish) was of Q1,938.4 million, lower by Q108.9 million (5.3%) than that of the previous year. It is worth highlighting that in the deceleration of the VAT growth rhythm, we can highlight the reimbursement of fiscal credit in favor of contributors and, on the other hand, the deceleration in the aggregate demand and the effect of the worldwide economic crisis. The fall in the collection of import taxes 109

110 was mainly caused by a reduction in the import value and by discounts in the customs tariffs contained in the free trade agreement. Regarding the lower collection of IDP, it was caused by the lower demand of fuels and lubricants, because of the increase in the international price of oil and its derivatives. Regarding the non-tax income, it was of Q1,826.5 million, amount higher by Q205.9 million (12.7%) than the collected in Among the most significant nontax income is the income derived from the security and social prevision contributions Q746.5 million (which includes Q730.2 million in contributions from employees in the liable class regimen); of the sale of goods and services from public administration, it was Q360.4 million; and, property rentals, Q185.1 million. Regarding capital income, these were of Q31.0 million, amount higher by Q4.2 million than that of Regarding donations from abroad, an amount for the equivalent of Q362.4 million was received, lower by Q57.3 million (13.7%) than that that of 2007, from which Q343.3 million were from governments and Q19.1 million from organizations and international institutions. Below are two graphs that show the total income structure. GRAPH 39 CENTRAL GOVERNMENT TOTAL INCOME STRUCTURE YEARS Million of quetzales (93.8%) 31,543.4 (93.8%) 33,358.1 (1.4%) (1.1%) % = 33,610.5 (4.8%) 1, % = 35,578.0 (5.1%) 1,826.5 TAX NON TAX FROM CAPITAL AND DONATIONS 110

111 D. EXPENDITURE The toal expenditure of the Central Government in 2008 was of Q42,661.5 million, amount higher by Q3,113.4 million (7.9%) than the registered in The operation expenses reached Q27,134.4 million, higher by Q2,359.9 million (9.5%) than those of 2007; the capital expenses were of Q13,221.0 million, higher by Q619.4 million (4.9%) than the executed in 2007; and, the public debt expenses were of Q2,306.1 million, higher by Q140.1 million (6.5%) than those of Such categories represented 63.6%, 31.0% and 5.4% of the total, whereas in 2007 such structure was of 62.6%, 31.9% and 5.5%, as shown in the following graphs. GRAPH 40 CENTRAL GOVERNMENT TOTAL EXPENDITURE STRUCTURE YEARS MillIon of quetzales (62.6%) 24,780.5 (63.6%) 27,134.4 (31.9%) 12,601.6 (5.5%) 2,166.0 (31.0%) 13,221.0 (5.4%) 2, % = 39, % = 42,661.5 OPERATION CAPITAL PUBLIC DEBT 111

112 1. Expenditure according to the type of program and specific objective Studying the composition of expense per type of program, the most relevant categories were the following: Personal Services, (21.8%); Current Transfers, (20.1%); Capital Transfers, (17.6%); and, Public Debt Service (14.8%). Regarding Personal Services, which include, among other categories, payment and salaries, it reached a level of Q9,309.6 million, higher by Q1,064.4 million (12.9%) than in Regarding the Current Transfers category, this was of Q8,571.5 million, amount lower by Q555.8 million (6.1%) than that registered in Of this total, Q4,827.1 million corresponded to transfers to public sector entities, higher by Q621.9 million (14.8%) than that of the previous year. The most important transfers were carried out to the Judicial Branch for Q1,042.0 million, to Universidad de San Carlos de Guatemala for Q973.5 million, to Ministerio Público [Equivalent to the US Department of Justice] for Q599.9 million, to the Congress of the Republic for Q402.4 million and to the Supreme Electoral Tribunal for Q131.0 million. The transfers to the private sector reached Q3,683.5 million, lower by Q787.0 million (17.6%) than those granted in Among these, the social security benefits (retirement and pensions) added Q2,346.7 million; also, it is worth highlighting the transfer of resources to Asociación de Empresas de Autobuses Urbanos for Q369.8 million. On the other hand, transfers to the foreign sector were of Q59.0 million. Regarding Capital Transfers, it reached a total of Q7,499.6 million, amount lower by Q377.1 million (4.8%) than that of 2007, highlighting the transfer of resources to municipalities, to Urban and Rural Development Councils, to Instituto Nacional de Electrificación (INDE), to Instituto Nacional de Fomento Municipal (INFOM), to Instituto Nacional de Ciencias Forenses (INACIF) and to the Peace Secretariat. Finally, the expenditure in the Public Debt Service reached Q6,332.0 million, higher by Q274.5 million (4.5%) regarding From this total, Q4,025.9 million corresponded to the payment of interest and commissions, Q1,912.8 million for the 112

113 amortization of foreign loans and Q393.3 million for the amortization of the monetary policy cost of Expenditure according to institutional destination When analyzing governmental expense execution according to the institutional destination, the offices that executed the greatest amount of resources were the following: Ministry of Education, Q5,792.6 million; Ministry of Communications, Infrastructure and Housing, Q4,248.3 million; Ministry of Public Health and Social Assistance, Q2,684.5 million; and Secretariats and other Executive offices, Q2,345.8 million. On the other hand, the State Obligations under the responsibility of the Treasury, that include financial commitments derived from constitutional decrees and specific laws, of international treaties and contributions to non-governmental organization and to non-governmental entities, they added up Q14,840.6 million, higher by Q2,155.8 million (17.0%) than the observed in Expenses according to their nature a) Operation expenses The operation expenses were of Q27,134.4 million, higher by Q2,353.9 million (9.5%) than those registered in Regarding their structure, the operation expenses represented 53.6%, transfers 31.6% and public debt interest and commissions 14.8%. Regarding the operation expenses, these were of Q14,538.9 million, higher by Q2,776.5 million (23.6%) regarding the observed in 2007; this increase was mainly caused by the increase registered by Goods and Services expenses of Q1,754.4 million (49.0%). Regarding disbursements due to transfers, these reached Q8,569.6 million, which represented a reduction of Q557.0 million (6.1%) regarding those of Regarding expenses derived from public debt interest and commissions, these were of Q4,025.9 million, higher by Q134.4 million (3.5%) than those of 113

114 2007. Such result was mainly influenced by the increase of Q365.0 million (20.0%) in the payment of interest of foreign public debt. b) Capital expenses Regarding capital expenses, these were of Q13,221.0 million, higher by Q619.4 million (4.9%) than those of Of this total, Q5,569.6 million (42.1%) correspond to direct investments and Q7,651.4 million (57.9%) to indirect investments. Regarding direct investments, expenses due to Goods and Services stand out for an amount of Q5,462.1 million, higher by Q862.6 million (18.8%) than the registered in 2007; while regarding indirect investments, the following are highlighted: public sector transfers for an amount of Q6,864.8 million, which increased by Q1,077.1 million (18.6%) and private sector transfers for an amount of Q630.6 million, lower by Q445.6 million (41.4%) regarding that in It is worth highlighting that from the total of indirect investment, Q7,499.6 million were destined to capital transfers and Q151.8 million to financial disbursements. From the capital transfers, Q6,864.8 million were destined to the public sector, Q630.6 million to the private sector and Q4.2 million to the foreign sector. Regarding transfers to the pubic sector, those made to municipalities for Q4,003.6 million are highlighted, higher by Q749.9 million (23.0%) than those registered in On the other hand, Urban and Rural Development Councils, received Q1,286.9 million; Q747.8 million were transferred to decentralized and autonomous entities, while Q350.2 million were transferred to other public sector entities. It is also important to indicate that through Governmental Budget Agreement number , the Ministerio de Finanzas Públicas [Equivalent to the US Department of Treasury] was authorized to transfer Q200.0 million to Crédito Hipotecario Nacional, for capitalization. Regarding destinations per sectors, the expenses destined to Housing and Urban Development were highlighted, which reached Q5,221.1 million, lower by Q203.9 million (3.8%) than that of 2007, as well as Transportation for an amount of Q4,450.4 million, lower by Q135.4 million (3.0%) than the registered in

115 E. FISCAL TILL During the 2008 fiscal year, the total income from the Central Government registered an amount of Q35,578.0 million, of which Q35,184.6 million correspond to current income, Q31.0 million capital income, and Q362.4 million to donations. Regarding total expenditure, it was of Q40,355.4 million; regarding operation expenses, Q27,134.4 million were disbursed and Q13,221.0 million were executed for capital expenses. Derived from the income and total expenditure registered in 2008, the Central Government registered a fiscal deficit of Q4,777.4 million, which was financed in the following way: net domestic credit Q1,625.6 million, result of the placement of Treasury Bonds for Q3,850.6 million minus repurchase agreements of public values for Q1,831.7 million and the amortization of the monetary policy cost corresponding to the 2006 tax year for Q393.3 million; net foreign credit Q849.7 million (disbursement for Q2,762.5 million minus amortizations for Q1,912.8 million) and use of tax till resources for Q2,302.1 million. F. PUBLIC SECTOR DEBT 1. Domestic public debt a) Movement of the domestic public debt The balance of the internal public debt of the non-financial public sector, to December 31, 2008, was of Q26,209.9 million, amount higher by Q2,018.9 million than the registered on the same date of 2007, which gave as a result that the internal debt relation regarding the GDP would decrease from 9.2% in 2007 to 8.9% in

116 YEARS PUBLIC SECTOR INTERNAL PUBLIC DEBT AÑOS BALANCE (Million of quetzales) TABLE 20 BALANCE/GDP (%) , , , , , , , , SOURCE: Ministerio de Finanzas Públicas. The increase of internal public debt of Q2,018.9 million, was caused by the placement of value titles for Q3,850.6 million and payment of bonded debt for Q1,831.7 million. Regarding the placements, Q2,908.6 million were carried out through auctions, while Q548.7 million through bidding mechanism. b) Balance of the internal public debt per holder Regarding the distribution per holder of the internal public debt balance, the same varied as a result of the negotiations made with the public sector and of the increase in the values holding by the Banco de Guatemala. In effect, in 2008 the participation of banking and public sectors among the total of internal public debt was 24.8%, percentage higher than the registered in 2007 (19.4%). Regarding the Banco de Guatemala, the participation in the holding structure of internal debt increased, from 13.2% in 2007 to 14.1% in 2008, because the Ministerio de Finanzas Públicas [Equivalent to the US Department of Treasury] in July 2008 transferred Treasury Bonds for Q393.3 million to recover the net deficiencies of the 2006 tax year. 116

117 On the other hand, the private, banking and non-resident sectors reduced their participation in the same period, after the holding of Treasury Bonds by such sector decreased from 39.1%, 27.5% and 0.8%, in 2007, to 35.4%, 25.0% and 0.7% in 2008, in Below are two graphs that show the internal debt per holder. GRAPH 41 BALANCE AND DISTRIBUTION OF THE INTERNAL PUBLIC DEBT PER HOLDER YEARS Millions of quetzales (27.5%) 6,641.0 (25.0%) 6,554.7 (19.4%) 4,683.7 (13.2%) 3,191.6 (24.8%) 6,505.9 (14.1%) 3,685.0 (0.8%) (39.1%) 9,469.1 (0.7%) (35.4%) 9, % = 24, % = 26,209.9 Banco de Guatemala Banking Sector Public Sector Non Resident Non-Financial Sector c) Interest rate and Maturity term During 2008, the weighted average interest rate applied in the placements of Treasury Bonds in national currency in the internal market, registering an increase from 9.0% in 2007 to 9.4% in Such increase was because the negotiations of value titles were mainly held for 10-year terms and at an annual interest rate of 9.4%. It is worth indicating that in 2008, as well as in the last three years there were no placements of Treasury Bonds in foreign currency. The weighted average interest rate, in national currency, of the internal public bonded debt per holder is shown in the following graph In the calculation of the weighted average interest rate, the interest rates of the Treasury Bonds issued by the Ministerio de Finanzas Públicas [Roughly equivalent to the US Department of the Treasury.] in favor of the Banco de Guatemala is not included, to restitute net deficiencies corresponding to the 2006 fiscal year, which is of 4.27% anually. 117

118 GRÁPH 42 WEIGHTED AVERAGE INTEREST RATE OF THE INTERNAL PUBLIC BONDED DEBT IN NATIONAL CURRENCY PER HOLDER YEARS Percentages TOTAL BANKING SECTOR PUBLIC SECTOR NON FINANCIAL PRIVATE SECTOR Regarding the term of the internal public debt placement, in 2008 the weighted average of placements in quetzales was similar to that of the previous year, being of 3,888 days, while in 2007 it was of 3,910 days. Regarding the profile of the maturity term of the internal public debt, at the end of 2008, 1.5% of the balance had to be paid at a term of less than six months (1.5% in 2007), 1.5% of balance in terms between six months and a year (6.1% in 2007) and 97.0% of the balance in terms of more than one year (92.4% in 2007). It is worth highlighting that regarding interest and commissions on the internal public debt, in 2008, Q2,097.9 million were paid, amount higher by Q276.3 million than that of Foreign public debt To December 31, 2008, the balance of foreign public debt was of US$4,382.4 million, equivalent to 11.2% of GDP, amount higher by US$156.4 million than the registered on the same date of This result was mainly caused by the loan disbursements for US$381.9 million and by amortizations of foreign loans for US$260.2 million. 118

119 Million of US Dollars GRAPH 42 Balance of Foreign Public Debt Years CENTRAL GOVERNMENT PUBLIC COMPANIES PUBLIC FINANCIAL INSTITUTIONS Preliminary data Regarding the integration of the balance of the foreign public debt per debtor, to December 31, 2008, the Central Government had US$4,285.3 million (97.79%), public business US$95.2 million (2.17%) and public financial institutions US$1.9 million (0.04%). Regarding disbursements of loans per creditor, the ones that stood out were those coming from IDB for US$139.1 million, IBRD for US$132.7 million and CABEI for US$101.0 million 44. Regarding the balance of the foreign public debt per creditor, 70.0% of the total corresponded to multilateral financial organizations, mainly to IDB with a balance of US$1,519.8 million, that represented 34.7% of the total; 8.2% corresponded to bilateral financial organizations and governments, among which, Japan Bank International Corporation is the greatest creditor (3.7% of the total) and 21.8% to Treasury Bonds expressed in US dollars. Regarding the service payment of the foreign public debt in 2008, it was of US$506.4 million, from which, US$260.2 million corresponded to capital and US$246.2 million to interest and commissions. From the total of amortizations, 44 Among the loan disbursements, the following highlight: IDB US$100.0 million to finance the Public Financial Management Reform Program II ; IBRD US$99.8 million to finance the Third Broad Base Development Policy Loan ; and, CABEI US$66.8 million for the Budgetary Support Financing to the Ministry of Communications, Infrastructure and Housing. 119

120 US$225.1 million (86.5% of the total) were made to multilateral financial organizations, while regarding the payment of interest and commissions to such creditors, it was of US$148.3 million (60.2% of the total). To bilateral financial organizations and governments, US$35.0 million were paid and US$10.0 million were paid due to interest and commissions. Regarding Treasury Bonds, regarding interest and commissions, US$87.9 million were paid. According to the information of the Ministerio de Finanzas Públicas [Equivalent to the US Department of the Treasury.], the resources obtained from foreign sources were for the financing of the following areas: financial sector (55.3%), construction sector (19.4%), power supply sector (9.3%), social development (6.5%), health and social assistance sector (3.3%), education sector (3.2%) and other destinations (3.0%). Finally, it is worth mentioning that among the indicators generally used to measure the sustainability of the foreign debt, is that of foreign public debt versus the gross domestic product, which was of 11.2% in 2008, lower than the registered in 2007 (12.4%); that of foreign public debt as a proportion of the exportation of goods and services, which was of 43.1%, lower by 2.5 percentage points than that of 2007; and, the service of the foreign public debt regarding the exportation of goods and services, that was of 5.0%, lower by 1.5 percentage points than the previous year According to the parameters used by the international financial organizations, the level of international monetary reserves and the external position of a country are committed when the relation of the balance of foreign public debt, regarding the gross domestic product and the balance of foreign public debt in relation to exportation of goods and services, are over 30% and 150% respectively; and, when, the relation of the service of foreign public debt regarding the exports of goods and services are over 25%. 120

121 PUBLIC SECTOR FOREIGN DEBT YEARS TABLE 21 YEARS BALANCE BALANCE/GDP BALANCE/EXPORTATIONSERVICE/EXPORTS MILLION OF US$ (%) OF GOODS AND SERVICES OF GOODS AND SERVICES (%) (%) , , , , , p/ 4, p/ Preliminary data SOURCE: Ministerio de Finanzas Públicas and Corporación Financiera Nacional -CORFINA-. G. MAIN DECISIONS REGARDING PUBLIC FINANCE IN In Decree Number of the Congress of the Republic, the Law of Economic Increase to Retirement for the beneficiaries of the State Civil Liable Class. This law determined an economic increase of Q70.3 million to retirement perceived by beneficiaries of the State Civil Liable Class. 2. In Decree number of the Congress of the Republic amendments to Decree number of the Congress of the Republic were approved, as well as to the Organic Law of the Santo Tomás de Castilla Industry and Free Zone. Among the amendments, the modification to article 26 of such law highlights, through which the distribution of liquid utilities was established, of which 20% is transferred to the State. 3. In Decree Number of the Congress of the Republic, amendments to the Tax Income Law (ISR) were approved, Decree Number of the Congress of the Republic and its amendments. Such reforms amended articles 35 and 36 of such law, regarding the percentage of income tax. 121

122 4. In Decree number of the Congress of the Republic, the Solidarity Tax Law (ISO, for its acronym in Spanish) was approved, substituting the Law of Extraordinary and Temporary Support of the Peace Agreements Tax (IETAAP, for its acronym in Spanish). The ISO applies for individuals or legal entities that obtain a gross margin of more than 4% of their gross income. 5. In Governmental Agreement number the granting of 8% to the initial salary of National Teachers was authorized. 6. In Governmental Agreement number the Ministerio de Finanzas Públicas [Equivalent to the US Department of Treasury] was authorized to adjust the Expenditure Budget for the 2008 Fiscal Year, for an amount of Q1,535.2 million. 7. In Governmental Agreement number the Ministerio de Finanzas Públicas [Equivalent to the US Department of Treasury] was authorized to grant an economic increase to the pension received by beneficiaries of the State Civil Liable Class. 122