Guatemalan Bonds Flounder and Partially Recover

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In this issue, which is the last of the year, you will find:

•Guatemalan Bonds Flounder and Partially Recover

•In Chile, Constitutional Reform Was For Nought

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•Guatemalan Bonds Flounder and Partially Recover
596 words | 3 minutes reading time

On December 8, the Guatemala Public Prosecutor’s Office held a press conference in which it suggested the presidential election could be overturned. The country’s bonds faltered shortly thereafter. It now seems likely that President-elect Bernardo Arévalo will take office, but Guatemala could emerge from its political crisis with a worse risk profile.

• In early December, bonds with a 2036 maturity went for 98 cents on the dollar. By December 15, they reached just over 82 cents per dollar, and this, it must be said, came after a significant rally.

• These figures, of course, refer to the price of Guatemalan debt in the secondary market. This means that bondholders are willing to sell their holdings for only 82% of their face value.

• This month, Guatemalan debt has undoubtedly had the worst return among emerging and frontier markets. This can be contrasted with El Salvador, whose bonds this year have shown the best returns in the world.

Outlook. The downward trend will not affect current debt, which has already been issued and is not subject to change. However, Guatemala could be forced to offer higher interest rates when it taps capital markets again, which will undoubtedly occur in 2024.

• The government deficit stands at around 1.5-1.7% of GDP; only debt will allow the state to maintain its level of spending. This will raise debt service costs if the political crisis is not resolved soon.

• Next year’s budget raises spending from $14.3 billion to $15.6 billion. $800 million in bonds will mature in 2024; the country wishes to reissue these bonds, but it risks having to do so under unfavorable circumstances.

• Guatemala does not have a debt problem. Its debt-to-GDP ratio is the lowest in the region and the country would benefit from investments in infrastructure, something the new budget more or less ignores.

Yes, But. The Bank of Guatemala maintains the country’s economic fundamentals are solid. Álvaro González Ricci, president of the Bank, believes the economy will grow around 3.5% and inflation will be within the 3-5% range. These are hardly revolutionary predictions: Guatemala tends to grow at 3.5% each year—mediocre figures for a country of its type.

• As a historical note, González Ricci highlighted that in 2015, the year in which President Otto Pérez Molina was forced to resign, GDP grew 4.1%. He also said supply chains had recovered following October’s protests.

• The end of the political crisis is in sight, which would help restore the status quo ante bellum. Indeed, the Constitutional Court has dismissed all legal appeals to overturn the election. 

• The incoming government, bound by a budget it abhors, will be very cautious in its spending. Their probity will be of great use when attempting to issue the $500 million to $1 billion needed during their first year in power.

The Balance. Things are not going smoothly in Guatemala, but the ship of state continues sailing. The country is notorious for its economic stability: it rarely goes into recession, even in turbulent times, but it tends to miss major booms. If the country’s political crisis is resolved, investors will enthusiastically buy up Guatemalan bonds.

• That said, structural problems, such as lack of infrastructure, which hinders long-term development, remain. The increase in spending planned by the budget will not solve these shortcomings.

• Guatemalan authorities often boast of their debt level, one of the lowest in the world. Yet while past governments were sensible in their debts, they missed the opportunities presented by last decade’s low interest rates. 

• Although rates will begin to fall in 2024, it is unlikely that they will return to 2019 levels. In sum, developing Guatemala now is more expensive today than it was 10 years ago.

•In Chile, Constitutional Reform Was For Nought
644 words | 3 minutes reading time

For the second time this decade, Chilean voters have rejected a new constitution lawmakers. The 1980 Constitution, the heavily amended remnant of Pinochet’s regime, will remain, ending the constitutional controversy that has dominated Chilean politics since the 2019 left-wing protests. 

Outlook. With 55% voting “against,” the electorate rejected the new constitution, mainly (but not exclusively) promoted by the Republican Party (PR, right). For President Gabriel Boric, who promised to replace “Pinochet’s Constitution,” the survival of the 1980 Constitution comes as a relief.

• The proposed text’s greatest weakness, at least in voters’ eyes, was its strengthening of privatization provisions. This left it open to attacks from the left and opened the field to outright fabrications.

Between the Lines. Although the proposed text was relatively moderate in many regards, it was criticized on three counts: the strengthening of the privatization model, the recognition of the unborn as persons, and the ability of medical personnel to become conscientious objectors and refuse to perform certain procedures. 

• The proposed constitution protected Chile’s private pension model and a mixed education and health system. Additionally, it would have overseen a reduction in citizens’ tax burden.

• It also established rigid deportation mechanisms for illegal immigrants. This was popular, especially in the north of the country, where increased immigration is correlated with a considerable uptick in violent crime.

Yes, But. The text recognized Chile’s indigenous peoples, stating that “their individual and collective rights will be respected and promoted,” recognizing them as “part of the Chilean nation, which is indivisible,” and consecrating “interculturality as a value of the ethnic and cultural diversity of the country".

• The text’s framers attempted to imbibe the document with dashes of lexical progressivism. After all, the proposed constitution’s elimination of income tax was justified under the right of equal access to a home. 

• The constitutional proposal called for gender parity in the workplace, guaranteeing the presentation of an equal number male and female candidates for posts. 

• From the right’s perspective, the new constitution was an attempt at reaching a consensus, something notably missing from the left-wing draft rejected in 2022. 

Historian’s Corner. Starting October 18, 2019, Chile was seized by protests, whose immediate cause was a 30 cent fare increase in the Santiago Metro. The price hike led to ample examples of looting and rioting, as well as police repression. 

• Left-wing student groups took advantage of the discontent to agitate against Pinochet’s so-called “neoliberal” model. Their proposed solution was a constitutional convention that would effectively amount to a refoundation of the state.

• Unable to quell the demonstrations, President Sebastián Piñera called a referendum. On October 25, 2020, an overwhelming 78% of Chileans voted in favor of constitutional reform. 

Newspaper Archive. In the 2021 presidential runoff, Boric won with almost 56% of the vote. Systemic change was his great campaign promise: a Constitutional Convention, dominated by the radical left, worked on a constitution proposal that was overwhelmingly rejected in another plebiscite.

• Boric promised to abide by the will of the 78% of voters who voted for a reform, so he convened another convention, this time named the Constitutional Council. Its 50 members were popularly elected.

• The Council’s proposal was deemed “radical” and excessively right-wing, but it secured much more support than the previous proposal, which was rejected by 61.87% of voters.

Takeaway. The left has recognized defeat and accepted that voters are exhausted with the “constitutional question.” Current government leaders’ careers were forged in their opposition to the 1980 Constitution, yet this remnant of Pinochet’s military rule will remain for the foreseeable future. 

• Despite the relief of defeating a supposedly radically right-wing proposal, this humiliating for Boric and his colleagues. It means that the five-year-long “war” in Chilean politics was for nought; from a legal perspective, things remain as they were before the 2019 protests.

• Despite its high inequality, Chile will continue to be a model for the rest of the region. Its inequality, it must be said, is the natural consequence of its citizens’ higher living standards.