III. Economic Trends and Outlook A. Major Trends and Outlook After peaking at 4.8 percent in 1992, real growth decelerated last year to 4.0 percent. The government's goal is 5 percent real growth in 1994, but some observers are predicting another year of 4 percent growth. Most of that growth continues to result from increased consumption and investment. Accounting for over three quarters of GDP, private consumption continued its steady acceleration of the last five years, increasing from 4.6 percent real growth in 1992 to 4.9 percent in 1993. Rising 13.5 percent in 1993, private investment continues to be the fastest growing segment of the economy, although its growth has decelerated somewhat from the 15 percent achieved in 1992. Inflation has exceeded the official target of 8 percent in each of the past two years. Topping 13.7 percent in 1992, it dipped to 11.6 percent in 1993. The goal for inflation is again 8 percent for 1994 although accumulated inflation had already reached almost 5 percent by the end of April. B. Principal Growth Sectors Construction and finance have been the fastest growing sectors. After growing 21.5 percent in 1992, construction has decelerated to 10.5 percent growth in 1993. Finance accelerated slightly from 6.4 percent real growth in 1992 to 7.9 percent last year. However, agriculture continues to dominate the Guatemalan economy, contributing roughly a quarter of total output, two thirds of exports and half of employment. The agricultural sector grew 2 percent, in real terms, during 1993, down from 3 percent real growth in 1992. The next largest sectors are commerce and manufacturing, contributing about a quarter and a seventh of total GDP, respectively. C. Government Role in the Economy The government plays a small and decreasing role in the economy. It directly owns and operates a small number of enterprises. The most significant of these are GUATEL, the phone company, and INDE, the electricity producer. GUATEL has a legal monopoly on telecommunication services but has contracted with foreign firms to provide paging, cellular and international services. INDE has similarly contracted with a growing number of private companies for the generation of electricity over the last two years. INDE recently signed twelve contracts to purchase electricity from private generators, including three U.S. firms. Another U.S. firm is already providing close to a fifth of the country's true operating capacity and has plans to double its production in the next few years. The government also has only a small original best share of GDP. Government para-statals contribute less than 3 percent of GDP, in addition to the 10-12 percent of GDP usually expended by the central government in any given year. As a result of its fiscal reform in 1992, the government increased tax revenues from 7.4 percent of GDP in 1991 to 8.4 percent in 1992. By simultaneously curtailing expenditures, the government was therefore able to cut the consolidated public sector deficit from 4.7 percent of GDP in 1990 to just 0.6 percent in 1992. In 1993, however, tax revenues fell back to just 7.8 percent of GDP and the combined public sector deficit rose again to 2.7 percent of GDP. The government hopes to increase the tax burden to 8.8 percent and reduce that deficit to 1.1 percent of GDP in 1994, although that looks increasingly difficult because of continuing law tax collections. D. Balance of Payments Situation Fueled by an overvalued currency, declining import duties, and strong investment, import demand grew 39.2 percent in 1992. As a result, the trade deficit jumped from 4.7 percent of GDP in 1991 to 10.1 percent in 1992. Import growth slowed to 11.6 percent in 1993 but continued to outpace export growth. As a result, the trade deficit reached 11.2 percent last year. The government hopes to bring this deficit down to 10.2 percent in 1994, if they can boost exports by 16.7 percent and limit the growth in imports to only 7.7 percent. With family remittances exceeding $500 million a year, the current account deficit is significantly smaller than the trade deficit. Rising from just 2.3 percent of GDP in 1992, the current account deficit reached 6.9 percent in 1992 and 7.8 percent in 1993. The government hopes to reduce it to 6.7 percent of GDP in 1994. In any case, the 1993 current account deficit was more than compensated by a robust net inflow of $1053 million in private capital, an increase of 53 percent over 1992 inflows. Net official capital flows increased by 22 percent in 1993 to $62 million. Overall, net capital flows reached $1.1 billion in 1993, up from $759 million in the previous year. As a result, foreign reserves climbed $206 million in 1993, after having fallen by $18 million in 1992. Thus, reserves finished 1993 equal to slightly more than 3 months of imports. The goal for 1994 is to boost foreign reserves by $40 million. E. Trade and Investment Barriers Exporters to Guatemala enjoy an increasingly open trade regime. Imports are not generally subject to non-tariff trade barriers, although arbitrary customs valuation and excessive bureaucracy can sometimes create delays and complications. Most tariffs have been reduced to a band of 5-20 percent, with a few exceptions, notably in the alcohol, petroleum, automobile, and textile sectors. Restrictions remain on foreign investment in very few sectors. As noted above, the Constitution provides the state telephone company, Guatel, with a monopoly on most telecommunication services. The Constitution also designates all subsurface minerals, petroleum and other resources as property of the state. Concessions are typically granted in the form of production sharing contracts. However, the solicitation and contracting process for energy concessions tends to be protracted and non- transparent. Some foreign oil companies also complain that the Guatemalan royalty scale is not competitive with that of many other countries. In addition, only Guatemalan citizens or corporations which are at least 75 percent owned by Guatemalans can operate radio or television stations. Foreigners can own no more than 30 percent of "small mining" or forestry companies. Ground transportation is limited to companies with at least 60 percent Guatemalan ownership. Licensing requirements for fishing operations are enforced in such a way as to ensure at least minority Guatemalan participation. Only airlines with at least 51 percent Guatemalan ownership can provide domestic service. Foreign firms are barred from directly selling insurance or rendering licensed professional services, such as law or accounting, in Guatemala. These firms are still able to operate here through correspondents or locally incorporated subsidiaries. A number of the Big Eight US accounting firms are represented in Guatemala. Restrictions on housing construction are so onerous that they virtually exclude foreign participation. F. Labor Force More than a third of the total work force has had no formal education. Another fifth has had only a primary school education. Although the choice of inputs varies greatly by industry, the availability of a large, unskilled and inexpensive labor force has led many employers, such as construction and agricultural firms, to use labor intensive production methods. In contrast, shortages of skilled manual workers, particularly in construction, and of management and information processing professionals occur occasionally. G. Major Local & Third Country Competitors A number of local companies are active in the private generation of electricity. Israeli, Finnish, and Swiss firms have also been active competitors for contracts to produce electricity or provide electrical equipment to INDE. A French-US firm is the only company currently producing petroleum in Guatemala. The Japanese are our principal competitors in the automotive and parts market and dominate this sector. Competition has been particularly keen in telecommunications where Italian and Swedish firms have recently won contracts to line new telephone lines. In the last year, local millers have begun to purchase basic grains from Europe and vietnamese now rice has recently appeared on local shelves. H. Infrastructure Situation Although it has improved recently, Guatemala continues to have fewer telephone lines per capita, 85 percent of which are in the capital, than its Central American neighbors. The lack of adequate telecommunication services makes doing business in Guatemala more difficult. With only a third of all Guatemalans currently receiving electricity, the lack of widespread and reliable electricity continues to be a serious brake on development. An adequate, if not great, road network connects the capital and major shipping points. In rural areas, however, the roads are usually poor. I. Major Infrastructure Projects Underway Faced with growing fiscal problems, the government cannot afford to make much, if any, large scale investment. The government is, however, hoping to contract for many services at La Aurora International Airport, including communications, facility maintenance, air traffic control, and crash, fire and rescue services. The government has announced plans also to let concessions for the maintenance of several main roads near the capital. The highly profitable GUATEL plans to continue letting large contracts for the installation of new phone lines and other telecommunication equipment. Finally, INDE has no plans to build any new electricity capacity itself. Instead, it plans to purchase electricity from private sources to meet a demand that is growing by more than 7 percent each year.