OREANDA-NEWS. Guatemala's new government is likely to maintain macroeconomic stability but will face challenges tackling longstanding fiscal and institutional weaknesses, Fitch Ratings says. President Jimmy Morales took office today following an election victory in October 2015 that reflected a popular rebuke of establishment candidates amid corruption revelations that culminated in arrests for the former president and vice president.

These events highlighted longstanding governance issues in Guatemala, which Fitch has considered a key constraint to its 'BB/Stable' rating. The revelations led to increased protests and created impetus for institutional reforms. The Legislature has approved changes to improve transparency in public contracting laws, while progress on reforms to campaign finance, political party and electoral rules and the civil service has been slower.

Morales won on a platform of fighting corruption, and his initial efforts have involved supporting ongoing investigations and the mandate of the UN-backed investigative body CICIG. However, his administration has yet to outline concrete reform proposals for strengthening governance. The fragmented and gridlock-prone Legislature and the ruling party's small minority in the new congress (just 11 of 158 seats) will challenge these efforts.

Fitch's affirmation of Guatemala's 'BB'/Stable Rating Outlook in June 2015 partially reflected the resilience of the economy amid the ongoing political turbulence. Favorable and broad-based economic growth came in at an estimated 4% in 2015, in line with 4.2% in 2014 and above the historical average of 3.5%. Macroeconomic variables including the exchange rate, interest rates and credit growth remained stable, and inflation expectations moderated within the target (3%-5%).

Fitch expects broad macroeconomic stability will continue under the new administration, supported by prudent monetary management. Favorable external factors (lower oil prices and positive US economic performance underpinning robust remittance inflows) should continue to support growth, albeit at rates likely to be insufficient for material convergence of per-capita income with peers.

The new administration will also face persistent challenges from a weak tax revenue base. Guatemala's fiscal revenues fell to an estimated 10.9% of GDP in 2015, the second-lowest in the 'BB' rating category. However, the deficit fell to an estimated 1.7% despite the revenue shortfall as tight congressional control over government borrowing forced spending cuts.

Fitch expects these conservative fiscal policies will continue to support the stability of public debt, but they limit the ability of the new government to adequately address social development and infrastructure needs absent revenue-enhancing reforms. Morales has supported efforts to raise tax collections by fighting evasion, but not for new taxes or raising tax rates.