Ca alán-He e a, Juan Ca los
Wo king Pape
Deb sus ainabili y in Gua emala: Ins i u ional
a angemen and quan i a i e analysis
IDB Wo king Pape Se ies, No. IDB-WP-1140
P o ided in Coope a ion wi h:
In e -Ame ican De elopmen Bank (IDB), Washing on, DC
Sugges ed Ci a ion: Ca alán-He e a, Juan Ca los (2020) : Deb sus ainabili y in Gua emala:
Ins i u ional a angemen and quan i a i e analysis, IDB Wo king Pape Se ies, No. IDB-WP-1140,
In e -Ame ican De elopmen Bank (IDB), Washing on, DC,
h ps://doi.o g/10.18235/0002648
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Abs ac 1
This pape assesses deb sus ainabili y in Gua emala. Deb s abili y has been
achie ed a e y low expendi u e le els, a he expense o adequa e p o isioning o
public goods and se ices and a widening gap in social de elopmen and
in as uc u e. Since iscal ou comes a e no independen om iscal policy
a angemen s and p ocedu es, he pape also se s o h a hypo hesis o possible
ins i u ional a angemen s ha ha e allowed o he con ainmen o iscal de ici s
o o e 20 yea s. The pape a gues ha embedded in he legal amewo k and
ins i u ional a angemen , he e is an “implici ” iscal ule ha a o s s abili y. The
pape explo es cha ac e is ics o how iscal policy is conduc ed, showing ha
go e nmen expendi u es a e p o-cyclical, p o iding oom o imp o emen in
cycle managemen . Fiscal policy has been mainly conce ned wi h s abili y a he
han o he possible goals like boos ing long- un g ow h, a enua ing business
cycles, imp o ing human de elopmen indica o s, dealing wi h edis ibu ion issues
and o he goals ha iscal policy could pu sue.
JEL classi ica ions: H62, H63, E62, E02
Keywo ds: Fiscal sus ainabili y, Gua emala, Deb , Fiscal policy
1 This s udy was unde aken in he Economic Resea ch Depa men o Banco de Gua emala wi hin he amewo k o
he Cen e o La in Ame ican Mone a y S udies (CEMLA) Join Resea ch P og am 2019 in collabo a ion wi h he
Financial S abili y and De elopmen (FSD) Ne wo k o he In e -Ame ican De elopmen Bank (IDB). The au ho s
g a e ully acknowledge commen s p o ided by Alejand o Izquie do, P incipal Economis o he Resea ch Depa men
o he IDB, and commen s ecei ed du ing he in e nal pee e iew p ocess. The au ho addi ionally app ecia es
aluable commen s by Juan Ca los Cas añeda Fuen es and Héc o Wil edo Ma ínez Méndez. The opinions exp essed
in his publica ion a e hose o he au ho and do no e lec he iews o CEMLA, he FSD Ne wo k, he IDB, o he
Cen al Bank o Gua emala. Email: jcch@bangua .gob.g ; phone: +(502) 2429-6000x3653; ax: +(502) 2429-6086.
Economic Resea ch Depa men , Banco de Gua emala. 7a A e. 22-01, zona 1. Ciudad de Gua emala, C.A. Email:
jcch@bangua .gob.g ; phone: +(502) 2429-6000x3653; ax: +(502) 2429-6086.

2
1. In oduc ion
Al hough iscal adjus men seems inc easingly necessa y in se e al coun ies in La in Ame ica, in
o de o p e en a si ua ion in which deb sus ainabili y is comp omised, he e a e also coun ies
like Gua emala whe e s ic expendi u e con ols ha e led o mode a e budge de ici s and low deb
a ios, e lec ing a long-s anding commi men o p uden iscal and mone a y managemen .
Clea ly, iscal sus ainabili y is desi able, and by any means his should be jeopa dized, bu in
Gua emala deb sus ainabili y has been achie ed a e y low expendi u e le els, a he expense o
adequa e p o isioning o public goods and se ices and a widening gap in social de elopmen and
in as uc u e. In a coun y wi h hese social de elopmen lags, i is necessa y o unde s and and
e alua e how iscal policy is ope a ing and how hese iscal esul s a e a ained.
In o de o documen deb dynamics and sus ainabili y, I implemen ou di e en
me hodologies: i) he s anda d o long- un app oach, ii) he sho - un app oach, iii) he Fan Cha
app oach and i ) he p obabilis ic model de eloped by Mendoza and O iedo (2004). The gene al
conclusion ac oss me hodologies is ha public deb lies wi hin easonably s able le els. Fiscal
de ici s ha e been con ained o o e 20 yea s, which ansla es in o he obse ed low le el o deb .
Behind his esul , he e a e cul u ally-shaped ins i u ions ha go agains he p oblem o excessi e
public indeb edness; in Gua emala he e is a s ong bias owa ds cu ing spending as opposed o
deb inc eases whene e he e is a decline in go e nmen e enues. This is an idiosync a ic
cha ac e is ic o he coun y. Fu he mo e, I a gue ha legal and ins i u ional a angemen s
cons i u e an “implici ” iscal ule a o ing s abili y o public inances. Fiscal policy in Gua emala
has been mainly conce ned wi h mac oeconomic s abili y a he han o he possible goals like
boos ing long- un g ow h, a enua ing business cycles, imp o ing human de elopmen indica o s,
dealing wi h edis ibu ion issues and o he goals ha iscal policy could pu sue.
Despi e Gua emala’s success in e ms o iscal sus ainabili y, go e nmen expendi u e has
been p o-cyclical. This endency his migh be exace ba ed by p e-commi men s o e enue o
speci ic spending lines, since hey ie down expendi u es o e enues, making expendi u es almos
as p o-cyclical as e enues. On he one hand, hese a angemen s help o s abilize deb , bu on he
o he , hey a e de imen al in e ms o adequa e cycle managemen . I use dynamic co ela ions o
show he posi i e associa ion be ween ou pu and leads and lags o ax income and expendi u es.
I a gue ha adequa e cycle managemen equi es expendi u es o be coun e -cyclical. Thus he e
is s ill oom o imp o emen in e ms o cycle managemen , pa icula ly when i is appa en ha
3
capi al spending is highly p o-cyclical; his is p ecisely he ype o expendi u e ha could be used
o implemen sound coun e cyclical policy.
The es o he pape is o ganized as ollows. Some s ylized ac s and desc ip i e s a is ics
a e gi en in Sec ion 2, along wi h a discussion o how iscal esul s a e in luenced by ins i u ional
a angemen and cul u e. This sec ion addi ionally documen s p o-cyclicali y o expendi u es.
Sec ion 3 p esen s he s anda d deb sus ainabili y analysis, and Sec ion 4 concludes wi h some
inal ema ks.
2. S ylized Fac s
2.1 O e iew
Fo mo e han 20 yea s, deb has emained low and s able, luc ua ing be ween 20 and 25 pe cen
o GDP. In 2018, o ins ance, cen al go e nmen deb amoun ed o 24.5 pe cen o GDP, one o
he lowes le els in La in Ame ica (see Figu e 1). The la ges sou ce o inancing o cen al
go e nmen is he domes ic ma ke , which accoun s o abou 57 pe cen o he o al deb s ock.
Ex e nal inancing comes mos ly om mul ila e al loans (28 pe cen ) and ex e nal bonds (16
pe cen ). Due o weak e enue collec ion, he s ock o deb as a sha e o o al go e nmen e enue
has been ising in ecen yea s, eaching 231 pe cen in 2018 (see Figu e 2).
Figu e 1. Go e nmen Deb Ra ios
4
Figu e 2. Composi ion and Deb Bu den
Since cen al go e nmen deb is a s ock a iable e lec ing accumula ed de ici s, his
obse ed s abili y e lec s a ack eco d o low and s able iscal de ici s obse ed o e nea ly wo
decades (see Figu e 3). Despi e ad e se shocks, cen al go e nmen inances ha e emained s able.
The de ici widened ma kedly in 2009-2010 in he mids o he global inancial c isis bu na owed
o e he ollowing yea s as economic condi ions imp o ed, eaching a low o 1.1 pe cen in 2016
be o e ising aised again o 1.7 pe cen in 2018 as he esul o a mo e expansiona y iscal policy
in he con ex o a weake economy.
Figu e 3. O e all and P ima y Balances, % o GDP
In spi e o being able o main ain low iscal de ici s, cen al go e nmen e enue in ake
emains a key challenge. Gua emala has consis en ly anked in he lowes posi ions in e ms o
go e nmen e enue as pe cen age o GDP, 11.4 pe cen on a e age om 1999 o 2018 (10.6
5
pe cen in 2018). Tax e enue is ai ly s able, as 94 pe cen o o al e enue comes om ax
collec ion, bu i has been insu icien o sa is y social de elopmen needs. Low go e nmen
e enue has cons ained expendi u es, also anking among he lowes in La in Ame ica a jus 12.1
pe cen o GDP in 2016 (12.3 pe cen in 2018) and limi ed he esou ces a ailable o social
de elopmen , as expendi u es on heal h and educa ion also ank a he bo om o La in Ame ican
coun ies (see Figu e 4). Al hough Gua emala was ecen ly upg aded and classi ied as an uppe
middle-income coun y (Wo ld De elopmen Indica o s Da a Bank), a es o inequali y and
po e y a e highe han La in Ame ican a e ages. The po e y headcoun a io a na ional po e y
lines was 0.6 pe cen o popula ion, which was highe han he a e age o La in Ame ica (0.3
pe cen ). Mo eo e , he Human De elopmen Index was 0.65 in 2017 (Human De elopmen Da a
2017, UNDP), lowe han La in-Ame ican a e age (0.73).
Figu e 4. Low Re enue- o-GDP Ra io and Low Expendi u e Le els
While he ac o ha ing one o he lowes e enue- o-GDP a ios has limi ed he esou ces
a ailable o sa is y social de elopmen needs, i has no jeopa dized he s abili y o public inances
(as shown in Sec ion 3), because i seems ha in Gua emala i is easie o cu expendi u es han o
inc ease deb . This is unusual, since mos democ acies ha e a endency o pu sue sub-op imal
iscal policies, leading o he accumula ion o excessi e deb . I a gue ha , in he pa icula case o
12
in expo s and wo ke s’ emi ances), i seems ha he go e nmen employed a coun e -cyclical
measu e, inc easing expendi u es (as a sha e o GDP) as ou pu and ax e enue dec eased. A e
2010, expendi u es began o adjus , con e ging o he le el o e enues. To e u n o Figu e 8, in
bo h panels i is e iden ha he adjus men o expendi u es a e he c isis came almos en i ely
h ough a educ ion o “ lexible” expendi u e, despi e he ac ha he s imulus o 2009 was
enginee ed mainly h ough “ igid” expendi u e. I we obse e he yea -o e -yea change in
expendi u e- o-GDP a ios (see Figu e 9), hen i is ob ious ha he s imulus o 2009 was mainly
p o ided by an inc ease in “ igid” expendi u e. I is also e iden ha he subsequen adjus men
included a la ge componen o capi al expendi u e educ ion.
Figu e 9. Expendi u e- o-GDP, YoY Change (%)
Displaying se ies o expendi u es and e enues ha coin eg a e in he long un is ce ainly
a basic cha ac e is ic o op imal (o a leas app op ia e) deb managemen . In Gua emala his
seems o be he case. Ne e heless, in e ms o cycle managemen , he e is s ill conside able oom
o imp o emen . While expendi u es a e p o-cyclical, adequa e cycle managemen equi es hem
o be coun e -cyclical. In o de o implemen a success ul coun e -cyclical expendi u e policy,
while p ese ing he good esul s obse ed so a in e ms o deb sus ainabili y and con ainmen
o de ici s, Capi al Expendi u e should be used as he main iscal policy ool. The e a e wo main
easons o his policy ecommenda ion. Fi s , since Capi al Expendi u e is lexible, he s imulus
can be wi hd awn wi hou majo poli ical opposi ion, and he e o e his can be unde aken in a

13
imely manne wi hou a ec ing iscal inances in he medium e m. Secondly, as men ioned
abo e, public in es men may ha e complemen a i ies wi h p i a e in es men , posi i ely
a ec ing posi i ely he g ow h a e o he economy, and in u n, imp o ing iscal sus ainabili y.
3. Deb Sus ainabili y Analysis
The e is a la ge li e a u e on indica o s o public deb sus ainabili y and empi ical es s o iscal
sol ency. Mos o he empi ical li e a u e a emp s o cons uc simple indica o s ha can be used
o assess deb sus ainabili y (e.g., Blancha d, 1990; Blancha d e al., 1991; Bui e , 1985) and o
de elop o mal econome ic es s ha can de e mine whe he he hypo hesis ha he In e empo al
Go e nmen Budge Cons ain (IGBC) holds can be ejec ed (o no ) by he da a; see, o example,
Bohn (2007), Mendoza and Os y (2008) and Ghosh e al. (2013). Since he deb - o-GDP a io in
Gua emala has been ma kedly s able du ing he las 20 yea s, as no ed abo e, he e is no ob ious
eason o o e complica e deb sus ainabili y analysis by applying s a e-o - he a echniques. I
he e o e con ine he exe cise o a classic deb sus ainabili y analysis using ou di e en
me hodologies: i) he s anda d o long- un app oach, ii) he sho - un app oach, iii) he Fan-Cha
app oach and i ) he p obabilis ic model de eloped by Mendoza and O iedo (2004) o wha hey
call he “Na u al Deb Limi .” All ou me hodologies a e implemen ed using he Templa e o
Deb Sus ainabili y Analysis de eloped by he In e -Ame ican De elopmen Bank (see
Bo ensz ein e al., 2010).
3.1 The Long-Run App oach
The Long- un o S anda d App oach ollows he con ibu ions o Blancha d (1990) and Bui e
(1985). I is based on he analysis o he p ima y su plus (PS) equi ed o main ain he a io o
deb - o-GDP cons an in he long- un. The analysis ies o ind he equi ed PS o s abilize deb -
o-GDP a a gi en le el—usually (and in his case) he cu en deb le el, gi en he condi ions
consis en wi h he long- un o he s eady s a e.
The analysis s a s om he cu en pe iod budge cons ain o he non- inancial cen al
go e nmen , which equa es he lows o go e nmen e enues and expendi u es wi h changes in
he s ock o public deb :
G + (1 + R )D −1 = T + D (1)
14
whe e G a e expendi u es, R is he in e es a e paid o e deb , D is he s ock o (one pe iod, non-
con ingen ) public deb and T is go e nmen e enues.
A e conside ing ha a sha e (α) o deb is issued in US dolla s and o which an in e es
a e ( ) is paid, we can ew i e equa ion (1) in eal e ms and as a ac ion o GD, o ind a
di e ence equa ion desc ibing he way deb e ol es o e ime:
(2)
whe e lowe -case le e s ep esen he same a iables as in equa ion (1) bu in eal e ms and
exp essed as sha es o GDP. Le γ be eal ou pu ’s g ow h a e, e he US-bila e al eal exchange
a e and ps = (τ −g ) he p ima y su plus. Imposing he s eady s a e condi ion o e he p e ious
equa ion and sol ing o ps, we ob ain:
(3)
This condi ion s a es ha he p ima y su plus is enough o co e he ne , eal in e es cos
o se icing deb (ne om he eal g ow h a e o GDP). In o he wo ds, he s eam o long- un
p ima y su pluses—app op ia ely discoun ed—has o ully co e d, he speci ied le el o deb , in
his case, he cu en deb le el (Bo ensz ein e al., 2010).
Using his equa ion, we ind he le el o p ima y su plus equi ed o s abilize he deb - o-
GDP a io a ound i s cu en alue o a gi en in e es a e and g ow h a e o he economy (see
Table 2).
A p ima y su plus o 0.05 pe cen o GDP is equi ed o main ain he deb - o-GDP a io a
i s cu en le el (24.5 pe cen ). Table 2 con ains all he assump ions made o calcula e he equi ed
ps. The las obse ed (o cu en ) le el o p ima y su plus (−0.32 pe cen , nega i e meaning a
p ima y de ici ) implies a equi ed adjus men om cu en ps o 0.37 pe cen o GDP o each he
0.05 pe cen o GDP needed o s abilize deb a i s cu en le el. Since his calcula ion is based on
he assump ions, desc ibed in he le panel o Table 2, abou he in e es a e, he long- un eal
g ow h a e and o he a iables, i is ob ious ha he equi ed p ima y su plus will a y wi h
changes in hese assump ions. The e o e, on he igh panel o he same able, some simula ions
a e pe o med. The i s one calcula es wha would be he equi ed p ima y su plus i GDP g ows
15
one s anda d de ia ion below he assumed po en ial g ow h, ce e is pa ibus. In his case, in o de
o s abilize deb - o-GDP a io in i s cu en le el, a p ima y su plus o 0.34 pe cen would be
equi ed. The second simula ion assumes an a e age eal in e es a e 2 s anda d de ia ions highe
o wha was p e iously assumed, inc easing he equi ed p ima y su plus om 0.05 pe cen o 1.07
pe cen o GDP. Addi ionally, i we assume an ini ial deb le el o 40 pe cen o GDP (ins ead o
he cu en 24.5 pe cen ) he equi ed ps in his case would be o 0.08 pe cen . Finally, in a wo s -
case scena io, in which all nega i e shocks we e o happen simul aneously, he p ima y su plus
equi ed o s abilize deb is 2.24 pe cen o GDP.8
Table 2. Long-Run App oach
The assump ions made in his app oach a e hose ha one would expec o be ul illed in a
s eady s a e condi ion. The e o e, hey cons i u e a use ul benchma k, bu hey a e a he s ong
assump ions. Ne e heless, a p ima y su plus o 0.05 pe cen o GDP equi ed o main ain he
cu en le el o deb - o-GDP a io, i is easonably a ainable, i we obse e ha he economy has
un su pluses up o 1.7 pe cen o GDP in he pas ; achie ing a su plus o 0.05 pe cen would no
equi e majo adjus men s o iscal e o ms. Addi ionally, his equi ed p ima y su plus is close o
8 In o de p o ide and idea o how sensi i e a e hese esul s o changes o he unde lying assump ions, Table 7 o
Appendix A.1 con ains a sensi i i y analysis in which a g id o possible p ima y su pluses is p esen ed, esponding o
changes in he assumed eal ou pu g ow h a e, he a e age eal in e es a es and he eal dep ecia ion.
Long- un App oach Simula ions
S eady-S a e Le el o Deb 2.3%
Deb - o-GDP Ra io 24.46%
A e age Real In e es Ra e 3.71% Requi ed P ima y Su plus (%GDP) 0.34%
Real Dep ecia ion -1.92% Requi ed Adjus men (%GDP) 0.65%
In la ion a e (GDP de lac o ) 4.00%
Long- un g ow h a e 3.50%
Alpha 57.14% 8.03%
Es ima ed p ima y su plus o NFPS -0.32% Requi ed P ima y Su plus (%GDP) 1.07%
Requi ed Adjus men (%GDP) 1.39%
Requi ed P ima y Su plus (% GDP) 0.05%
40%
Requi ed P ima y Su plus (%GDP) 0.08%
Requi ed Adjus men (%GDP) 0.37% Requi ed Adjus men (%GDP) 0.40%
A e age P ima y Su plus (1990-2018) -0.35%
Requi ed P ima y Su plus (%GDP) 2.24%
Requi ed Adjus men (%GDP) 2.56%
A e age Real In e es Ra e (+2 s.d.)
GDP g ow h (-1 s.d.)
Deb /Y
All Simula ions
16
a balanced budge , which implies ha , gi en ou assump ions, he cu en le el o deb is no a
om he alue consis en wi h he no ion o equilib ium implied by he s eady s a e.
3.2 Sho -Run App oach
This app oach is also based on equa ion (2), bu in con as o he long- un app oach, he ocus
he e is on he sho - un deb dynamics wi h a cen al (baseline) scena io and disc e e s ess es s;
o e o he mos likely pa h o deb de e minan s. To elabo a e he baseline, we use se e al sou ces
o de e mine he mos likely pa h o he de e minan s o he deb - o-GDP a io in he sho o
medium e ms. Fo he Real GDP g ow h a e, we use p ojec ions o Banco de Gua emala o he
i s wo yea s and o subsequen yea s we used IMF’s p ojec ions epo ed in he Wo ld
Economic Ou look (WEO), eleased in Ap il 2019. P ojec ions o he p ima y su plus also come
om he WEO, Ap il elease. Bo h in e es a es, domes ic and o eign, a e se o he las obse ed
alue o he i s i e yea s o he p ojec ion. The nominal exchange a e dep ecia ion and he
in la ion a e a e aken om o ecas s o a mac o model de eloped wi hin he cen al bank.
Table 3. Sho -Te m o Endogenous App oach: Baseline
Baseline: no shocks
2019
2020
2021
2022
2023
2024
2025
Real GDP G ow h
3.7%
3.8%
3.7%
3.6%
3.6%
3.5%
3.5%
Domes ic Nominal In e es Ra e
7.0%
7.0%
7.0%
7.0%
7.0%
10.0%
10.0%
Nominal Exchange Ra e Dep ecia ion
-0.4%
-2.1%
-1.5%
-0.3%
0.7%
0.0%
0.0%
P ima y Su plus
-0.6%
-1.0%
-0.6%
-0.5%
-0.3%
-0.3%
-0.3%
In la ion
4.0%
3.6%
3.6%
3.7%
3.7%
3.8%
3.9%
Fo eign Nominal In e es Ra e
4.4%
4.4%
4.4%
4.4%
4.4%
5.0%
5.0%
Deb /GDP a io
24.5%
24.9%
25.1%
25.2%
25.2%
25.6%
26.0%
The sho - un dynamics o he deb - o-GDP a io a e epo ed in Table 3. Unde hese
assump ions, deb dynamics appea o be s able. We expec he deb - o-GDP a io o inc ease 1.5
pe cen age poin s o GDP in he nex se en yea s, assuming ha he go e nmen will un a small
p ima y de ici h oughou he p ojec ed ho izon; in his case, deb (as a sha e o GDP) shows a
modes inc ease, going om 24.5 pe cen in 2019 o 26 pe cen in 2025.9 This baseline scena io
conside s, wi h he pa h o he p ima y su plus, he expec ed o mos likely beha io o he iscal
au ho i y. Ne e heless, i could be he case ha he iscal au ho i y decides o implemen an ac i e
9 A sensi i i y analysis o his esul s can be ound in Appendix A.2.
17
policy wi h a pa icula objec i e in mind. Fo example, in Table 4 we calcula e he p ima y su plus
needed o s abilize he deb - o-GDP a io a i s cu en le el o 24.5 pe cen . This goal could be
a ained e en i he go e nmen uns a small p ima y de ici (a nega i e ps) du ing he en i e
p ojec ion ho izon, a p ima y su plus o -0.41 pe cen o GDP on a e age. This seems highly
easible a e no ing ha he coun y has un a p ima y su plus o −0.35 pe cen o GDP on a e age
o he las 19 yea s.
Table 4. Sho -Te m App oach: S abilizing Deb - o-GDP Ra io a I s Cu en Le el
Ac i e policy: PS needed o s abilize deb
2019
2020
2021
2022
2023
2024
2025
Real GDP G ow h
3.7%
3.8%
3.7%
3.6%
3.6%
3.5%
3.5%
Domes ic Nominal In e es Ra e
7.0%
7.0%
7.0%
7.0%
7.0%
10.0%
10.0%
Nominal Exchange Ra e Dep ecia ion
-0.4%
-2.1%
-1.5%
-0.3%
0.7%
0.0%
0.0%
P ima y Su plus
-0.6%
-0.5%
-0.5%
-0.4%
-0.3%
-0.3%
-0.3%
In la ion
4.0%
3.6%
3.6%
3.7%
3.7%
3.8%
3.9%
Fo eign Nominal In e es Ra e
4.4%
4.4%
4.4%
4.4%
4.4%
5.0%
5.0%
Deb /GDP a io
24.5%
24.5%
24.5%
24.5%
24.5%
24.5%
24.5%
We also simula e a scena io in which he go e nmen delibe a ely inc eases he p ima y
su plus in one pe cen age poin o GDP in o de o inc ease in es men . To accoun o gene al
equilib ium e ec s and he ac ha public in es men may ha e complemen a i ies wi h p i a e
in es men , a ec ing posi i ely he g ow h a e o he economy, we adjus he expec ed u u e pa h
o he eal GDP g ow h a e (using es ima es o he elas ici y be ween public in es men and ou pu
g ow h) o accoun o inc eases in he g ow h a e a ising om highe le els o public spending.
Table 5 con ains he esul o his exe cise, whe e we can obse ed ha deb - o-GDP a io
inc eases, bu no d ama ically (5.7 pe cen age poin s o GDP), e en when he p ima y de ici
inc eases by one pe cen age poin o GDP e e y single yea along he se en-yea ho izon.10
10 A g aphic depic ion o deb dynamics can be ound in Figu e 14 in Appendix A.2.

18
Table 5. Sho -Te m App oach: Inc easing P ima y De ici by 1 Pe cen
Ac i e policy: Inc ease p. de ici by 1%
2019
2020
2021
2022
2023
2024
2025
Real GDP G ow h
3.7%
3.9%
4.0%
4.1%
4.0%
4.1%
4.2%
Domes ic Nominal In e es Ra e
7.0%
7.0%
7.0%
7.0%
7.0%
10.0%
10.0%
Nominal Exchange Ra e Dep ecia ion
-0.4%
-2.1%
-1.5%
-0.3%
0.7%
0.0%
0.0%
P ima y Su plus
-1.6%
-2.0%
-1.6%
-1.5%
-1.3%
-1.3%
-1.3%
In la ion
4.0%
3.6%
3.6%
3.7%
3.7%
3.8%
3.9%
Fo eign Nominal In e es Ra e
4.4%
4.4%
4.4%
4.4%
4.4%
5.0%
5.0%
Deb /GDP a io
25.5%
26.9%
27.9%
28.8%
29.7%
30.5%
31.2%
3.3 Fan Cha s
Un il now, deb sus ainabili y has been analyzed elying on medium and long- e m simula ions o
he deb - o-GDP a io gi en speci ic mac oeconomic o ecas s and iscal policy assump ions
wi hou any conside a ion o he unce ain y su ounding hese assump ions (besides he basic
sensi i i y analysis p esen ed). This Fan Cha app oach is pa o wha is known as a p obabilis ic
app oach o unce ain y analysis. In his con ex , unce ain ies a e cha ac e ized by he
p obabili ies associa ed wi h e en s o ou comes o a se o a iables ha a ec he dynamics o
public deb . This app oach ende s a p obabili y dis ibu ion o he deb - o-GDP a io. Ra he han
simply p ojec ing one cen al scena io, his app oach inco po a es he s uc u e o andom shocks
hi ing he domes ic economy o ob ain a comple e dis ibu ion o possible pa hs o deb - o-GDP
a io, based on he dynamics p o ided by a Vec o Au o-Reg ession (VAR) econome ic model o
ex e nal o ecas wi h o wi hou co ela ed e o s. The use o an cha s is a common p ac ice in
he s udy o isk managemen in mone a y policy, as i is use ul o g aphically illus a ing he
unce ain y su ounding in la ion o ecas s; om he e, i has been g adually ex ended o he
analysis o deb sus ainabili y (A izala e al., 2008).
The e a e se e al me hodologies o gene a e he Fan Cha s; he e we p esen esul s using
he ex e nal o ecas s me hodology ollowing A izala e al. (2008), whe e p ojec ions o each o
he a iables included in o he deb equa ion (equa ion (2)) a e made acco ding o:
whe e:
19
and whe e is a ec o o ex e nal p ojec ions included in he deb equa ion and coming om
he same sou ces as in he baseline scena io used in Sec ion 3.2, ητ is a ec o o simula ed e o s,
wi h a iance Ω
�, ha is es ima ed wi h he a iance-co a iance ma ix o he esiduals om an
es ima ed VAR-model. Figu e 10 illus a es he esul s o compu ing he Fan Cha using his
me hodology. I is clea om he cha ha he mos likely pa h o deb - o- a io is o con inue on
a s able pa h along he p ojec ion ho izon. The p obabili y o exceeding he 30 pe cen o GDP
ma k is slim. Ac ually, one ad an age o his me hodology is ha i allows us o calcula e he
equency wi h which he deb - o-GDP a io su passes di e en h eshold alues in any o he
p ojec ed yea s; in o he wo ds, we can calcula e he p obabili y ha he deb su passes o achie es
ce ain h esholds. Fo example, acco ding o his es ima ion, su passing he 30 pe cen o GDP
h eshold a o emen ioned has a p obabili y o 3 pe cen .
Figu e 10. Ex e nal P ojec ions: Co ela ed E o s
Ano he a ian o his ex e nal o ecas me hodology is one ha uses unco ela ed e o s.
I simula es e o s ha ha e a a iance equal o he sample a iance o each o he se ies. Fan
Cha s can addi ionally be cons uc ed using he poin es ima es coming om he VAR model,
which cons i u e he cen al endency o he o ecas s o each o he a iables included in he
simula ion. The simula ed pa hs a e he esul o he sum o he poin es ima e om he VAR and
20
one o he gene a ed e o s using he VAR-gene a ed a iance-co a iance ma ix. Bo h addi ional
me hodologies we e applied, and esul s can be ound in Appendix B.
3.4 Mendoza-O iedo 5p oach
Unde his app oach, Mendoza and O iedo (2004) assume ha he e is a go e nmen which is
highly a e se o he isk o de aul on i s so e eign deb . This leads he go e nmen o espec a
“Na u al Deb Limi ” (NDL), which ep esen s a c edible commi men o be able o epay e en in
a iscal c isis. In u n, a “Fiscal C isis” is de ined as a long sequence o ad e se shocks o iscal
e enues whe e public ou lays adjus o a ole able minimum. In his con ex , i he ac ual le el o
deb emains highe han he NDL h eshold, he go e nmen aces a posi i e p obabili y o
de aul .
The c edible- epaymen -commi men alue o he deb ( he NDL) sa is ies he ollowing
condi ion:
(4)
whe e d∗ he h eshold alue o GDP a io; min is he lowes possible ealiza ion o he ax e enue
o GDP; emin ep esen s he minimum le el o go e nmen expendi u e o GDP a io ha can be
sus ained i he coun y we e o en e a iscal c isis (in which = min).
The Mendoza and O iedo App oach (MO) migh be he mos sui able me hodology o
analyzing deb dynamics in Gua emala o wo easons. Fi s , his me hodology ocuses on e enue
unce ain y; as men ioned abo e, one o he main iscal issues in his coun y is he inabili y o
collec axes. Second, he p oblem p esen ed by he au ho s, ha o a go e nmen which is highly
a e se o he isk o a collapse in i s iscal ou lays (which leads he go e nmen o espec he
NDL), is akin o he appa en public-deb a e sion pe cei ed in Gua emala.
This model equi es in o ma ion abou he ola ili y and pe sis ence o go e nmen
e enues, he a e age le els o e enue and expendi u e, he size o he po en ial adjus men in
expendi u e in he e en o eaching a c isis s a e, he wo ld eal in e es a e and he economy
s eady s a e g ow h a e. The alues used o all hese a iables a e de ailed in Table 6. The a e age
le el o e enues and expendi u es as sha es o GDP a e calcula ed om his o ical da a.
Pe sis ence o go e nmen e enues a e app oxima ed by he au o eg essi e coe icien o he
e enue- o-GDP cyclical componen ( om an HP il e ). One impo an aspec o he model is he
21
po en ial adjus men he economy can endu e in case o a iscal c isis. In case o he minimum
e enue, we assume ha i will be wo s anda d de ia ions below i s mean (8.8 pe cen o GDP).
Fo he maximum expendi u e adjus men , we ake wo di e en assump ions, he i s one is ha
expendi u es can all wo s anda d de ia ions below i s mean in case o c isis, which is ai ly
s anda d. Bu also, since his app oach is qui e sensi i e o he adjus men o go e nmen
expendi u e, we assume al e na i ely ha he minimum le el o expendi u es ha can be a ained
is equal o he minimum le el o expendi u es obse ed in ecen his o y (i.e., 8.1 pe cen o GDP).
Table 6. Assump ions o he MO Model
Assump ions
Values
Al e na i e
Real in e es a e
1.05
S eady-S a e GDP G ow h
1.035
A e age le els o non-in e es expendi u es
11.5%
Maximum Expendi u e Adjus men (2.1 s.d.)
3.2%
Adjus ed Go e nmen Expendi u e
8.3%
8.1%
A e age le els o e enues
11.2%
Vola ili y o he go e nmen e enues
1.2%
Pe sis ence o Tax e enue
48.3%
Minimum Le els o e enues (-2 s.d.)
8.8%
Ini ial Le el o Deb
24.5%
Na u al Deb Limi
37.7%
46.6%
Numbe o epe i ions o he simula ions
500
Acco ding o his app oach, he e is s ill oom o Gua emala o inc ease i s deb , as he
es ima ed NDL (in bo h cases) is easonably highe han he cu en le els. Gi en he sensi i i y
o di e en assump ions on e enue ola ili y and expendi u e adjus men , Figu e 11 depic s how
he NDL will inc ease as expendi u e becomes mo e lexible, and he same happens as e enue
ola ili y dec eases. On he con a y, as expendi u e becomes less lexible and ola ili y o
e enues inc eases, he NDL will be lowe .11
11 See Table 9 in Appendix A.3 o da a on he sensi i i y o di e en assump ions on e enue ola ili y and
expendi u e adjus men .
28
Appendix B. Addi ional Fan Cha s
Figu e 15. Ex e nal P ojec ions: Unco ela ed E o s
Figu e 16. VAR-Model P ojec ions

29
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