As a macroeconomic preamble, Guatemala is a developing country highly dependent on agricultural products, textile manufacturing, remittances sent by expats and a strong informal economy (which represents 22% of the overall GDP). The country enjoys a stable currency without drastic inflation, even with the COVID-19 crisis, the cumulative inflation rate is at 2.16% and has inflationary rhythm of 2.39%. This strong currency has had a negative impact on exports’ revenue, another extremely relevant economic sector.
Interestingly, on May 2020, Guatemala reported a 2.2% increase in exports compared to May 2019. Guatemala’s main export products are: i) textiles and apparel (10%); ii) cardamom (8.2%); iii) coffee (8.1%); iv) sugar (7.7%); and v) bananas (7.6%). These five products accrue for 41.6% of overall exports. On the import side, on May 2020 Guatemala reported a -9.5% decrease on imports compared to May 2019. This is mainly due to a -35% decrease on the imports of fuel and lubricants and a -17.3% decrease on consumer products. Although exports play a critical role, from 2018 to 2020 Guatemala has maintained a trade deficit of an averaged US$3,93bn. From a trade in services perspective, Guatemala’s balance of payments reflects an overall reversion of the trade deficit with a significant increase in the export of manufacturing services. However, this trade surplus rhythm went from 2013 until 2018 and was interrupted in 2019, when Guatemala reported a trade deficit of US$46.8m.
Despite these not so negative numbers, due to the current COVID-19 economic crisis, the Guatemalan Central Bank has adjusted its economic yearly growth projection from 3.5% to 0.5%-1.5% for 2020. From a microeconomic perspective, both social distancing and transit limitation dispositions rendered by the government have significantly impacted the services sector. For example, projections show a negative impact in hotels and restaurants with an estimated reduction of -24.3%, transportation with -14.7%, basic services (water, electricity and gas) with -9.4% and real estate services with -8.4%. Even though it may seem that the supply chains have not been substantially strained, they reported a turnover decrease of 20%-40% in March 2020. Depending on the length of the crisis, Guatemala could be facing a loss of 97,000 to 177,000 formal jobs.
To mitigate this crisis, the Guatemalan government has increased the national budget on Q19bn quetzales (around US$2.5bn) in order to create public funds for social and economic purposes that will inject liquidity to the economy. 80% of the Q19bn was financed by the emission of treasury bonds and the remaining 20% was covered via institutional loans. These measures have increased the fiscal deficit by 5.7% in comparison with 2019. Surely, this will have an impact on the macroeconomic indicators of the country. Furthermore, the government has also suspended: i) certain tax obligations reducing collection by 3.3% (which will intensify this fiscal deficit); ii) the payment of Bono 14, a yearly mandatory bonus that employers pay to employees. Such provisions, along with the social distancing and transit limitations guidelines, have impacted the conducting of business of our clients; influencing their business projections in a short- and long-term perspective. They turn to their trusted legal advisors and appreciate a holistic approach in their everyday challenges.
Within this context, the Guatemalan legal market is going through a very pressing and critical time. COVID-19 has, not only disrupted the way legal services are rendered, but also drastically shaped our clients’ current needs. The new reality has forced law firms to migrate to a full home office model, challenging the in-office stereotype enshrined in the legal profession.
As many law firms have moved to a mandatory home office, it is important to closely monitor the working culture of their employees and substantially rely on their technological platforms to enable a smooth transition. Before the COVID-19 outbreak, the home office standard had a limited and informal presence within the law practice. Many law firms allowed lawyers to work half a day from home, but it was not formally stated as an internal policy. At EY, employees have always enjoyed a mandatory policy requiring them to work from home at least once a week. This has nourished the home office culture and facilitated the migration to a full home office model overnight without compromising efficiency.
Our clients have constantly relied on our services in order to help them better understand the impact changing COVID regulations could have on their daily operations. We have created multidisciplinary service packages where EY’s legal division works closely with other service lines within our multidisciplinary teams, advising our clients to tackle most of their COVID necessities from a legal, financial and tax perspective. Within the legal element of this full package, we have detected a strong need for advice in the labor, contractual, tax and regulatory areas.
The M&A market has also been impacted by the current situation. The buy side M&A practice has observed dynamism triggered by big companies. Certain groups are using this crisis as an opportunity to expand their operations by acquiring smaller companies in distress for a better price. This has generated several opportunities for our transactional practice.
The COVID-19 crisis has brought uncertainty. It is an ongoing crisis with unpredictable effects continuously unfolding without a clear projection, affecting all sectors of the economy – and the legal market is no exception. However, with change as the only constant, organizations are forced to keep up with this roller coaster by rapidly evolving their internal administration and the manner in which they are addressing their clients’ needs. Survival depends on resiliency and the ability to adapt.