Fitch predicted in a report that the Central American nation's economy will contract by 0.6% this year. The report also warned of spending cuts if the government's bid to issue $37 million in treasury bonds for infrastructure projects and social programs was not approved by Congress.

“The government's flexibility to fully implement its fiscal stimulus program may be hindered by challenges to obtain congressional approval for additional financing,” the report said.

Remittances, which make up 11% of Guatemala's gross domestic product, have dropped sharply this year. Over the first five months of the year Guatemalan migrant workers have sent home $1.59 billion, 9.6% less than the same period in 2008.

A political scandal earlier this year in which a murdered lawyer accused the president of plotting his assassination in a video that surfaced after his death, led to concerns over social unrest and dampened domestic demand, the report noted.

Weak domestic demand has slowed inflation to levels not seen in decades. Guatemala's consumer price index rose just 0.62% in June, the lowest monthly increase since September 1984. (Reuters)