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El Salvador

Executive Summary

El Salvador’s location and natural attributes make it an attractive investment destination. The macroeconomic context and declining rule of law present some challenges. El Salvador’s economy has registered the lowest levels of growth in the region for many years, with average annual GDP growth of 2.5 percent from 2016 to 2019. After a deep pandemic-related contraction (7.9 percent) in 2020, the Central Bank estimates GDP rebounded to 10.3 percent growth in 2021. The IMF expects the economy to grow 3.2 percent in 2022, with growth rates declining to 2 percent in the medium-term. Economic underperformance is mainly driven by fiscal constraints. Persistent budget deficits and increased government spending – exacerbated by the pandemic – have contributed to a heavy debt burden. With public debt at an estimated 88.5 percent of GDP in 2021, the Government of El Salvador (GOES) has limited capacity for public investment and job creation initiatives. Large financing needs are projected for 2022.

The Bukele administration continues to make efforts to attract foreign investment and has taken measures to reduce cumbersome bureaucracy and improve security conditions. However, the implementation of the reforms has been slow, and laws and regulations are occasionally passed and implemented quickly without consulting with the private sector or assessing the impact on the business climate.

After being announced in June 2021, Bitcoin became a legal tender in El Salvador on September 7, 2021, alongside the U.S. dollar. The Bitcoin Law mandates that all businesses must accept Bitcoin, with limited exceptions for those who do not have the technology to carry out transactions. Prices do not need to be expressed in Bitcoin and the U.S. dollar is the reference currency for accounting purposes. The GOES created a $150 million trust fund managed by El Salvador’s Development Bank to guarantee automatic convertibility and subsidize exchange fees. The rapid implementation caused uncertainty in the investment climate and added costs to businesses.

Government of El Salvador actions have eroded separation of powers and independence of the judiciary over the past year. In May 2021, the Legislative Assembly dismissed the Attorney General and all five justices of the Supreme Court’s Constitutional Chamber and immediately replaced them with officials loyal to President Bukele. Furthermore, in August 2021, the legislature amended the Judicial Career Organic Law to force into retirement judges ages 60 or above and those with at least 30 years of service. The move was justified by the ruling party as an effort to root out corruption in the judiciary from past administrations. A September 2021 ruling from the newly appointed Constitutional Chamber allows for immediate presidential re-election, despite the Constitution prohibiting presidential incumbents from re-election to a consecutive term. Legal analysts believe these measures were unconstitutional and have enabled the Legislative Assembly and the Bukele administration to exert control over the judiciary.

The Legislative Assembly is not required to publish draft legislation and opportunities for public engagement are limited. With the Nuevas Ideas ruling party holding a supermajority, legislation is often passed quickly with minimal analysis and debate in parliamentary committees and plenary sessions, contributing to an overall climate of regulatory uncertainty.

Commonly cited challenges to doing business in El Salvador include the discretionary application of laws and regulations, lengthy and unpredictable permitting procedures, as well as customs delays. El Salvador has lagged its regional peers in attracting foreign direct investment (FDI). The sectors with the largest investment have historically been textiles and retail establishments, though investment in energy has increased in recent years.

The Bukele administration has proposed several large infrastructure projects which could provide opportunities for U.S. investment. Project proposals include enhancing road connectivity and logistics, expanding airport capacity and improving access to water and energy, as well as sanitation. Given limited fiscal capacity for public investment, the Bukele administration has begun pursuing Public-Private Partnerships (PPPs) to execute infrastructure projects. In August 2021, El Salvador’s Legislative Assembly approved the contract award of the first PPP project to expand the cargo terminal at the international airport.

As a small energy-dependent country with no Atlantic coast, El Salvador heavily relies on trade. It is a member of the Central American Dominican Republic Free Trade Agreement (CAFTA-DR); the United States is El Salvador’s top trading partner. Proximity to the U.S. market is a competitive advantage for El Salvador. As most Salvadoran exports travel by land to Guatemalan and Honduran ports, regional integration is crucial for competitiveness. Although El Salvador officially joined the Customs Union established by Guatemala and Honduras in 2018, implementation stalled following the Bukele administration’s decision to prioritize bilateral trade facilitation with Guatemala. In October 2021, however, the GOES announced it would proceed with Customs Union implementation. El Salvador rejoined technical level working group discussions and resumed testing of system interconnectivity.

The Bukele administration has taken initial steps to facilitate trade. In 2019, the government of El Salvador (GOES) relaunched the National Trade Facilitation Committee (NTFC), which produced the first jointly developed private-public action plan to reduce trade barriers. The plan contained 60 strategic measures focused on simplifying procedures, reducing trade costs, and improving connectivity and border infrastructure. Measures were not fully implemented in 2020 due to the coronavirus pandemic. In 2021, the NTFC revised the action plan to adjust measures under implementation and finalized drafting the national trade facilitation strategy, which will be launched in March 2022. In January 2022, the NFTC met to evaluate progress on the action plan. The NFTC released the action plan for 2022 on February 17th. The 2022 action plan has 29 measures to facilitate cross-border trade and improve road and border infrastructure.

Table 1
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 115 of 180 http://www.transparency.org/research/cpi/overview 
Global Innovation Index 2021 96 of 132 http://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2020 3,4133 https://apps.bea.gov/international/factsheet/factsheet.html#209 
World Bank GNI per capita 2020 3,630 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $27,022.64 2019 $27,023 https://data.worldank.org/country/el-salvador
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 $2,104.22 2019 $3,413 BEA data available at
https://apps.bea.gov/international/
factsheet/factsheet.cfm?Area=209
 
Host country’s FDI in the United States ($M USD, stock positions) 2019 N.A. 2019 N.A. BEA data available at
http://bea.gov/international/direct_
investment_multinational_companies_
comprehensive_data.htm
Total inbound stock of FDI as % host GDP 2020  40.9% 2020 N.A,

* Central Bank, El Salvador. In 2018, the Central Bank released GDP estimates using the new national accounts system from 2008 and using 2005 as the base year.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (2020)*
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 10,075 100% Total Outward 3.1 100%
Panama 3,656 36.3% Guatemala 1.6 49.5%
 United States 2,104 20.9% Honduras 0.8 24.3%
Spain 1,339 13.3% Costa Rica 0.5 17.3%
Colombia 833 8.3% Nicaragua 0.3 8.9%
Mexico 670 6.7%      
“0” reflects amounts rounded to +/- USD 500,000.

*Coordinated Direct Investment Survey, International Monetary Fund 

Guatemala

Executive Summary

Guatemala has the largest economy in Central America, with a $ 85.9 billion gross domestic product (GDP) in 2021. The economy grew by an estimated 7.5 percent in 2021 following a 1.5 percent retraction in 2020. Remittances, mostly from the United States, increased by 34.9 percent in 2021 and were equivalent to 17.8 percent of GDP. The United States is Guatemala’s most important economic partner. The Guatemalan government continues to make efforts to enhance competitiveness, promote investment opportunities, and work on legislative reforms aimed at supporting economic growth. More than 200 U.S. and other foreign firms have active investments in Guatemala, benefitting from the U.S. Dominican Republic-Central America Free Trade Agreement (CAFTA-DR). Foreign direct investment (FDI) stock was $21.4 billion in 2021, a 21.9 percent increase over 2020. FDI flows increased by 272.6 percent in 2021 mostly due to the purchase of outstanding shares of a local company by a foreign telecommunications company. Some of the activities that attracted most of the FDI flows in the last three years were information and communications, financial and insurance activities, manufacturing, commerce and vehicle repair, water, electricity, and sanitation services.

Despite steps to improve Guatemala’s investment climate, international companies choosing to invest in Guatemala face significant challenges. Complex laws and regulations, inconsistent judicial decisions, bureaucratic impediments, and corruption continue to impede investment.

Citing Guatemala’s CAFTA-DR obligations, the United States has raised concerns with the Guatemalan government regarding its enforcement of both its labor and environmental laws.

Guatemala’s Climate Change Framework Law established the groundwork for Guatemala’s Low Emission Development Strategy (LEDS) and is designed to align Guatemala’s emissions and development targets with national planning documents in six sectors: energy, transportation, industry, land use, agriculture, and waste management. In November 2020, the Guatemala government endorsed the LEDS as the country’s official strategy for climate change mitigation.

As part of the government’s efforts to promote economic recovery during and after the COVID-19 pandemic, the Ministry of Economy (MINECO) began implementing an economic recovery plan in September 2020, which focuses on recovering lost jobs and generating new jobs, attracting new strategic investment, and promoting consumption of Guatemalan goods and services locally and globally.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 150 of 180 http://www.transparency.org/
research/cpi/overview
Global Innovation Index 2021 101 of 132 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 USD 789 https://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2020 USD 4,490 https://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

Honduras

Executive Summary

Honduras contains all the ingredients for a thriving, prosperous economy: strategic location next to U.S. markets with a deep-water port, a rich endowment of natural resources, breathtaking tourist destinations, and hard-working people, including a significant cadre of skilled labor. Despite these advantages, per capita income in Honduras is the third lowest in all Latin America. Investors cite corruption, crime, and poor infrastructure and weak or nonexistent rule of law as the primary reasons that Honduras does not attract more of the private investment it needs to stimulate inclusive economic growth. According to the International Monetary Fund (IMF), real Honduran GDP grew by 12.5 percent in 2021, a rebound from the devastating effects in 2020 of the COVID-19 pandemic and twin hurricanes Eta and Iota. The IMF predicts the economy will grow by 3.8 percent in 2022.

The 2022 inauguration of Honduras first woman president, Xiomara Castro, marked the beginning of a new era in the country’s political economy. The participation of U.S. Vice President Harris at President Castro’s inauguration exemplified the strong U.S. commitment to Honduras. The two countries have committed to work jointly to address the root causes of migration, including by combating corruption and expanding economic opportunity. Since taking office, the Castro administration has launched initiatives to reduce corruption, improve education and public health, and create jobs.

These laudable efforts have been frustrated by fiscal challenges, including budget planning and debt management. Although the United States and international organizations including the IMF assess Honduras as low risk for debt distress, public messaging from the administration announcing a fiscal crisis roiled international bond markets, driving up the risk premium on Honduran debt. To address these budget shortfalls, the government announced it will utilize its foreign reserves to finance operations, which could put additional inflationary pressure on the economy. To help Honduras implement its social agenda without increasing its debt burden, the United States has begun a debt management technical assistance program with the Ministry of Finance.

In both public and private, the Castro administration emphasizes the need for job creation and private investment in Honduras. The government approved a new law in 2022 to facilitate the development and formalization of Micro, Small, and Medium Enterprises (MSMEs). The government’s Results-Based Governance system and other anti-corruption efforts are excellent examples of efforts to improve the investment climate. From the perspective of the private sector, however, these efforts have been overshadowed by policy decisions that have dramatically increased the uncertainty of investment returns. Chief among these was the May 2022 approval of a new energy law that threatens power generators with forced sale at a “just price” if they do not reduce their tariffs to the government’s satisfaction. The law provides no guarantee of future payment, stipulates that new energy investment must be majority state-owned, and all but eliminates private trade in energy. As a result of the new law, several private energy companies have discontinued planned projects in Honduras and are exploring investment opportunities in other countries in the region.

The Castro administration also eliminated the special economic zones known as “ZEDEs” by their initials in Spanish. The ZEDEs were broadly unpopular, including with much of the private sector, and viewed as a vector for corruption. Rather than pursuing reforms or seeking dialogue with the ZEDE investors, by eliminating the frameworks without any regard for the protections afforded the investors under the U.S.-Honduras Bilateral Investor Treaty (BIT) or the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR), the government has exposed itself to potentially significant liability and fueled concerns about the government’s commitment to commercial rule of law.

Another government policy contributing to uncertainty in the investment climate has been the elimination of the legal framework used by most businesses to employ per-hour workers. The law’s repeal fulfilled a Castro campaign promise, responding to criticism by labor unions that temporary work allowed companies to evade their social security obligations and exploit workers. Business representatives note, however, that many industries, including retail, tourism, and food service rely heavily on hourly labor and will be constrained by the new framework. Civil society representatives also point out that the change adversely affects women and students, who relied on hourly work to manage households and school schedules, although union leaders counter that the previous framework allowed employers to target women and young people for economic exploitation, given that their personal circumstances often do not allow them to take on full-time employment.

Many foreign investors in Honduras operate thriving enterprises. At the same time, all investors face challenges including unreliable and expensive electricity, corruption, unpredictable tax application and enforcement, high crime, low education levels, and poor infrastructure. Squatting on private land is an increasingly severe problem in Honduras and anti-squatting laws are poorly enforced. Continued low-level protests and strikes are additional concerns for private investors.

Despite these setbacks, over 200 American companies operate businesses in Honduras. Honduras enjoys preferential market access to the United States under CAFTA-DR, which has allowed for the development of intra-industry trade in textiles and electrical machinery, among other sectors. The proximity to the United States and established supply chain linkages means that opportunities exist to increase nearshoring sourcing to meet U.S. demand for a variety of goods. The White House “Call to Action to Deepen Investment in the Northern Triangle” is designed to coordinate increased U.S. investment in the region, including Honduras. This program, along with others, aims to support sustained and inclusive economic development in Honduras and surrounding countries.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 157 of 175 http://www.transparency.org/research/cpi/overview 
Global Innovation Index 2021 108 of 132 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2020 USD 1,111 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2020 USD 2180 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD 
Investment Climate Statements
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