The outgoing government of El Salvador (GOES) is generally perceived as unsuccessful at improving the investment climate. Political polarization, cumbersome bureaucracy, an ineffective judicial system, and widespread violence and extortion have all contributed to this perception. The GOES has taken some measures to improve the business climate, with very limited results. The most commonly cited impediments to doing business in El Salvador include the discretionary application of laws/ regulations, lengthy and unpredictable permitting procedures, and customs delays.
President-elect Nayib Bukele assumes office on June 1, 2019. He has pledged to support investors and make El Salvador a more attractive destination for investment. The incoming administration’s plans to improve the investment climate will be evident soon after Bukele takes office.
In 2015, El Salvador’s second Millennium Challenge Corporation (MCC) Compact entered into force. The five-year USD 277 million Compact (plus USD 88.2 million from GOES funding) seeks to improve El Salvador’s investment climate by improving its productivity and competitiveness in international markets. MCC Compact information is available at https://www.mcc.gov/where-we-work/program/el-salvador-investment-compact.
El Salvador began implementing the Simplified Administrative Procedures Law in February 2019. This law seeks to streamline and consolidate administrative processes among GOES entities to facilitate investment. In 2016, El Salvador adopted the Electronic Signature Law to facilitate e-commerce and trade, which is still pending implementation.
In August 2018, El Salvador recognized the People’s Republic of China and ceased to recognize Taiwan. El Salvador signed several memorandums of understanding (MOUs) with China, but has not entered into negotiations with China for an investment or trade agreement. Although the GOES announced the cancellation of its trade agreement with Taiwan in February 2019, the Supreme Court halted the cancellation in March 2019 and the agreement remains in force.
In November 2018, El Salvador officially joined the Northern Triangle Customs Union with Guatemala and Honduras following the ratification of the Accession Protocol by Legislative Assembly. The Customs Union inaugurated the first integrated border post in El Salvador in December 2018. Northern Triangle countries continue technical-level negotiations to operationalize the Customs Union, harmonize customs regulations and procedures, interconnect automated systems, and finalize which goods will freely move within the single customs territory. Full implementation of the Customs Union is targeted for 2020.
In recent years, El Salvador has lagged behind the region in attracting foreign direct investment (FDI). The sectors with the largest investment have historically been textiles and retail establishments, though investment in energy projects has been increasing steadily.
In November 2018, El Salvador and Bolivia signed a Partial Scope Agreement that is pending ratification in the Legislative Assembly. In 2018, El Salvador also ratified a free trade agreement (FTA) with South Korea, signed trade agreements with Cuba and Bolivia, and reinitiated long-stalled FTA negotiations with Canada.
In December 2018, El Salvador adopted the Regulatory Improvement Law (LMR), which establishes the Regulatory Improvement Institution (OMR), an MCC compact investment, as the government’s sole institution for regulatory reform. OMR will coordinate the regulatory improvement process and the simplification of business procedures and paperwork. In addition, El Salvador enacted the Law on the Elimination of Bureaucratic Barriers in December 2018 that creates a specialized tribunal to verify that regulations and procedures are implemented in compliance with the law. The new tribunal has the authority to sanction public officials who impose administrative requirements not contemplated in the law.
Guatemala has the largest economy in Central America, with a USD 78.45 billion gross domestic product (GDP) and an estimated 3.0 percent growth rate in 2018. Remittances, mostly from the United States, increased by 13.4 percent in 2018 and were equivalent to 11.8 percent of GDP. The United States is Guatemala’s most important economic partner. The Government of Guatemala (GoG) 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 USD 16.36 billion in 2018, a 1.5 percent increase over 2017. Despite this, FDI flows fell 11.8% in 2018. Some of the activities that attracted most of the FDI flows in the last three years were commerce, banking and insurance, manufacturing, telecommunications, and electricity.
Despite steps to improve Guatemala’s investment climate, international companies choosing to invest in Guatemala face significant challenges. Complex and confusing laws and regulations, inconsistent judicial decisions, bureaucratic impediments, and corruption continue to constitute practical barriers to investment. Under CAFTA-DR obligations, the United States has raised concerns with the GoG regarding its enforcement of both its labor and environmental laws.
Since 2006, the UN-sponsored International Commission against Impunity in Guatemala (CICIG) has undertaken numerous high-profile official corruption investigations, leading to significant indictments. In 2015, CICIG uncovered several cases of high-level official corruption. A case revealing a customs corruption scheme led to the resignations of the president and vice president. Since 2016, the public’s perception of the commitments of President Morales and Congress to anti-corruption efforts has eroded following allegations of corruption against Morales and members of his family. President Morales announced he would not renew CICIG’s mandate on August 31, 2018. CICIG’s mandate is set to expire on September 3, 2019.
Table 1: Key Metrics and Rankings
The United States is Honduras’ most important economic partner. While the Honduran government places a priority on improving the investment climate as a means of attracting investment and promoting economic growth, meaningful reform has been slow. As of April 2019, the Honduran Congress is debating plans to merge the three institutions charged with attracting increased foreign direct investment: the National Investment Committee, ProHonduras, and President Hernandez’s signature Honduras 20/20, an ambitious initiative to create 600,000 new jobs by 2020. Economic reforms and continued commitment to fiscal stability in Honduras have led to a stabilized macroeconomic environment and positive outlooks and debt upgrades from major international ratings agencies. Some foreign companies with investments in Honduras, however, continue to face challenges. Inconsistent and expensive energy, corruption, weak institutions, high levels of crime, low education levels, and poor infrastructure hamper Honduras’ investment climate. While the political climate has stabilized since the weeks of protests that followed the November 2017 presidential election, continued low-level protests and uncertainty also pose a challenge to the investment climate.
The Honduran government implemented several measures to improve investment and trade facilitation. In November 2016, the Government of Honduras launched the Presidential Commission for Integral Reform of the Customs System to simplify import/export procedures and improve relevant efficiency aspects of Honduran customs services. In July 2016, Honduras formally ratified the WTO Trade Facilitation Agreement, which contains provisions for expediting the movement, release, and clearance of goods, and sets out measures for effective cooperation for customs compliance and trade facilitation issues. In June 2017, Honduras and Guatemala initiated a Customs Union to foster and increase efficient cross-border trade. El Salvador subsequently approved joining the Customs Union in July 2018. In July 2017, the Government of Honduras shifted management of product registration from the Ministry of Health to a new, more efficient Sanitary Regulatory Agency, leading to a decrease in the backlog of 13,000 sanitary registrations. Finally, in February 2019, the Government of Honduras established the National Trade Committee, chaired by the Minister of Economic Development.
Many of the approximately 200 U.S. companies that operate in Honduras take advantage of protections available in the Central American and Dominican Republic Free Trade Agreement (CAFTA-DR). Honduras’ participation in CAFTA-DR has enhanced U.S. export opportunities and diversified the composition of bilateral trade. Substantial intra-industry trade now occurs in textiles and electrical machinery, alongside continued trade in traditional Honduran exports such as coffee and bananas. In addition to liberalizing trade in goods and services, CAFTA-DR includes important disciplines relating to investment, customs administration and trade facilitation, technical barriers to trade, government procurement, telecommunications, electronic commerce, intellectual property rights, transparency, and labor and environmental protection.
Table 1: Key Metrics and Rankings