Spotlight on... Latin America
New investment opportunities in El Salvador
Second call for investment proposals for the new compact of the Millennium Challenge Corporation
In 2014, the Millennium Challenge Corporation, a US governmental agency, signed a USD 277 million compact with the government of El Salvador, aimed at increasing the productivity of export-oriented sectors by strengthening El Salvador’s investment climate, human capital and logistical infrastructure. On 11 November 2015, FOMILENIO II, the Salvadoran government entity responsible for administering the compact, opened registration for the second round of El Salvador Investment Challenge, a USD 75 million program to leverage private investment for the provision of public goods or services. FOMILENIO II will receive proposals from national and foreign investors willing to invest in a new project or expanding an existing one that falls under the category of internationally tradable goods or services.
Despite high murder rates and a stagnant business climate, El Salvador is an open economy with many trade agreements, included the Dominican Republic, Central America and United States Free Trade Agreement. Together, these provide preferential access to more than 1.2 billion consumers in 44 countries. This new programme embodies a commitment from the Salvadoran government to do what is necessary to stimulate more investment. Therefore, these funds represent a good opportunity for firms engaged in the international trade of goods and services. The funds represent the Salvadoran government’s great interest in promoting exports and the lack of local competition due to poor technical quality of local firms. Furthermore, the participation of a US government agency ensures a transparent, fair and competitive process in the allocation of funds.
Source:
“Fomilenio II lanza segunda convocatoria de apuesta por inversiones”, Fomilenio 2, 11 November 2015, http://www.fomilenioii.gob.sv/fomilenio-ii-lanza-segunda-convocatoria-de-apuesta-por-inversiones
Further reading: El Salvador Investment Compact (https://www.mcc.gov/where-we-work/program/el-salvador-investment-compact)
Customs Union will facilitate business in Honduras and Guatemala
The agreement streamlines the transit of goods and improve conditions for business
Between December 2015 and January 2016, Honduras and Guatemala approved an international treaty to create a customs union between the two countries that will guarantee the free movement of people and of 80% of traded goods. These two countries will thus form a single customs territory equivalent to almost 50% of Central America and about 52% of trade within the region. February 2016 will see the beginning of the unification of customs and creation of an integrated system for goods with some form of tariff border control.
For over 60 years, Central American countries have tried to streamline customs procedures à la the European Union, but all attempts have failed for political, economic and technical reasons. Despite the short distance between the Central American countries, goods in transit currently travels at 16 km/hour on average. This union is expected to reduce the transit time between Guatemala and Honduras, and to encourage other countries to take the same measures. This policy provides benefits to exporting firms in manufacturing and agriculture, and creates incentives in these countries to offer better conditions to foreign firms.
Source:
“Guatemala y Honduras: un solo territorio aduanero”, Ministerio de Economia, January 22, 2016, http://www.mineco.gob.gt/guatemala-y-honduras-un-solo-territorio-aduanero
Further reading: Union aduanera entre Guatemala y Honduras (http://www.mineco.gob.gt/paginaUA/)
Costa Rica proposes tax reform
The country is challenged by the need to combine more tax revenue with the promotion of foreign investment
Since 2015, the new government of Costa Rica has explored tax reform in order to rationalise public spending, increase tax revenue and crack down on tax evasion. In 2013, tax evasion, avoidance and delay reached 8.2% of GDP, equivalent to the annual fiscal deficit. Currently, the Costa Rican congress is discussing the government’s proposal, which includes measures to strengthen the tax collection administration, change a modified system of dual income tax, and create a value-added tax from various excise taxes.
Costa Rica has an excellent position in international business climate indicators. It is ranked 58th in Doing Business 2016 and will soon be a member of the OECD. However, tax reform may negatively affect the conditions for foreign investment. Examples include proposals to limit multinationals’ access to their subsidiaries’ resources and the creation of a shareholders register for corporations within the Tax Administration. The legislative precedents and the political environment predict a lengthy approval process, but the government has been determined in pursuing reform. Therefore, any firm interested in operating in Costa Rica should evaluate these proposals in its final form.
Source:
“Evasión fiscal alcanzó un 8,22% del PIB en el 2013”, La Nacion, February 4, 2016, http://www.nacion.com/economia/indicadores/Incumplimiento-tributario-alcanzo-PIB_0_1540646033.html; “Presidente Luis Guillermo Solís advierte de ‘caos’ y ‘ miseria’ si no se aprueba reforma fiscal”, El Financiero, February 3, 2016, http://www.elfinancierocr.com/economia-y-politica/Solis-advierte-miseria-aprueba-reforma_0_896310373.html
Panama will open the new set of locks in the Panama Canal
Despite delays, the government expects to start operations in June 2016
In January 2016, the government reported that the Panama Canal expansion project is 4% completed and will be opened this semester. The expansion of the Canal is a project worth USD 5.25 billion, one of the largest projects in Latin America, and involves the construction of a third set of locks, 92 buildings and an urbanisation project. This extension will allow the transit of Post Panamax ships with a nominal capacity of 13,000 TEU, more than double the current capacity of 5,000 TEU, between the Pacific and Atlantic Oceans.
Despite project delays, cost overruns, social tensions and challenges to international maritime traffic, it is estimated that the project will contribute an additional USD 3.7 billion to Panama’s GDP in 2025, and open new global business opportunities, such as shipping natural gas from the US to Asia, or raw materials from Latin America to Asia. The challenge for the government will be to deal with the social pressures generated by this project as well as to sustain and increase new business opportunities with the development of the areas around the Canal, especially in logistics and distribution.
Source:
“La ampliación del Canal de Panamá, a 4% de su conclusión”, La Estrella de Panama, January 18, 2016, http://laestrella.com.pa/economia/ampliacion-canal-panama-4-conclusion/23916599
About Carlos Guzman-Sanchez
I am a postgraduate student at LSE reading MSc in Public Management and Governance. My interest in political risk started with my professional experience researching the impact of legal and institutional factors in the business climate in El Salvador, my previous academic background in law and political science and the fascinating ideas of Ian Bremmer.
