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Confronting Challenges, Seizing Opportunities

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Although Guatemala has experienced some level of political stability in the last two decades, the nation’s course remains uneven, as the political turmoil in 2015 indicated. Yet investment opportunities are on the rise, particularly in energy, agriculture, and service industries like business process outsourcing.

Guatemala

Published: 2016

After the conclusion of the 36-year Civil War that devastated the entire nation, Guatemala finally began to experience economic growth and political stability in the first years of the 21st century. Although poverty and unequal income distribution still plague the nation, Guatemala has maintained its status as Central America’s largest economy, with a gross domestic product (GDP) of US $58.7 billion and a per capita income of US $2,379.99. In 2014, GDP growth measured 4.2 percent, while experts predicted just under 4.0 percent by the end of 2015. Forecasters are expecting a slightly slower but steady growth rate of 3.7 percent through 2016. To boost this number in the coming years, public and foreign direct investment (FDI) must continue to grow, while the obstructions that hinder expansion must be eradicated.

Effective December 1, 2015, both goods and people gained the ability to move freely between Guatemala and Honduras, under a new initiative that allows for greater commercial traffic between the two countries.

Various free trade agreements (FTAs) have advanced FDI, while the development of free trade zones has fostered these relationships and allowed for the elimination of certain taxes for investors. The average tariff in Guatemala is 2.7 percent, and foreign investors have the ability to repatriate their profits. Foreign investors will, however, experience some limitations when it comes to the ownership of land, such as being prohibited from owning land immediately next to rivers, oceans, and international borders. Past transfers of titles are also inadequately documented, leaving large gaps in the public records and thus confusion of actual ownership.

Sectors such as energy, agriculture, and the services industry offer remarkable potential for investment. The country’s exports totaled US $10.8 billion in 2014 and US $7.46 billion through August of 2015. In the 2015 Index of Economic Freedom, Guatemala ranked 87th in the world and 17th in the region—a clear sign that the capacity for improvement remains.

ECONOMIC PILLARS
Perhaps the most important sector of the Guatemalan economy is agriculture, which accounts for 13.7 percent of GDP and anywhere from one-third to one-half of the total labor force, depending on the season. Sugar and coffee are the main agricultural exports, and bananas, vegetables, livestock, and other products contribute significantly to GDP. Energy and industry also play a vital role in Guatemala’s economy. The nation is a net exporter of electricity to the

interregional power network known as SIEPAC, and oil and renewable sources such as hydro, solar, and wind are becoming increasingly prominent. Industry accounts for 29 percent of Guatemala’s GDP and 14 percent of the labor force. The nation’s output encompasses products such as beverages, furniture, clothing, chemicals, precious metals, non-perishable food items, furniture, and pharmaceuticals.

A LONG PROMISE OF EMERGENCE
The 1996 Peace Accords represent the most significant outcome of the end to Guatemala’s Civil War. Economic reforms were built into the very agreement, the implementation of which paved the way for considerable economic gains from trade freedom and tax relief. Yet Guatemala has not broken completely free of its past, and many sought-after reforms have not yet been realized. The rule of law is still weakly enforced, and it is estimated that corruption in customs offices results in an annual cost of US $1.5 billion. Although the political climate is considered stable—despite the recent resignation of the president and his cabinet—crime and violence continue to disrupt the country’s economic potential, with an annual cost estimated at 7.7 percent of GDP.

In order to increase its bond market, Guatemala targeted foreign institutional investors by issuing two Eurobonds in 2012 and 2013, each for US $700 million.

Related to crime and unrest is the issue of poverty. Guatemala’s poverty rate decreased from 56 percent to 51 percent from 2000 to 2006, but it rose again shortly thereafter and currently hovers around 54 percent. A large portion of this demographic is in extreme poverty, surviving on next to nothing per day. Many of these people are among the indigenous populations that represent approximately half of the country’s overall population. The unemployment rate of 2.9 percent is low and is expected to increase slowly to slightly over 3 percent by the year 2020, but much of the workforce labors long hours in low-paying jobs that

EXCEPTIONAL OPPORTUNITIES
Agriculture represents 41 percent of the nation’s exports and is one area where private and government sectors are working together successfully. The nation is concentrating more on organics to meet global demands, and the quality of Guatemala’s verdant soil, its abundant forests, and its potential for aquaculture are assured. With the planned expansion of the regional power grid SIEPAC, Guatemala’s energy sector also has significant investment potential. It is anticipated that the SIEPAC grid will be expanded and enhanced in neighboring countries, which will strengthen the demand for electricity in Guatemala. In addition to electricity, oil has great potential for investment.

The nation has a large number of oil wells but does not have a single refinery plant to transform the crude into a more usable finished product. With the addition of a refinery, Guatemala’s oil production capacity may at last meet its potential.

Business process outsourcing (BPO) also holds great promise as a developing industry with a tremendously high ceiling. This industry is underpinned in large part by the nation’s youth—some 70 percent of its 15 million residents are under the age of 40. As Guatemala focuses more on educating this very young population, BPO is becoming a very attractive career choice for that demographic. While this is a newer market for Guatemala, the nation can now claim a 10-year history with BPO call centers, the last five of which have been characterized by substantial government involvement as it promotes this industry in the academic and private sectors. This has resulted in an increasing percentage of educated Guatemalans who are bilingual, and new trends in education will only increase this percentage in the future.

CHALLENGES REMAIN
More than 200 foreign firms are currently investing in Guatemala due to the U.S. Dominican Republic–Central America Free Trade Agreement (CAFTA-DR). Foreign direct investment (FDI) increased by 18 percent from 2013 to 2014, and 400 percent since 2003, reaching US $12.1 billion. These foreign investments are predominately in oil production, energy, and agriculture.

These foreign investors face serious challenges, however, that have been present for many years. The Guatemalan government has complex laws and regulations, as well as internal conflicts in its judicial system. The international community, as well as local organizations and the government itself, continues to encourage reform, particularly in the area of labor law, but corruption and illegal practices still exist and impact foreign investment negatively.

Additional obstacles exist for foreign investors as well, such as the requirements to demonstrate solvency, supply financial statements, and deposit operating capital into a Guatemalan bank. They must also sign a contract stating they will satisfy all debts before leaving the country. While these requirements are not in place to act as a deterrent, the degree of difficulty within them and the amount of time involved place barriers in front of investors.

Bidan

US Vice-President Joseph Biden gives presents to students during a visit to Villa Nueva municipality, 20 km south of Guatemala City on March 3, 2015. Leaders from Guatemala, El Salvador and Honduras were meeting with US Vice President Joe Biden for two days of talks on the crisis of child immigrants entering the United States.

Even with these challenges, Guatemala represents a tremendous possibility for foreign investment. Its financial system is represented by 18 banks, 14 financial institutions, and 15 bonded warehouses that offer numerous financial services. It also yields solid international reserve levels and has the lowest foreign debt in the region.

ATTEMPTS AT TRANSFORMATION
The United States, which represents approximately one fourth of the region’s FDI, has entered into agreements with Guatemala and other Central American countries to promote important areas of interest. Earlier this year, the Joint Statement of Commitments, which was signed by Vice President Joseph Biden along with the Presidents of Guatemala, El Salvador, and Honduras, was implemented to assist the region with the productive sectors of the economy, including the development of human capital, citizen security, social inclusion, and a much needed enhancement to the legal system. Citizen security and public safety are also of major concern and are being addressed with this Joint Statement, due in large part to the United States’ outspoken concern over Guatemala’s lack of enforcement of its labor and environmental laws. These efforts to create a safer environment for the work force will lead to further foreign investment.

Public debt in Guatemala is approximately 24 percent, while government consumption comprises 14.1 percent of the domestic output.

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