Caribbean & Central America - September 2024

Central America received US$11.64bn in foreign direct investment (FDI) in 2023, a 12% increase compared to the previous year, according to a new report by the United Nations (UN) Economic Commission for Latin America and the Caribbean (Eclac).

This is the highest amount of FDI inflows that the region has received since 2018, when it brought in US$12.526bn, according to the latest edition of Eclac’s annual report which was published on 1 August. Every country in the region received more FDI in 2023 than the year prior, with the exception of Panama (-22.4%) and Nicaragua (-4.9%).

Costa Rica was the top performer, with a record US$4.69bn in inflows, up 28% on the previous year. Manufacturing contributed 55% of inflows, up 1%, while services surged by 60% year-on-year and contributed 42% of total inflows. A massive 56% of the total came from the US, followed by Belgium on 9%. The country ranked second in Central America for project announcements in 2023, with 117 projects worth US$1.64bn, but this represents a 35% drop on 2022. 

Panama was the second-largest recipient of FDI in the region, with US$2.33bn in inflows, but this was down 22% compared to 2022. Project announcements also fell, down 80% to just US$866m, the fourth-lowest figure in the last 10 years. 

• Panama

The drop in foreign direct investment (FDI) to Panama comes amid wider investor uncertainty following the shutdown of the massive Cobre Panamá mine last year amid massive unrest over a new contract which has since been struck down by the top court. This has led Panama to be downgraded by international credit ratings agencies Moody’s, Standard & Poor’s, and Fitch [EB-24-08].

Guatemala saw an 8% year-on-year increase in FDI to USD1.55bn, a figure below the country’s 2021 record but above the average of the last 10 years. Manufacturing saw a 75% increase year-on-year, but the sector represented just 21% of the total. Services represented 77% of the total but saw a 1% decrease and natural resources experienced a 55% decrease while accounting for only 3% of the total. Project announcements were worth around the same as in 2022 at US$480m, with renewable energy a significant contributor. One initiative, worth US$180m, will see European firm MPCES launch a project that includes a long-term power purchase agreement from a solar farm. 

Nicaragua received US$1.23bn in inflows in 2023, representing a year-on-year decline of 5%. In addition, only one project was announced last year: a US$137m warehouse to be built by Sri Lanka based logistics company EFL Global.

Next is Honduras with a total US$1.09bn, a 33% increase year-on-year and the country’s highest value since 2018. Manufacturing saw 386% growth to account for 36% of total inflows, while services remained the largest sector at 63% of the total despite a 28% decline year-on-year. As for project announcements, Honduras recorded US$1.73bn in 2023, around eight times more than 2022 and the highest figure in Central America. Most announcements were in natural resource- and labour-intensive industries, according to Eclac, with Chinese firms heavily involved. One example is a US$600m project to build nappy and detergent factories by Chinese firm Guangzhou Sunda International Trading Company.

Inflows to El Salvador increased 345% from US$171m in 2022 to US$760m in 2023, with the services sector contributing 87% of the total and manufacturing making up the remaining 13%. Project announcements fell by 53% to US$218m, but the telecommunications sector saw announcements worth US$150m. This is due to plans for a bitcoin mining site announced by Tether, a cryptocurrency firm based in the British Virgin Islands.

Eclac says that countries must do more to attract investment to take advantage of trends such as nearshoring and the energy transition, and it recommends the use of investment promotion agencies. Costa Rica’s investment promotion agency, Agencia Costarricense de Promoción de Inversiones (Cinde), is held up as an example to follow, and its success is borne out in the figures for both inflows and project announcements in recent years. However, emulating this success is difficult, relying on multifaceted efforts to develop strong regulatory frameworks, attractive tax policies, and an education system that can develop skilled workers. This means that inflows in value-added sectors such as high-end manufacturing will likely continue to flow to those countries such as Costa Rica that already present good conditions for investors, rather than to other countries in the region.