Caribbean & Central America - January 2021

Foreign direct investment (FDI) in Central America fell 6.4% from 2018-2019, according to a recent report from the United Nations Economic Commission for Latin America and the Caribbean (Eclac), but has proven more resilient than FDI to the region as a whole, which fell 7.8% for the period.

This is the steepest decline of any world region, according to the annual report, ‘Foreign Direct Investment in Latin America and the Caribbean 2020’, which was published 2 December 2020 and forecasts that inflows will plunge further in 2020. Central America attracted 7% of total FDI to Latin America and the Caribbean in 2019, according to Eclac. Of the Central American nations, only Panama (7.4%) and Guatemala (0.4%) saw an increase in FDI inflows in 2018-2019 from US$5.49bn to US$5.89bn, and US$994m to US$998m, respectively. FDI in Nicaragua fell from US$838m to US$503m during the period, a decrease of 39.9%; Honduras recorded a 31.3% fall from US$1.38bn to US$947m; in El Salvador it decreased by 19.9% from US$826m to US$662m and in Costa Rica it fell by 9.3% from US$2.76bn to US$2.51bn. The ranking of Central American countries in terms of the proportion of regional FDI received is largely unchanged year-on-year. Panama continues to lead the way, attracting just over half of FDI in the region, followed by Costa Rica with 21.8%. Guatemala (8.7%), Honduras (8.2%), El Salvador (5.8%), and Nicaragua (4.4%) complete the table.

In terms of sectors, services (58%) and manufacturing (34%) received the lion’s share of those inflows. Natural resources represents 4% and other sectors 3%. In terms of sources, 52% of FDI in the region came from the US, while intra-regional investment represented 6%. Costa Rica stands out for having received 60% of its FDI in manufacturing compared to 40% for services, inverting the average for the region. This is thanks to the country’s important healthcare industry, which attracted 21 investments in 2019, 100% of the total for Central America. Eclac also highlights investments from large telecommunications firms such as Millicom, headquartered in Luxembourg, and Mexican firm América Móvil, which are increasing their presence in the Central American market. Millicom acquired Telefónica Móviles Panamá for US$650m and committed US$500m to investment in high-speed internet in Honduras, while América Móvil pledged to invest US$300m in Panama’s ‘5G’ telecoms network over the next three years and signed a cooperation agreement with Spanish company Telxius Telecom in Guatemala to work on a proposed underwater internet cable on the Pacific coast.

FDI in Latin America and the Caribbean as a whole has declined fairly steadily from a peak of US$214bn in 2012 to US$161bn in 2019, demonstrating “the relationship existing in the region between FDI flows, the macroeconomic cycle and commodity price cycles,” according to Eclac. However, FDI in Central America has proven more resilient, increasing from US$6.2bn in 2010 to US$12.2bn in 2014 and remaining around that level until 2019, when FDI inflows totalled US$11.5bn. That said, the region is unlikely to escape Eclac’s forecast drop of 45%-55% of FDI inflows into Latin America in 2020 due to the coronavirus (Covid-19) pandemic.

Yet there are also reasons for optimism. Economies in the sub-region could benefit from a drive to shorten supply chains at a time of increased tensions between the US and China, with US firms looking to invest in “nearshoring”, bringing manufacturing capacity back to the Americas. Eclac also highlights the possibility of building subregional supply chains which take advantage of existing capacity in certain sectors, such as textiles, medical devices, and pharmaceuticals, which are well-developed in Central American nations.