Caribbean & Central America - January 2023

Foreign direct investment (FDI) rebounded throughout Central America in 2021 after a sharp decline in 2020, with Costa Rica the top performer according to the latest annual report from the United Nations’ Economic Commission for Latin America & the Caribbean (Eclac).

The sub-region received a total of US$10.8bn in FDI in 2021, more than five times more than the previous year, which saw US$2.1bn in inflows, according to the latest Eclac report on FDI, published 29 November. The regional trend reflects that of Latin America and the Caribbean as a whole, which saw FDI increase 40.7% year-on-year to US$142.8bn, as well as a global increase of 64% year-on-year. 

Costa Rica topped the list of Central American countries, vis-à-vis FDI inflows, attracting US$3.6bn in FDI in 2021, up from US$2.1bn in 2020. This represents a third of total inflows for Central America and is more than the country’s average yearly FDI received over the last decade. Since 2013 Costa Rica has seen increasing investment in its manufacturing sector, and the pattern held in 2021. Three-quarters of the country’s total FDI was destined for manufacturing, with services representing a quarter of the total. The US is the largest source of investment accounting for 79% of the total, followed by Colombia (6%) and Spain (2%). The country has seen announcements for new investments in technology-intensive industries such as medical devices and IT, which are priority areas for the Agencia Costarricense de Promoción de Inversiones (CINDE), the body responsible for attracting investment. Other priority areas include knowledge services, smart manufacturing, and health and wellbeing. One of the largest recent investments saw German firm Bayer invest US$200m in a new pharmaceutical plant, which is scheduled to start production in 2024.

Guatemala vastly outperformed its 10-year average of US$1.16bn in FDI, receiving US$3.5bn in 2021. This was down to Luxembourg-headquartered  telecoms firm Milicom acquiring local operator Tigo Guatemala for US$2.2bn in cash, making Luxembourg the largest source of FDI for the year with 65% of the total. The next highest sources of FDI were Colombia (7%), Mexico (6%), Panama (5%), and the US (4%). However without the Tigo sale the country would have only marginally beaten its 10-year average in 2021.

• Guatemala investments

Other key investments in Guatemala according to the Eclac report include US electronics firm Intcomex opening a new distribution centre; a new production plant for Costa Rican food firm Cooperativa de Productores de Leche Dos Pinos; and a new plant for paper company GrandBay Paper and Care Products.

The third best performer in the region is Panama, which saw US$1.35bn in FDI in 2021, 163% more than the previous year. One important project is Italian firm Enel Green Power committing to build the Madre Vieja solar plant, a 30.88MW facility that will cost US$43m. As for the rest of the region, Nicaragua received US$1.22bn in FDI in 2021, higher than its 10-year average, with Mexican firm Rotoplas announcing a US$56m investment in a production plant. Honduras has not yet recovered to levels of FDI registered prior to the coronavirus (Covid-19) pandemic, receiving just US$876m in 2021, which is equivalent to 76% of its 10-year average. New investments have been falling since 2017, and US investment plunged 70% from 2020-2021, now representing only 11% of the country’s total. Similarly, El Salvador has failed to recover to pre-pandemic levels of investment and received US$313m in 2021.

Eclac executive secretary José Manuel Salazar-Xirinachs underlined the importance of FDI in a statement accompanying the new report. “In a region with generally low levels of investment, foreign direct investment is fundamental in designing a development model,” he said, referring to LAC as a whole. “The rolling crisis that the region is going through means we have to develop strategies to position LAC countries in the global investment environment,” added Salazar-Xirinachs. 

Countries throughout the region would do well to try and emulate Costa Rica’s successful approach to attracting foreign investment, but it’s not an easy trick to pull off. Guatemala’s President Alejandro Giammattei has lauded the country’s performance in attracting investment, but without the huge Milicom acquisition of Tigo Guatemala, last year’s figure would have been barely higher than the 10-year average. And attracting investment can sometimes be at odds with domestic political priorities, as Honduras’ President Xiomara Castro found when investors reacted badly to her much needed energy reform plans [EB-22-10]. But as Salazar-Xirinachs recognised, tough economic conditions throughout the region mean that attracting FDI is more important than ever for Central America and LAC as a whole.