Caribbean & Central America - August 2023

Costa Rica received the highest amount of foreign direct investment (FDI) of any country in Central America, with Panama in second place, according to a recently published annual report from the United Nations Economic Commission for Latin America and the Caribbean (Eclac).

The report, published 10 July, reveals that Costa Rica received US$3.673bn in FDI inflows in 2022, followed by Panama (US$2.513bn), Guatemala (US$1.352bn), Nicaragua (US$1.294bn), Honduras (US$1.082bn), and El Salvador, which recorded a negative balance of (-US$101m). Overall, the sub-region received US$9.813bn in FDI in 2022, down from US$11.144bn in 2021, and still lower than the pre-coronavirus (Covid-19) pandemic level of US$10.232bn in 2019. As a whole Latin America and the Caribbean received a record US$224.579bn in FDI in 2022, a 55.2% increase year-on-year.

Costa Rica’s inflows were predominantly recorded in manufacturing, which represented 68% of the total, and the US was responsible for 73% of inflows. Investment from Switzerland represented 9% of the total, followed by Colombia (3%), Mexico (2%), Spain (1%), and Germany (1%). The country has developed a strong track record in attracting investment from technology and professional services sectors, as well as life sciences.

As for Panama, inflows grew 43% compared to 2021 but remain below pre-pandemic levels. One significant project is a planned container port from Switzerland-based Mediterranean Shipping Company (MSC) worth US$1.4bn, and another is a biorefinery for the production of lower-carbon aviation fuel, announced in May 2022 by energy companies including SGP BioEnergy.

Guatemala saw a 61% decrease in FDI year-on-year, but 2021 saw a spike due to a large telecoms acquisition, and the 2022 figure of US$1.352bn is higher than inflows for 2015-2020. Most investments (77%) were made in the services sector, despite the fact that they decreased 67% year-on-year, followed by manufactures, which represented 12% of the total despite seeing a 45% fall year-on-year. Natural resources saw a 354% increase from 2021-2022, representing 7% of the total.

Nicaragua received 6% more FDI than in 2021, although the government does not release information on the origin or destination of investments. Honduras saw a 35% year-on-year increase, with 91% of investment in services. Inflows were dominated by Panama (29%), the US (23%), and Colombia (19%).

El Salvador is an interesting case, recording a 133% decrease in inflows compared to 2021. This is because US$294m was divested from the manufacturing sector, and investment in services also fell 35% year-on-year.

“The challenge of attracting and retaining Foreign Direct Investment that contributes effectively to the region’s sustainable and inclusive productive development is more relevant than ever,” said Eclac Executive Secretary José Manuel Salazar-Xirinachs. “There are new opportunities in an era of reconfiguration of global value chains and geographic relocation of production in the face of a changing globalization.”

For Central America, there may be opportunities in the nearshoring trend as companies selling to the US market relocate production facilities from Asia. This trend will largely benefit Mexico due to its geographical proximity to the US, but neighbouring Guatemala has also seen investments in new plants, such as a US$10m in an auto parts factory by Japanese firm Yazaki. Governments throughout the region are working to attract investment in order to drive growth, but political developments can affect the business climate. For example, Salvadoran President Nayib Bukele’s increasingly authoritarian governing style and refusal to release economic data has affected investor confidence, as shown by the negative FDI balance in 2022. As the US Department of Commerce wrote in an investment climate statement published December 2022, “the macroeconomic context and declining rule of law present some challenges”. 

There is a lesson here for other governments in the region, such as Guatemala, where a rolling political crisis around the ongoing electoral process threatens the country’s reputation as a safe place to invest. Nicaragua’s slide into authoritarian rule under President Daniel Ortega is also placing downward pressure on inflows, with concerns over US and European Union sanctions limiting growth, and Honduran President Xiomara Castro has also spooked investors with her plans to enact deep reforms in the energy sector. On the other hand, the stable investment climate in Panama and Costa Rica is a major reason for their longstanding status as investment hubs.