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Central America in the Global Economy: Growth and Investment Strategies

July 18, 2007

Introduction

Marking nearly two years since the United States signed the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) into law, the Americas Society and Council of the Americas (AS/COA) held its first Latin American Cities Conference in Central America. Organized with PROESA, the investment promotion agency of El Salvador, over 300 senior-level private sector representatives and government officials benefited from analyses on the region’s growth and investment opportunities.

"Central America in the Global Economy: Growth and Investment Strategies" featured keynote speakers, two panels, and a dialogue between two representatives of successful Central American companies.

Keynote speakers included:

  • H.E. Elias Antonio Saca, President of El Salvador
  • H.E. Ana Vilma Albanez de Escobar, Vice President of El Salvador
  • H.E. Ruben Rochi, Minister of Tourism of El Salvador
  • David Lovegrove, Director, International Development Ireland

Conference panelists included:

  • John Hewko, Vice President of Operations, Millennium Challenge Corporation
  • Manuel Enrique Hinds, Former Minister of Treasury of El Salvador
  • Robert Ivanschitz, Director for Legal and Corporate Affairs Central America, Microsoft
  • Patricia Menendez-Cambo, Chair, International Practice Group, Greenberg Traurig, LLP
  • Fernando Paiz, Chairman of the Board, Wal-Mart Central America
  • Carlos Quintanilla Schmidt, Member of the Board, Scotiabank
  • Mauricio Samayoa, President, Grupo Cuscatlán
  • Roberto Sifón-Arévalo, Associate Director, Latin America Sovereign Ratings Group, Standard and Poor’s
  •  Felipe A. Bosch, Member of the Board, Corporación Multi-Inversiones
  • Roberto Kriete, Chairman and CEO, Grupo TACA
  • Susan Segal, President and CEO, Americas Society and Council of the Americas

The conference analyzed the importance of foreign investment in Central America, opportunities and challenges of regional integration, as well as competitiveness and the business climate. DR-CAFTA offers an important engine for growth. It is currently in force for all signatory countries except Costa Rica, which has yet to ratify the agreement.

The San Salvador Conference is part of the AS/COA’s signature 2007 Latin American Cities Conferences. This summary provides an overview of the main themes addressed.Summary

The conference focused on Central America’s current investment climate, growth opportunities, global integration, and the region’s successful business models. Presentations also highlighted Ireland’s experience in development as a model for innovation and competitiveness.Investment Climate and Opportunities

Analysts agreed that Central America offers attractive growth opportunities. The region’s average inflation rate, as well as its fiscal and trade balances, have proven to be more stable than that of the rest of Latin America. Central America enjoys a privileged geo-strategic position, with access to many major markets. Given these conditions, multi-national corporations are increasingly looking to Central America as a business hub.

Vice President Ana Vilma Albanez de Escobar highlighted Central America’s progress in areas such as education, technology and foreign investment. On the international front, the banking community now recognizes El Salvador and Central America as valuable banking centers and safer investment climates. El Salvador now needs to channel investment into key sectors, namely public infrastructure and renewable energy, according to the vice president.

Other speakers looked at regional growth and corporate decisions to expand business. Roberto Sifón-Arévalo outlined the general ratings outlook, which now hovers at an average grade of BB. El Salvador’s transition to the dollar was crucial in lowering interest rates and inflation, two key factors when it comes to attracting investors. But, looking ahead, Sifón-Arévalo noted that "between 2007 and 2008, fiscal results and consolidation of the economic system will be crucial."

According to Mauricio Samayoa, Citi’s decision to purchase Banco Cuscatlán and to expand Central American operations was influenced by large-scale client investments and a local business boom. "Heavy investment has strengthened Central America, confirming the confidence placed upon the region," said Samayoa.

However, some insist that the government must step up efforts to ensure a safer investment climate. Robert Ivanschitz pointed out that 92 percent of all software is sold illegally in El Salvador—in Central America that number remains at 76 percent. He emphasized that "every country still needs to follow through with the new obligations assumed under CAFTA and respect intellectual property."The Irish Case: A Model for Innovation and Competitiveness

David Lovegrove used the "Irish Model" to showcase innovative strategies for economic growth applicable to Central America. The historical parallels between Ireland and El Salvador in terms of immigration and post-conflict economies make the Irish case especially relevant.

Drawing examples from Ireland’s ability to become one of the most open and globalized economies in the world, Lovegrove noted best practices for attracting foreign investment. For Ireland, an internal consensus between unions, government, parties, and the opposition was crucial to bring needed investment and to promote economic development. Sound regulations and economic policies provide certainty to investors and are a key component of the Irish strategy. Overall, the factors that worked in Ireland are taking root both in El Salvador and across the region.

Central America in the Global Economy

Experts agreed that regional and global trade and integration have dramatically improved. For Vice President Ana Vilma Albanez de Escobar, key priorities are creating effective relationships with local and foreign investors and integrating small and medium enterprises into the global economy. These are opportunities created by DR-CAFTA.

In Central America, the MCC has signed projects totaling $850 million with the El Salvador, Honduras and Nicaragua governments, according to John Hewko. Ultimately, MCC’s development assistance aims to provide a catalyst for generating sustainable development. Funds have focused on rural development, export assistance, and infrastructure development—especially road maintenance and new highway construction. Together, such projects are important complements to DR-CAFTA and the many economic development benefits of free trade.

The region has benefited from global liquidity, low interest rates and high commodity prices. Fernando Paiz pointed out that government reforms have prompted greater investment, which, in turn, is providing a unique opportunity to promote growth and elevate living standards. Carlos Quintanilla Schmidt echoed Paiz’s assessment. In addition, trade agreements such as DR-CAFTA and a potential Central American-European Union association agreement are critical for stimulating regional economies and furthering integration into global markets. However, Paiz argues that Central American integration is still lacking important fiscal agreements necessary for helping to provide business with clear regional rules.

The consolidation of the banking sector, which has taken place in most emerging economies, is now apparent in Central America. Quintanilla attributes this, among other reasons, to demographics. According to a 2005 census, over 35 percent of Salvadorians are less than 15 years old, providing an attractive environment for banks seeking to grow credit portfolios.

Successful Central American Business Models

Roberto Kriete and Felipe Bosch analyzed successful business models in Central America, emphasizing globalization, competitiveness, and corporate social responsibility.

Kriete highlighted that confidence in the region has grown significantly. Investment is increasing and governments have solid, long-term development goals. Education is the best way to increase productivity and competitiveness, generate skilled jobs, attract investment, and improve living standards. As highlighted throughout the conference, strong institutions and clear regulations provide certainty and confidence to investors.

Bosch stressed the importance of governments with long-term visions and policies that transcend administrations. Increasingly, Central American countries are eliminating bureaucratic obstacles that hamper business development.