Foreign Direct Investment: Which Central American Countries Have Benefited the Most and Least?

Despite its giant bet on Bitcoin, El Salvador is the Central American country that attracts the fewest foreign investors.

View of the city of Granada in Nicaragua

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LatinAmerican Post | Yolanda González Madrid

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Leer en español: Inversión Extranjera Directa: ¿Qué países de Centroamérica se han visto más y menos beneficiados?

In order to inject more economic power into a country, either by creating new companies or strengthening established ones, governments often receive foreign capital through Foreign Direct Investment (FDI) from economic entities of other nations. Therefore, this type of strategy does nothing more than generate benefits for the parties involved, especially for the country that receives said investment in favor of its financial growth.

According to data published by the Central American Monetary Council, Guatemala was the country with the highest FDI income in 2021 with a total figure of $3,311 million. This record reached by the nation chaired by Alejandro Giammattei is due, in large part, to the entire acquisition of the Tigo-Guatemala telecommunications company by the European firm Millicom, based in Luxembourg, who invested $2.2 billion for all his actions.

Likewise, it is worth mentioning that, according to information from the Guatemalan Ministry of Economy, the first quarter of 2022 saw an increase in FDI of 19.7% compared to last year, totaling more than $240 million. This reflects the confidence on the part of foreign investors in the country due to different factors such as the geographical location or the excellent political-economic situation. And it is that these resources are intended to contribute to the growth of manufacturing, communications, agribusiness, food, and tourism, among others.

Nicaragua, a Pleasant Surprise

Despite the political and social crisis that has been going on for years and the indications of a dictatorship, Nicaragua has been greatly surprised by its FDI income. The government of Daniel Ortega recorded $1.47 billion in 2021, an increase of 64.8% compared to the previous year, according to information from the Nicaraguan Central Bank. How has a country with so many problems managed to capture the attention of foreign investors, even above, for example, El Salvador?

The key in Nicaragua has been in its frankness and security when presenting its investment bets, mainly in sectors such as mining and electricity. Of course, none of this would have had that share of success were it not for the pact between the government and the private sectors to work for the benefit of the nation. Here, it would be worth the saying "one for all, and all for one".

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So, this recovery trend has been seen not only in the development of new projects but also in the activities of national companies with foreign capital and in the financing of international companies to their branches in the Central American country. And it is that, unlike some neighboring countries, Nicaragua's bet has several fronts that go from energy and mines, through trade and services, to industrial and financial sectors.

Last but not least, we find that one of the great steps that the Nicaraguan government has taken on this issue comes from trade agreements with the European Union and the United States. Precisely, the latter is the largest foreign investor and invested a figure that exceeds $400 million, much higher than that of Russia, which is Ortega's main ally. This boost to economic growth passes through the manufacturing and communications sectors, but above all because it is the main market for coffee.

What Happens in El Salvador?

El Salvador lives a case contrary to those already mentioned. However, it is worth noting that they have traditionally always received a lower FDI contribution than the rest of the Central American nations, and this time they are no exception. The Nayib Bukele government suffers from a lack of growth engines that are attractive to foreign investors, even though they have put a lot of dedication into implementing Bitcoin as legal tender.

As reported by the Central American Monetary Council, the Salvadoran nation added a total of $413.8 million in the first two quarters of 2021, not to mention that it closed the last semester with negative figures from -$19 million to -$80 million. Given this, different economists point out that the problem lies in the lack of a good economic plan and the lack of clarity on what type of investors to find.

Many pointed out that with the implementation of the Bitcoin Law a greater flow of investment would be seen, which did not happen. In fact, if Bitcoin has not made a difference, it is partly because there is no well-structured project beyond the announcement of Bitcoin City, whose future is increasingly uncertain. With all that, the Salvadoran government seems determined to continue betting on its projects with crypto assets, although nothing seems solid at the moment.

The truth of the matter is that El Salvador has a complicated panorama. Without certainties or guarantees, foreign investors will not want to risk their capital in a country that suffers -among many- an institutional deterioration. And is that if these shortcomings are not improved, FDI will continue to move away from Salvadoran territory to bet on nations that, dictatorships or not, have a clear plan for economic development.

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