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CENTRAL AMERICA
From Site Selection magazine, March 2012
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Central America In 2012

Capital investors should take note of this region’s economic growth and stability, says an expert on the region and on finding locations in which IT and other enterprises can succeed.

by ESTUARDO ROBLES
I

nvestors are taking note of the recent period of higher economic growth in Latin America, especially when compared to the lagging growth experienced in most other parts of the world in that same period. In 2012, the overall Latin American region will continue to grow significantly, albeit somewhat slower, still making it the fourth consecutive year of high growth for most of its 21 nations, leaving behind a more-than-decade-long period of overall stagnation.

After years of a consistent stream of positive news coming from the region, companies and investors are changing their historic impressions and attitudes toward Latin America, and many are announcing 2012 as a year of increased spending, investment and expansion in the region. Conditions have never been as optimal as they are this year, and despite a few remaining challenges, for the first time these are being turned into opportunities.

This is especially the case in Central America, which is gearing up for the end of a WTO-authorized subsidy program. Investors and companies that establish a presence in the Central American region can take advantage of this program for 10 more years.

Easy to Overlook

The IMF recently reduced its Latin America regional growth forecast for 2012 from 4 percent to 3.6 percent, and in 2013 to 3.9 percent down from 4.1 percent. But Brazil is the principal cause for driving the regional estimate downward. After it grew at a year-on-year average of 5 to 6 percent, it slowed down to a mere 2.9 percent in 2011 and is expected to grow only 3 percent this year.

But other markets continued to grow at very high rates last year, including small countries like Ecuador at 8 percent and Panama at 10.5 percent; medium-sized countries like Peru at 7 percent and Chile 6.3 percent and larger markets such as Argentina and Colombia at rates of 9 percent and 5.5 percent, respectively.

With the exception of Panama, the other five Central American nations have not had the same luck with economic growth. The simplest explanation for this: Central America is small and simply overlooked by most.

While Latin America has a significant population of 560 million, the small Central American market is slightly more than 40 million people. A good rule of thumb for remembering each country and its population is the 7, 6, 5, 4, 3 rule. With the exception of Guatemala, which has over 14 million people, the sizes of each country decreases in the same order as they are geographically located along the Central American isthmus: Guatemala (14), Honduras (7), El Salvador (6), Nicaragua (5), Costa Rica (4) and Panama (3).

Interconnected Block

The Central American region is highly interconnected and can be considered as one single market. With over 50 years since the establishment in 1960 of the Central American Common Market, the region has grown comfortable with being treated as a single entity.

Many firms today operate in the region in ways similar to how they would in a large country such as the United States. Just as one regional office would have half a dozen or so U.S. states within its territory, one office coordinates management in one Central American country, and executives travel back and forth to the other countries for supervision. With the exception of a few border relationships, most Central American citizens are able to cross borders freely between countries carrying only their national ID cards.

Products are labeled as "Producto Centroamericano," and most goods that are produced in one country can immediately be commercialized in the entire region. This sense of regional integration is a result of years of collaboration between governments to establish a truly single market.

Despite these advances, the region is still about two decades behind in its original plan to have a common Customs Authority and a common currency. But they have been able to get electric interconnectivity finalized, and today all countries share a common electric backbone, which has created a very dynamic and profitable electric generation market.

Crossroads of Travel, Commerce and Data Networks

Blessed by an enviable geographical position, Central America is already at the crossroads of travel, commerce and even fiber optic networks. Panama on one end is the crossing point for five of the six major undersea cable networks, and Guatemala at the top end is traversed by the largest and fastest fiberoptic ring in Latin America, the Emergia cable which is owned by Telefonica.

This small region also houses three major airline hubs, the San Salvador and San Jose hubs which are operated by TACA airlines, and the Copa Airlines hub in Panama, all of which connect to U.S. and European carriers.

TACA was the result of the merger of four national flagship carriers from Guatemala, El Salvador, Nicaragua and Costa Rica into a single larger airline. Recently, they merged with Avianca of Colombia, turning the airline into a significant player in the Americas region.

Air cargo rates have become very competitive especially between the region and the United States, sometimes less than a fourth of the "per kg" rates that are quoted to Asian destinations. This could be considered an advantage for the manufacture or assembly of high margin products which require quick lead times.

Prices for sea freight have also relatively decreased in the last decade, although Central American importers and exporters still battle with container prices that are higher from Central America than all the way from Asia. Despite this price problem, geographical position still places transit times between Central America ports and U.S. ports at less than a week, and even a few days in some cases.

This makes a case again for industries that operate in the new economic paradigm and need to adapt quickly to market changes. And since Central American workers are known for their capacity to adapt to changing conditions, they are not against the production of small batches nor frequent design changes.

Resilient to Disasters, Ready for the Future

The small Central American nations are among the most resilient in the world. Despite being held hostage by global economic forces to which they have few defense mechanisms compared to larger countries, having its fair share of natural disasters over the years including hurricanes and earthquakes, and more importantly its fair share of political disasters, the region keeps going and business continues to operate. In order to gauge this region's actual stability, one needs to study this region through a different lens than has been used historically.

Investors who have visited the region in the past five years have taken notice of the change. Political leadership has matured, and a very real separation of political and economic affairs has become the norm. Governments are working hand in hand with business and are willingly serving the needs of foreign investors.

The convergence of a new world economic and business model, coupled with perfect timing, make the immediate future very bright for this region. And additionally, firms that establish a presence in these countries can still benefit from WTO 10-year tax holidays authorized only for a handful of small nations.


Estuardo RoblesEstuardo Robles is an international business developer, entrepreneur and economic development trainer and is founder of The Americas IT Business & Investors Forum (www.americasitforum.com). He is based in Austin, Texas.


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