At the Central America Travel Market (CATM) in San Salvador in October there were a large number of international hotel chains exhibiting. Among them were InterContinental Hotels Group, representing both Holiday Inn and the flagship Inter­Continental brand, Hilton, Marriott, and Spanish chains Riu and Barcelo. The hotels were not there to simply cut deals with tour operators and airlines, but for investment opportunities.

InterContinental, for example, is one of the biggest hotel investors in the region. It has properties in Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. Under the Real Hotels brand, it invested $7m in 2006 on upgrading rooms; this year it spent a further $5m on upgrading conference and banquet facilities. Real also controls the Marriott franchise through which it is opening two hotels in Bogotá, and adding a further 100 rooms to its operations in Panama.

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Alejandro Cerna, tour and travel sales manager at InterContinental, Guatemala, says: “There is a lot of demand for business hotels. Central America is very pro-business, pro-market.” Mr Cerna cites Panama as a prime example, long a favourite for FDI.

Riu, for example, is spending $125m on a hotel in Panama City, in the heart of the city’s financial district, which is due to open in November 2010. Of the seven countries that make up central America (Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama), it is Panama that has historically attracted the most FDI. From 2000 to 2008 it attracted more than $10.7bn in investments, with 2006 a record year when HSBC bought the Panamanian bank Banistmo, boosting that year’s investment to nearly $2.5bn.

Panama’s strategic location, the canal, the fact that its currency is the US dollar, its stable government and a well-established network of tax-free zones all contribute to this. It is also way ahead of its neighbours in creating the right economic climate for investment, having passed a law in 2007 which incentivises multinationals to invest in a network of factories throughout the country, rather than just a single branch. Among the big names it has attracted are Hewlett-Packard, 3M and Procter & Gamble.

 

Second Switzerland

Costa Rica is often called the Switzerland of central America; with no army and no violent political past it stands in stark contrast to its neighbours. As a result it has been on a par with Panama in terms of attracting FDI: in 2003 its total FDI receipts were $575m; last year the figure topped $2bn.

However, the Switzerland comparisons go further – it is also the most expensive central American country and there is also much more red tape in terms of attracting foreign companies than its neighbours. This means that as its neighbours continue to pass laws easing restrictions on FDI, it is getting left behind.

Costa Rica dominates the investment market between central America and the UK, making up about 70% of trade between the two regions. The British Embassy in the capital San Jose runs a UK Trade and Investment website (www.uktradeinvest.gov.uk) and the top UK investors in Costa Rica include medical companies, as well as GlaxoSmithKline and AstraZeneca, and construction companies. It is also keen to attract the huge investments its neighbours have from telecommunication companies.

The embassy organises a biannual fair and the most recent, on August 12, focused on telecoms, which was opened up this year through the Central America Free Trade Agreement with the US.

Costa Rica has been hit hard by the economic downturn, mainly because it relies so heavily on US investment (some $1.2bn of the $2bn invested last year originated from the US), and to that end the government is organising Costa Rica Investment World next April, which aims to promote its emerging sectors of medical equipment, electronics, software and services such as call centres.

 

Reputation to shake

In June, El Salvador also elected a pro-business, pro-market government and the country is trying desperately hard to shed its violent image to attract foreign investors (which is frustrating for many locals because the civil war ended in 1991). In 2007, El Salvador attracted $1.5bn in FDI – its best year yet, but for many local operators this figure falls way below the country’s potential.

Rodrigo Moreno, marketing manager of Salvadorean Tours, says: “Not enough people come here. They do not think of the country as a place to invest, but they are missing a big opportunity. Everything is virgin. There is a market here that hasn’t been developed.” Mr Moreno’s point is backed by the fact that the only big-name hotels in the country, such as Hilton and InterContinental, are based in San Salvador and the Pacific coastline is largely untouched by development.

Yet the country is regarded as having the best network of highways in central America. It also has the best connectivity in the region, with nearly 100% mobile phone coverage and wireless in most public spaces. And like Panama, it uses the US dollar as currency. The capital also has the largest convention centre in central America, and for the past two years it has hosted the Central America Showcase, which highlights what the country has to offer in terms of business opportunities. That was shelved this year due to the economic downturn, but is likely to be revived in 2010.

The main industries in El Salvador are coffee production, tourism (business and leisure, and increasingly medical), offshoring (specifically call centres) and textiles. The government has designated a number of areas around the capital, the airport and towards the coast as tax-free zones, mainly for textile production, and is in the process of drawing up a five-year plan to attract business to the country.

Adriana de Gale, executive director of the El Salvador Convention Bureau, says: “The government is pro-business. It wants to attract inward investment and it is looking for guidance from the private sector.” Ms De Gale believes that it will only be a matter of time before the government follows the lead of Panama and puts in place generous tax breaks to attract foreign investors.

However, El Salvador has been far from immune from the downturn and in the past year its heavy reliance on the US for investment particularly in textiles and car parts has led to factory closures, rising unemployment and strikes.

 

Devastation and diversification

Honduras is the original ‘banana republic’, so-called because of the dominance of the major US fruit companies such as Dole and Del Monte in the country. The huge devastation caused by Hurricane Mitch in 1998 to the fruit crops and the economy led to diversification. In the past five years, major investments by telephone companies and electrical firms has led to a doubling of FDI in the country to $800m.

The president of the central bank of Honduras, Edwin Araque, puts this down to a stable economic climate and a foreign investment law encouraging companies to set up in the country. But the devastation wreaked by Hurricane Mitch could pale in comparison with the damage the political crisis that has engulfed the country since June could do.

Speaking at CATM, former tourism minister Ricardo Martinez, said: “According to the Economic Commission of Latin America, investment, infrastructure and quality of life, such as getting people out of poverty, has been set back by 10 years. Tourism is going to play an important role in the recovery of the economy. We need to repair the country’s image and one of the fastest ways we can do that is with tourism.”

The $250m expansion of the major port at Puerto Cortes, a highway connecting the coast to the border of El Salvador, and the planned airport at the town of Copan have all been shelved due to the political crisis. However, private investment such as the expansion of a cruise terminal on the island of Roatan and a controversial hotel development in Tela on the Caribbean coast will continue.

InterContinental’s Alejandro Cena admits that it is tough at times to do business in a region which is still marred by unstable governments, such as in Honduras. “The politics of the countries do impact. It does affect business, but our group believes it is important to invest in the region.”

What is particularly hard for neighbours such as Guatemala and Nicaragua – which both enjoy stable economies and governments – is being branded by association with Honduras. Their chief concern is that if the world sees Honduras as able to slip into political paralysis, investors will assume that its neighbours are equally unstable. As Mr Martinez said at CATM: “This is 2009. We don’t have coups any more.”

Coups notwithstanding, the US’s recent return to growth and central America’s ongoing march towards pro-business, pro-investment governments should mean that 2010 will see a return to FDI in the region.