Identifier
Created
Classification
Origin
05GUATEMALA218
2005-01-31 13:20:00
UNCLASSIFIED
Embassy Guatemala
Cable title:  

GUATEMALA: 2005 INVESTMENT CLIMATE

Tags:  EINV KIDE KTDB EFIN ECON GT USTR OPIC 
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UNCLAS SECTION 01 OF 08 GUATEMALA 000218

SIPDIS

STATE FOR EB/IFD/OIA

PASS TO USTR AND OPIC

E.O. 12958: N/A
TAGS: EINV KIDE KTDB EFIN ECON GT USTR OPIC
SUBJECT: GUATEMALA: 2005 INVESTMENT CLIMATE
STATEMENT

REF: STATE 250356

Following is the 2005 Investment Climate Statement
for Guatemala. Report is keyed to format outlined
in REFTEL.

Begin text:

VII. Investment Climate

A.1. Openness to Foreign Investment

Many U.S. and other foreign firms have active
investments in Guatemala. Though Guatemala passed
a foreign investment law in 1998 to streamline and
facilitate foreign investment, time-consuming
administrative procedures, arbitrary bureaucratic
impediments and judicial decisions, a high crime
rate and corruption are often cited as reasons why
direct investment has been stagnant. A new pro-
business administration took office in January
2004, ending the atmosphere of confrontation that
existed between the government and the private
sector that weighed on investment decisions during
the previous four years. There are no impediments
to the formation of joint ventures or to the
purchase of local companies by foreign investors.
The absence of an equities market in which shares
of publicly traded firms are exchanged makes non-
friendly acquisitions or takeovers virtually
impossible. Most foreign firms operate as locally
incorporated subsidiaries.

Both domestic and foreign firms must publish their
intent to conduct business, agree to Guatemalan
legal jurisdiction, and register with the Ministry
of Economy in order to incorporate formally in
Guatemala. Foreign firms are subject to
additional, often time-consuming requirements,
including demonstrating solvency, depositing
operating capital in a local bank, supplying
financial statements, contractually agreeing to
fulfill all legal obligations before leaving the
country, and the appointment of a Guatemalan
citizen or foreign resident (with work permit) as
legal representative. The requirements are not
used specifically to screen or discriminate
against foreign companies, but the procedures can
serve as a disincentive to investment.

The Foreign Investment Law removed limitations to

foreign ownership in domestic airlines and ground
transport companies in January 2004. However,
some specific restrictions remain in a few
sectors, such as auditing, insurance and forestry.
For example, foreign insurance companies are not
permitted to open branches in the country but
might operate as locally established companies.
There are no restrictions on foreign investment in
the telecommunications and electrical power
generation sectors.

The GOG privatized a number of state-owned assets
in industries such as power generation and
distribution, telephone, and grain storage in the
late nineties. Upon taking office in January
2000, the previous administration indicated that
it would review all previous privatizations and
concessions, and initiated a process to review the
1999 privatization of the telephone company. In
October 2001, the GOG reached an agreement with
the telephone company. The previous government
also stated that it would unilaterally review all
power purchase agreements, affecting the sector
with the greatest foreign investment. The
government subsequently decided not to take any
action. More recently, the semi-autonomous Human
Rights Ombudsman successfully reversed efforts by
the electrical ratemaking authority to reduce
subsidies mandated by the previous administration
and establish a more rational rate structure,
efforts supported by the current administration
and the IMF. These politically motivated
interventions into privatized businesses and their
regulatory authorities have tended to erode
investor confidence, despite the commitment of the
current administration to upholding contracts and
respecting regulatory autonomy.
Subsurface minerals and petroleum are the property
of the state. Contracts for development are
typically granted through production-sharing
agreements, which, in the past, were often
negotiated in a non-transparent manner. New
legislation has resulted in a more transparent
process, though the suspension in 2002 of a
hydrocarbon exploration contract, on environmental
grounds, without due process, raised some concerns
among investors. The government is planning to
introduce new mining legislation in 2005 to
encourage foreign investment in the sector while
ensuring modern standards of environmental
protection. Recent violent protests of a major
gold mining project are a reminder that mining has
historically been a sensitive issue in Guatemala.

Tariffs are based on the Common Duty System (SAC)
of the Central American Common Market (CACM),
which uses an eight-digit code based on the
Harmonized Code. In most cases, tariffs range
between 0-15 percent.

Guatemalan exports currently enjoy preferential
access to the U.S. market through the Caribbean
Basin Initiative (CBI),the Caribbean Basin Trade
Partnership Act (CBTPA) and the Generalized System
of Preferences (GSP). The U.S. - Central America
Free Trade Agreement (CAFTA),when ratified and
implemented, will expand these benefits and
provide additional access and guarantees for U.S.
investment, services, and intellectual property
rights. Current programs, together with favorable
agricultural conditions, favor nontraditional
exports such as cut flowers, seasonal fruits and
vegetables, which have seen rapid export growth
over the last decade. Textile and apparel
assembly activities have grown as a result of CBI
enhancement in October 2000. However, rising
labor costs relative to the Far East and Central
American neighbors, high electricity costs, an
overvalued local currency, and the WTO-mandated
lifting of quotas in January 2005 raise questions
over the sector's continued viability.
Implementation of the CAFTA, which broadens rules
of origin and provides a tariff preference in the
U.S. market with respect to Asia, will be critical
for the sector.

A.2. Conversion and Transfer Policies

The rights to hold private property and to engage
in business activities are specifically recognized
by the Guatemalan Constitution. Foreign private
entities have the right to establish, acquire and
dispose freely of virtually any type of business
interest, with exceptions for insurance, auditing
and forestry as noted above. Guatemala's foreign
investment law protects the investor's right to
remit profits and repatriate capital. There are
no restrictions on converting or transferring
funds associated with an investment (or any other
licit activity) into a freely usable currency at a
market-clearing rate. U.S. dollars are freely
available and easy to obtain within the Guatemalan
banking system. There are no legal constraints on
the quantity of remittances or any other capital
flows, and there have been no reports of unusual
delays in the remittance of investment returns.
In the past, the Central Bank had the legal
authority to impose restrictions on remittances.
However, the Law of Free Negotiation of
Currencies, in force since May 2001, eliminated
the Central Bank's legal authority to impose those
restrictions.

The Law of Free Negotiation of Currencies allows
Guatemalan banks to offer different types of
foreign currency-denominated accounts. In
practice, the dollar is the only foreign currency
used with any significance. Some banks offer "pay
through" dollar-denominated accounts in which the
depositor makes deposits and withdrawals at a
local bank with the actual account maintained on
behalf of the depositor in an offshore bank.

Capital can be transferred from Guatemala to any
other jurisdiction without restriction.
Guatemalans historically have not participated in
major direct investments outside of Central
America, the Dominican Republic, and South Florida
(principally real estate).
A.3. Expropriation and Compensation
The Constitution prohibits expropriation except in
cases of eminent domain, national interest, or
social benefit. The foreign investment law
requires advance compensation in cases of
expropriation.

A.4. Dispute Settlement

Resolution of business disputes through
Guatemala's judicial system is time-consuming and
often unreliable. Civil cases can take as long as
a decade to resolve. Corruption in the judiciary
is not uncommon.

The Government of Guatemala has signed the United
Nations Convention on the Recognition and
Enforcement of Arbitral Awards (New York
Convention) as well as the Interamerican
Convention on International Commercial Arbitration
(Panama Convention). In addition, Guatemala has
signed the Convention on the Settlement of
Investment Disputes between States and Nationals
of other States (ICSID),which was approved by the
Guatemalan Congress in 1996 but has not been
ratified by the Executive Branch. The foreign
investment law permits international arbitration
or alternative resolution of disputes, if agreed
by the parties.

Guatemalan procedures for enforcing agreements do
not differ significantly from those of the United
States. Guatemala's Arbitration Law of 1995 is
based on the UNCITRAL Model Law for International
Commercial Arbitration. Therefore, Guatemalan
regulations applicable to these matters are fully
in line with the New York Convention. Default
awards and arbitral agreements can be fully
enforced in Guatemala.

A.5. Performance Requirements/Incentives

Guatemala does not impose performance, purchase or
export requirements other than those normally
associated with free trade zones and duty drawback
programs. There are no conditions on locations in
specific geographic areas or on the percentage of
local content in production.

Guatemala eliminated remaining trade-related
investment restrictions with the 1998 foreign
investment law and became compliant with WTO
obligations stemming from the Agreement on Trade
Related Investment Measures (TRIMS). Guatemala
sent its notification of TRIMS compliance to the
WTO in 1999.

Investment incentives are specified in law and are
available, with few exceptions, to both foreign
and Guatemalan investors without discrimination.
The major Guatemalan incentive program, the Law
for the Promotion and Development of Export
Activities and Drawback, is aimed mainly at
"maquiladoras" - manufacturing or assembly
operations for which over half of production
inputs and components are imported and the
completed products are exported. Incentives
include exemption of duties and value-added taxes
on imports of machinery and a one-year suspension
of duties and value-added taxes, which can be
extended to a second year, on each import of
production inputs and packing material. Taxes are
then waived when the goods are re-exported. Some
investors claimed that significant payments were
demanded by officials of the previous
administration in order to process tax waivers or
value added tax rebates, but this situation has
reportedly improved. Investors in this sector are
also granted a 10-year income tax exemption, and
are also exempt from the Temporary and
Extraordinary Tax to Support the Peace Agreements
(IETAP),Guatemala's alternative minimum tax on
either net assets or gross income, during the 10-
year income tax exemption period. The income tax
exemption will be eliminated if the CAFTA enters
into force.

Property owners who engage in reforestation
activities may qualify for government incentives
through the National Institute of Forests (INAB).

A.6. Right to Private Ownership And Establishment

The right to hold private property and to engage
in business activity is recognized in the
Guatemalan Constitution. The foreign investment
law specifically notes that foreign investors
enjoy the same rights of use, benefit, and
ownership of property as afforded Guatemalans.
These rights are subject only to the limitations
imposed by the Guatemalan Constitution.
Foreigners are prohibited from owning land
immediately adjacent to rivers, oceans and
international borders.

A.7. Protection of Property Rights

Land invasions by squatters have become common in
rural areas. It can be difficult to obtain and
enforce eviction notices, as land title is often
clouded and the police have tended to avoid
actions against squatters that could provoke
violence. The government has stepped up its
efforts to enforce property rights where title is
clear, and some incidents have led to violence and
deaths.

Mortgages are available for both home and business
purchasers, though in practice, few banks offer
loans for residential real estate for longer than
five-year terms.

The legal system is accessible to foreigners and
does not discriminate on the surface. However, in
practice, it favors a "home team" accustomed to
maneuvering a case through the process, and
corruption is common. The need for foreign
investors to secure reliable local counsel cannot
be stressed enough.

Regarding intellectual property rights (IPR),
Guatemala belongs to the World Trade Organization
(WTO) and the World Intellectual Property
Organization (WIPO). It is also a signatory to
the Paris Convention, Bern Convention, Rome
Convention, Phonograms Convention, and the Nairobi
Treaty. Guatemala has ratified the WIPO Copyright
Treaty (WCT) and the WIPO Performances and
Phonograms Treaty (WPPT).

The Guatemalan Congress passed legislation in
August 2000 to bring the country's intellectual
property right laws into compliance with the WTO's
TRIPS agreement. This legislation was modified in
2003 to provide test data protection more
consistent with international practice, but
December 2004 legislation then effectively removed
data protection for pharmaceutical products and
agricultural chemicals. The government was
expecting to reform this legislation in early 2005
to make it consistent with the requirements of the
CAFTA. The Attorney General appointed a special
prosecutor devoted to IPR violations in May 2001
in an effort to improve the government's
enforcement actions, but successful prosecution of
violators is rare.

High piracy rates remain an ongoing concern. The
piracy rate for software applications, as reported
by the Business Software Alliance, increased from
61 percent in 2002 to 77 percent in 2003
(principally due to a worldwide change in
measurement methodology).

A.8. Transparency of the Regulatory System

Bureaucratic hurdles are common for both domestic
and foreign companies. Regulations often contain
few explicit criteria for government
administrators, resulting in ambiguous
requirements that are applied inconsistently or
retroactively by different government agencies.
The administration that assumed power in early
2004 has repeatedly expressed its intention to
improve matters, and its initial results have been
promising. Most public procurement is now handled
through an internet-based system that is open to
the public, and a system of "e-government"
permitting government requirements to be completed
online is reportedly approaching the
implementation stage.

The creation of the semi-autonomous
Superintendence of Tax Administration (SAT) in
1999 was expected to improve customs procedures,
but results under the previous administration were
at best disappointing, leading international
donors to suspend their assistance. The new
government has begun implementing a more
systematic and professional approach to its task,
focusing more on advance processing of electronic
documentation and less on random inspections.
Additionally, corrupt customs officials are being
systematically weeded out. Guatemala officially
implemented in its domestic legislation the WTO
Customs Valuation Agreement on August 10, 2004.

Public participation in the promulgation of
regulations is rare, and there is no consistent
legislative oversight of administrative rule
making.

A.9. Efficient Capital Markets and Portfolio
Investment

Guatemala's capital markets are weak and
inefficient, though some consolidation and
restructuring have begun as the result of
financial reforms legislated in the past few
years. Guatemala's 28 commercial banks, three of
which are currently facing liquidation, have only
an estimated USD 9.3 billion in assets among them.
The five largest banks control about 61 percent of
total assets. In addition, there are about 18
private non-bank financial institutions, which
perform primarily investment banking and medium
and long-term lending, and seven exchange houses.
The Superintendence of Banks (SIB) is charged with
regulating the financial services industry.

Previous banking regulations and practices
provided banks and other financial services
providers wide latitude in valuing assets and
evaluating the performance and quality of those
assets. In April 2002, the Guatemalan Congress
passed a package of financial sector regulatory
reforms that have increased the scope of
regulation and supervision and brought local
practices more in line with international
standards. The reforms include a new Banking and
Financial Groups Law, a Financial Supervision Law
and the Central Bank Law. The laws should
encourage further consolidation of the banking
system into a smaller number of stronger banks.

According to the new Banking and Financial Groups
Law, groups of affiliated credit card, insurance,
finance, commercial banking, leasing, and related
companies must issue consolidated financial
statements prepared in accordance with uniform,
generally accepted accounting standards. These
groups are then each subject to audit and
supervision on a consolidated basis. This is
requiring bank groups to include non-performing
assets they used to park offshore in their
calculation of loan loss provisions and capital
adequacy ratios. The new calculations, in turn,
are requiring a number of banks to seek new
capital, buyers, or mergers with stronger banks.
As of December 2004, the Superintendence of Banks
had approved the establishment of 14 financial
groups, 11 of which include licensed offshore
banks.
The Guatemalan Congress passed strong anti-money
laundering legislation in December 2001, and
Guatemalan authorities developed an aggressive
plan to prevent use of its financial system by
money launderers, e.g., enactment of regulation to
control offshore activities and establishment of a
Financial Intelligence Unit. The recent progress
in money laundering and bank regulatory reform led
to Guatemala's removal from the Financial Action
Task Force's list of non-cooperating countries in
the fight against money laundering in July 2004.

There are two principal commercial exchanges that
deal almost exclusively in commercial paper and
government bonds. There is virtually no market in
publicly traded equities. Borrowers now face real
interest rates in the range of 3-13%. Foreign
investors are reported to be active participants
in financial markets and are large holders of
government debt. Foreigners rarely rely on the
local credit market to finance investments.

A.10. Political Violence

The Guatemalan government and the guerrillas of
the Guatemalan National Revolutionary Unity (URNG)
signed an Accord for a Firm and Lasting Peace on
December 29, 1996, ending the 36-year internal
armed conflict. Political violence, which was
already much reduced from the worst years of that
conflict (1979-1984),decreased to even lower
levels after the demobilization of guerrilla
forces and civilian defense patrols, and a
dramatic reduction in the size and role of
Guatemala's regular army. Resumption of large-
scale armed political conflict appears a remote
possibility, though there are occasional incidents
of violence associated with organized land
invasions, protests against mining, and the like.

While political violence is much reduced,
Guatemala is experiencing a post-conflict wave of
common crime, including kidnapping, car-jacking
and robberies of banks and armored cars. Personal
security from crime was a major campaign issue in
the 2003 general elections and remains a
widespread concern, according to public opinion
surveys. Violence is sufficiently widespread in
Guatemala that it is often impossible to tell
whether crimes, including murders, are motivated
by politics, interpersonal conflicts, organized
crime activities, or are simply the result of
random violence. Foreigners are not singled out
as the targets of crime but, like Guatemalans,
must remain watchful. Large firms report that
security adds as much as 25 percent to the
variable cost of doing business in Guatemala.

Guatemala has a border dispute with Belize, and
territorial sea disputes with Belize and Honduras.
Guatemala remains committed to resolving these
disputes through diplomatic means. Talks with
Belize under the auspices of the Organization of
American States (OAS) have stalled. Honduras is
participating in the Guatemala-Belize discussions
leading to resolution of its maritime dispute with
Guatemala.

A.11. Corruption

Though bribery is illegal under the penal code,
corruption is a serious problem that companies may
encounter at nearly any level. Investors have
historically found corruption most pervasive in
customs transactions, particularly at ports and
borders away from the capital. Guatemala ratified
the Inter-American Convention against corruption
in July 2001, but has not implemented all of its
provisions, such as criminalizing illicit
enrichment. However, enrichment related to
narcotics trafficking activity is now illegal.
Several senior officials who served during the
Portillo Administration are under investigation
for their role in corruption scandals, and the
former Finance Minister, Comptroller General and
Superintendent of Tax Administration are in jail
pending trial. The former Vice President is free
on bail, as are several senior military officers
charged with looting the military budget during
the previous administration. Guatemala signed the
UN Convention against Corruption in December 2003,
but it has not been ratified.

B. Bilateral Investment Agreements
Guatemala has signed bilateral investment
agreements with Argentina, Cuba, Chile, France,
South Korea, Spain, Taiwan, and The Netherlands.
Guatemala has also signed bilaterally or in
conjunction with other Central American countries,
free trade agreements with Mexico, the Dominican
Republic and the United States (pending
ratification) and is currently negotiating free
trade agreements with Chile, Canada and Panama.


C. OPIC and Other Investment Insurance Programs

Guatemala ratified the Multilateral Investment
Guarantee Agreement (MIGA) in 1996. The Overseas
Private Investment Corporation (OPIC) is active in
Guatemala, providing both insurance and investment
financing. Obtaining Foreign Government Approval
(FGA) for OPIC applicants has generally been very
fast. For more information on OPIC programs, U.S.
investors should contact OPIC headquarters in
Washington, D.C. at tel. (202) 336-8685.


D. Labor

The minimum wage and maximum weekly working hours
are established by law and revised periodically.
The current minimum wage per day, after a recent
legislative increase, is USD 4.98 in agriculture
and USD 4.12 in commerce (at exchange rate of
USD=Q7.75). Current law requires an incentive
bonus be added to this minimum wage for all hours
worked, effectively bringing up the minimum wage
to USD 5.81 per day in agriculture and USD 5.97
per day in commerce. The wages of workers with
high-level technical skills however, can reach USD
25.00 per day. For day shift workers the
standard, six-day work-week is 44 hours; for night
shift workers it is 36 hours; for swing shift
workers it is 42 hours. Time-and-a-half pay is
required for overtime work. The Constitution
guarantees the right of workers to unionize and to
strike (Article 102 paragraph (q),and Article
104); the Constitution also commits the state to
supporting and protecting collective bargaining
and to respecting the stipulations of
international labor conventions (Article 106).
The rate of unionization is very low. According
to Labor Ministry statistics, 56,000 people --
approximately 3 percent of the country's formal
labor sector -- were union members in 2003, the
last year reported.

Managers of Guatemalan companies must be either
Guatemalan citizens or resident aliens with work
permits. The labor code specifies employer
responsibilities regarding working conditions,
especially health and safety standards, benefits,
severance pay, and bonuses. Employers are legally
required to pay bonuses equivalent to one month's
salary in July and December. The law establishes
a two-month probationary period for new employees.
If dismissed at any time after completing this
two-month period of employment, employees receive
separation pay equal to one month's pay for each
year worked. Employers are required to make a
12.67 percent contribution for social security.
Mandatory benefits, bonuses, and employer
contributions can add up to over 60 percent of an
employee's base pay. Many workers, especially in
agriculture, do not receive the full compensation
package mandated in the labor law and in practice
many labor rights are not well-enforced.

The estimated 1.8 million individuals in the
formal sector workforce are augmented by at least
three million more who work in the informal
sector. Many of these are underage for formal
sector employment. In rural areas in particular,
child labor remains a serious problem in certain
industries. The availability of a large,
unskilled and inexpensive labor force has led many
employers, such as construction and agricultural
firms, to use labor-intensive production methods.
Over a quarter of the overall workforce is
illiterate. In developed urban areas however,
education levels are much higher, and a workforce
with the skills necessary to staff a growing
service sector has emerged. Even so, highly
capable technical and managerial workers remain in
short supply.

USTR closed its review of worker rights in
Guatemala at the conclusion of the 2003 annual
review of the Generalized System of Preferences as
a result of positive steps taken by the government
in conjunction with the recently concluded U.S.
Central American FTA, which includes binding labor
provisions.


E. Foreign Trade Zones/Free Ports

Guatemalan law permits the establishment of "free
trade zones." Currently, there are twenty-one
authorized free trade zones in Guatemala, twelve
with operations. Textile assembly operations are
the common beneficiaries of Guatemala's free
trade/maquiladora laws.


F. Foreign Direct Investment Statistics

There is no reliable data on foreign direct
investment.

Major U.S. companies, including investors:
(representative, but not a complete listing)

ACS
American Cyanamid Co.
Avon products
Cargill
Citibank
Coastal Power
Colgate Palmolive
Constellation Power
Exxon
Gillette
Kellogg Co.
Kimberly Clark Corp.
Levi Strauss & Co.
Marriott Hotels
3M
Phillip Morris Inc.
Proctor and Gamble
Railroad Development Corporation
Ralston Purina
Sabritas-Frito Lay
Teco Power Services
Texaco
Warner Lambert
Xerox

Other major foreign investors:

Barcelo Hotel
BD Centroamericana
Bimbo de C.A.
Cindal-Nestle
Elektra
Ericsson de Guatemala
Shell Oil
Siemens
Telefonica de Espana
Telmex
Union Fenosa

End text.

Hamilton