Identifier
Created
Classification
Origin
06GUATEMALA49
2006-01-11 22:09:00
UNCLASSIFIED
Embassy Guatemala
Cable title:  

GUATEMALA: 2006 INVESTMENT CLIMATE STATEMENT

Tags:  EINV EFIN ETRD ELAB KTDB ECON GT OPIC EXIM 
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UNCLAS SECTION 01 OF 07 GUATEMALA 000049

SIPDIS

STATE FOR EB/IFD/OIA

DEPT PASS TO USTR, OPIC AND EXIMBANK

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB ECON GT OPIC EXIM
SUBJECT: GUATEMALA: 2006 INVESTMENT CLIMATE STATEMENT

REF: STATE 202943

Following is the 2006 Investment Climate Statement for
Guatemala. Report is keyed to format outlined in REFTEL.

Begin text:

VII. Investment Climate

A.1. Openness to Foreign Investment

The pro-business administration of President Oscar Berger took
office in January 2004. It has made promotion of foreign
investment and competitiveness a priority, and ended the
confrontation that existed between the government and the
private sector during the previous four years.

Hundreds of U.S. and other foreign firms have active
investments in Guatemala. Guatemala passed a foreign
investment law in 1998 to streamline and facilitate foreign
investment, and ratified the Central American - Dominican
Republic Free Trade Agreement (CAFTA) in 2005, which is the
equivalent of a Bilateral Investment Treaty (BIT). However,
in spite of the positive legal framework, time-consuming
administrative procedures, bureaucratic impediments,
inconsistent judicial decisions, and personal and product
security concerns compromise the investment climate.

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 traded makes 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 appointing 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 restrictions remain in 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.
In 2004, the semi-autonomous Human Rights Ombudsman
provisionally suspended efforts by the electrical ratemaking
authority to reduce subsidies mandated by the previous
administration and establish a more rational rate structure,
both of which were 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, and without due process, raised some
concerns among investors. The government is planning to
introduce new mining legislation in 2006 to encourage foreign
investment in the sector while ensuring modern standards of
environmental protection. Recent violent protests against 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). CAFTA, when
implemented in early 2006, 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, have allowed
nontraditional agricultural exports such as cut flowers,
seasonal fruits and vegetables, to grow rapidly 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 have affected the sector's competitiveness.
Implementation of 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 can establish, acquire
and dispose freely of virtually any type of business interest,
with the exceptions of insurance, auditing and forestry as
noted above. Guatemala's foreign investment law and CAFTA
commitments protect 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.

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 frequency. 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. Guatemalan firms have been
active investors in Central America, the Dominican Republic,
and South Florida, but not elsewhere.

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 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. In addition,
CAFTA includes a dispute resolution mechanism that provides an
alternative to Guatemala's problematic judicial system.

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" - garment 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 on December 31, 2009.

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,
and it can be difficult to obtain and enforce eviction
notices, as land title is often clouded. The police has
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. Foreign investors should
seek reliable local counsel early in the investment process.

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 rights laws into
compliance with the WTO's TRIPS agreement. This legislation
was modified in 2003 to provide pharmaceutical test data
protection more consistent with international practice.
However, legislation in December 2004 effectively removed data
protection for pharmaceutical products and agricultural
chemicals. After a tough internal debate, in February 2005
Congress restored data protection in an effort to comply with
CAFTA commitments. 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 a concern, with the piracy rate for software
applications, as reported by the Business Software Alliance,
increasing from 77 percent in 2003 to 78 percent in 2004.

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. In March 2004, the new administration made
mandatory the use of an internet-based electronic system that
is open to the public to publicize Guatemala's procurement
needs, which is improving transparency in the government
procurement process.

The creation of the semi-autonomous Superintendent 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, 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 25 commercial banks have an estimated $11 billion
in assets among them. The five largest banks control about 62
percent of total assets. In addition, there are about 17
private non-bank financial institutions, which perform
primarily investment banking and medium and long-term lending,
and six exchange houses. The Superintendent 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 forcing banks 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 forcing 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, enacting regulations to control
offshore activities and establishing 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 no market in publicly traded equities. Borrowers face real
interest rates of up to 53 percent. 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 highly unlikely, 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, including security of shipments, 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. It 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 many levels.
Guatemala's score on the 2005 Transparency International's
Corruption Perceptions Index was 2.5 points, which reflects
the perception of severe corruption problems. 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. The new administration has taken measures to
reverse the increase in government corruption under the
previous administration, but consolidating institutional
reform remains slow. Former President Portillo, Vice
President Reyes and several senior officials who served during
the previous administration are under investigation for their
role in corruption scandals, and the former Superintendent of
Tax Administration and Minister of Interior are in jail
pending trial. The former Comptroller General was recently
found guilty of fraud and sentenced to 17 years in prison, and
the former Minister of Finance was released after spending one
year in prison. 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, Ecuador, France, Germany, Italy, South
Korea, Spain, Sweden, Switzerland, Taiwan, the Czech Republic,
and The Netherlands. CAFTA contains a chapter on investment
similar to a Bilateral Investment Treaty with the U.S. Aside
from CAFTA Guatemala has also signed bilaterally or in
conjunction with other Central American countries, free trade
agreements with Chile, Mexico, the Dominican Republic, Taiwan
and is currently negotiating with 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) 336-8799.


D. Labor

The Ministry of Labor oversees a tripartite committee that
makes recommendations for increases in the minimum wage. In
the event that agreement is not reached in the tripartite
commission, the Government may decree such increases based on
recommendations of the Labor Minister. This occurred in late
2005, when the President raised the wage by 10%. Including a
mandatory monthly bonus for salaried workers, the increase
brings the agricultural minimum wage to 53.8 quetzales (about
$6.90),and the wage for non-agricultural work to 55 quetzales
(about $7.05).

The legal workday is 8 hours and the workweek is 48 hours; a
tradition of longer hours remains in place in certain sectors.
These limits do not apply to domestic workers. For day shift
workers, the standard 6-day workweek 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 Labor Code requires a weekly paid rest period of at least
24 hours. Trade union leaders and human rights groups charge
that employers sometimes force workers to work overtime
without legally-mandated premium pay. Labor inspectors
reported uncovering numerous instances of such abuses, but the
lack of strong fines or regulatory sanctions, as well as
inefficiencies in the labor court system and enforcement of
court orders, inhibit adequate enforcement of the law.

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).
However, 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, including those who are too young
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, with
secondary and tertiary education focused on social science
careers.
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-two authorized, with twelve in
operation. Commercial activities and apparel assembly
operations are the common beneficiaries of Guatemala's free
trade and "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.


DERHAM