US embassy cable - 05GUATEMALA218

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