Guatemala may be Central America’s largest economy, but it remains vulnerable to any downturn in the US economy and is facing growing competition from the likes of China and India. This, combined with the ongoing threat of tropical storms and the problem of poor land management of key crops, means that the trade outlook remains far from upbeat.
Last year, Guatemala’s economy grew a respectable 4%, mostly thanks to improving US demand. Any weakening in that demand could test the strength of Guatemala’s economy and affect its export performance of key products such as coffee, bananas and textiles. Indeed, even the slightest ripple in the US can have a lasting knock-on effect in Guatemala (along with every other Central American economy).
Last year, the US market accounted for about 50% of the approximately $4.2bn in goods and services exported by Guatemala. The country is struggling with a rising trade deficit caused by a drop in export income, while its import bill has grown, thanks to consumer demand fuelled by the increasing amount of remittances sent home by Guatemalans living abroad.
Regional free trade
While the Dominican Republic-Central American Free-Trade Agreement (DR-Cafta) is expected to provide a boost to Guatemalan exports, the real effect of the pact remains unclear. The question for Guatemala is where it stands to win from the accord, which eliminates duties on as much as 80% of US exports to Central America and was ratified by president Óscar Berger in March 2005.
The outlook for Guatemala’s agricultural exports is poor. Under DR-Cafta, the US can now export duty-free its regular list of goods to Guatemala, including cotton, wheat, beef and processed food. To protect certain crops that are especially vulnerable, including maize, DR-Cafta gradually eliminates quotas on US exports considered ‘sensitive’ to its Central America trade partners. “We want to get away from just subsistence farming that keeps so many in poverty,” Jose Guillermo Castillo, Guatemala’s ambassador to the US, told reporters when he lobbied for DR-Cafta’s passage in the US Congress, adding that “under the Cafta deal, the restrictions are gradually reduced over 15 to 20 years, which gives us plenty of time to adjust”. Perhaps, but even an extended period of adjustment may be insufficient for Guatemalan farmers to compete with their heavily subsidised US counterparts.
Worries are also running high over Guatemala’s key agricultural exports, such as coffee, bananas and cardamom. New players from other emerging markets are continuously entering the fray, while global prices and demand fluctuate. Guatemala is Central America’s top coffee producer, but exports last year still did not exceed 10% of the share of the country’s total exports. Moreover, coffee exports have barely moved up since 2002, when export share registered 6.3% of total exports, according to Guatemala’s coffee grower association.
To buck the trend, Guatemala is following Mexico and other Central American countries by turning to more gourmet, shade-grown coffee. Another marketing strategy involves creating a so-called ‘coffee atlas’, which will distinguish Guatemala’s various coffee-growing regions.
Higher global prices and greater demand from the US have boosted sugar exports, which represent about 5% of total exports. DR-Cafta also raised the amount of sugar Guatemala can export to the US. Now there is a push for Guatemalan sugar producers to take advantage of the industrial ethanol industry, says Rodolfo Batres, head of the government’s foreign investment promotion agency. Under the Caribbean Basic Initiative, Central American and Caribbean countries can export 7% of total US ethanol production duty-free.
Export assortment
The government is eager to diversify Guatemala’s export base, as DR-Cafta covers services it provides for nearly unlimited access and incentives to businesses that focus on software development, courier services, engineering and medical equipment manufacturing. There is even a Hollywood edge, with the doors wide open for attracting the entertainment industry.
Call centres are another focus. According to Mr Batres, more than 3500 new jobs were created in Guatemala last year as this business segment ramped up. He adds: “It was just a few years ago when we only had two or three call centres.”
Guatemala also aims to create hi-tech parks, with the aim of creating hubs for outsourcers. “There’s no doubt that we’ll see more business in software and back-office processing,” says Mario Cuevas, director of financial research at the Guatemala City-based Centre for National Economic Investigation.
“The challenge will be the possibility of taking these types of jobs to rural areas and second cities.” In that vein, says Mr Cuevas, the obstacle is not necessarily infrastructure, rather finding skilled workers who can offer the language and cultural affinity that more modern jobs require.
However, a key focus for the economy will be improving logistics, especially when it comes to streamlining the heavy bureaucracy involved in moving goods off a boat or a cargo plane.
In terms of transportation, roads are in relatively good shape in parts of the highlands and the southern coast, despite spending on roads accounting for just 2% of Guatemala’s gross domestic product. But venture off the main arteries and the lack of attention becomes noticeable, with many roads impassable. The situation grew considerably worse in October, 2005, when Hurricane Stan struck some of Guatemala’s most vulnerable areas. The road network, already underdeveloped in much of the storm’s path, was severely damaged and is still being repaired.
Despite problems, several transportation projects are under way and include a new beltway for Guatemala City, a project partially financed by the Inter-American Development Bank. That project will complement the Transmetro, a series of articulated buses inaugurated in the capital city in early February.
Plans are also under way to increase the number of international airports from two to five. However, some observers argue that, more than anything, Guatemala City’s international airport is in need of a major upgrade. “We should be creating a regional hub, not just remodelling,” says Mr Cuevas. There are also plans to improve the rail network, which is a cargo-only, non-passenger service. Several concessions have been awarded, including one to US-based Railroad Development Corporation, to manage chunks of the country’s main railway.
Ports are another focus. Most cargo is delivered to three shipping ports. Although the ports are strategically located for exporters and importers, they still lack certain international certifications and, more importantly, suffer from heavy red tape and a sluggish and expensive customs bureau. Yet the government has made progress at streamlining the system and getting the ports up to international standard. Plans are afoot to eventually operate four fully operable seaports.
Political inertia
Given its weak standing in Congress and the upcoming general election in September, the Berger administration has not pushed to privatise the management of ports and airports, unwilling to repeat failed privatisation attempts by the previous administration.
Guatemala is making some headway in terms of creating stronger trade relations with other countries, signing a free trade accord with Taiwan, which took effect in July, 2006. With the deal, Guatemala has dropped tariffs on more than 400 agricultural products and more than 3500 industrial goods imported from Taiwan. In return, Taiwan has lifted tariffs on more than 5000 imported industrial and agricultural goods from Guatemala. The biggest perk for Guatemala is the freedom to export some 60,000 tons of sugar annually to Taiwan. For Taiwan, a foothold in Guatemala complements its strategy of gaining a larger presence in Central America and, thus, the US.
Guatemala is well aware that the country’s poor infrastructure is a constant sore spot for investors and key toward improving overall competitiveness. “Improving infrastructure is part of the country’s plan to become more competitive,” says Richard Aitkenhead, the president’s chief political adviser. But moving forward on infrastructure upgrades this year will be tricky. It is an election year so any large-scale plans still requiring congressional approval or massive public spending should be viewed sceptically.
