I. Commercial Overview (Executive Summary) Guatemala's economy - the largest in Central America with a GDP of US$11 billion - is generally open to trade and investment. It is dominated by a strong private sector which accounts for almost 90 percent of output. With the entry into force of the North American Free Trade Agreement, Guatemala is well-positioned as one of only two countries to border on what is now the world's largest trading bloc. Guatemala also benefits from the Central American Common Market, through which most of its products are granted duty-free access to regional markets. Agriculture continues to dominate the Guatemalan economy, accounting for over one half of employment, one quarter of the country's output and two thirds of all exports. While traditional products such as coffee, sugar and bananas are still of great importance to the economy, growth in agricultural exports over the last ten years has come primarily from non-traditional products such as fruits and vegetables. Guatemala's manufacturing base consists of light industry which gears production toward domestic and regional markets. A large percentage of intermediate goods and consumer durables are imported. The country's textile and apparel manufacturing sector, focused primarily on the US market, has averaged 30 percent growth annually over the past decade. Textile and apparel exports reached approximately US$200 million in 1993. Businesses operating in Guatemala will encounter a fairly developed communications and transportation infrastructure, one however that requires significant renovation and expansion. The government-owned telecommunications monopoly Guatel maintains 200,000 lines at present and hopes to add another 100,000 by the end of 1995. AT&T, MCI and US Sprint offer direct dialing to the US through US-based operators. Guatel also offers Intelsat Business Services (IBS) and data communications for Packet Switching Network. Guatemala's current electrical production consists of 438 megawatts of hydro-electric and 331 megawatts of thermal generated power. Shortages have occurred in the past due to problems with hydro-electric production. With a pressing need to invest in electrical generation, the state-owned utility INDE has turned exclusively to the private sector for new projects, recently signing a purchase contracts for approximately 234 MW over the next five years. Guatemala offers port facilities on both its Caribbean and Pacific coasts. Puerto Quetzal on the Pacific and Puerto Santo Tomas on the Caribbean are connected to the capital by two-lane highways and by rail. The inefficient, government-owned railroad network is undergoing privatization. The roadway network consists of approximately 8,714 paved miles. A. Overview of the Import Market The Guatemalan economy is generally open to foreign goods. In March 1993, the government of Guatemala adopted the common external tariff of the Central American Common Market (CACM). Rates range from 5 to 20 percent of the CIF (cost, insurance and freight) value of almost all agricultural and manufactured goods. A price band mechanism applied to basic grains and a tariff-rate quota applied to chicken parts generate the major exceptions to the low duty schedules. The country's 7 percent value added tax (VAT) is also applied to imported goods. Fueled by an overvalued currency, declining import duties, and domestic investment, import demand grew 39.2 percent in 1992 and 11.6 percent in 1993. Total import for 1993 were estimated at US$2.6 billion, contributing to a trade deficit that was 11.2 percent of the GDP. Import growth is expected to continue in 1994, though at a less rapid pace. There is a mounting call for the privatization of parts of Guatemala's customs service. Established importers of U.S. products frequently complain of arbitrary practices of the service. Guatemala's 1989 draw back and export promotion law allows duty and tax free entry of raw materials, intermediate products, packaging and labels used in the production or assembly of merchandise exported. GUATEMALA: MAIN IMPORTS FROM USA 1993 (Thousands USDollars) US$ Kgs Vehicles and transport materials 280,866.2 80,282.4 Machines & apparatus f/electronic use 203,178.1 26,620.9 Petroleum products 129,237.2 545,835.1 Plastic materials & manufactures 70,117.5 66,512.8 Medical instruments 46,482.6 2,298.8 Products from chemical indust. 44,839.2 57,124.7 Paper and cardboard 39,574.2 87,961.8 Wheat 38,569.3 211,638.7 Greases and oils 28,963.8 56,218.3 Transistors & receptor apparatus 24,710.5 2,632.9 Total 10 main products 77% 906,538.6 1,137.26.4 Total remaining products 23% 265,960.8 445,634.1 TOTAL IMPORTS FROM USA 100% 1,172,499.4 1,582,765.5 IMPORTS FROM THE WHOLE WORLD 100% 2,599,273.4 Shared by USA 45% 1,172,499.4 Shared by Central America 8% 206,938.9 Shared by the rest of the World 47% 1,219,835.1 B. Brief Synopsis of Commercial Enviornment Exporters to Guatemala enjoy an increasingly open trade regime. Imports are not generally subject to non-tariff trade barriers, although arbitrary customs valuation and excessive bureaucracy can sometimes create delays and complications. Inadequate protection of copyrights, patents and trademarks sometimes hampers trade and investment opportunities in Guatemala. Government and private sector representatives are currently formulating various aspects of a new legal regime expected to bring the country up to "world class" standards for the protection of intellectual property. The Ministry of Economy expects to submit comprehensive, draft legislation to Congress by September, 1994. C. Host Country Business Attitude Towards the U.S. Geographic proximity and the familiarity of many Guatemalans with the United States through school or family ties have also shaped a pro-US business attitude. D. Major Business Opportunities Products considered the best prospects for export to Guatemala include bulk and intermediate agricultural commodities (particularly cotton and corn), agricultural machinery and equipment, computers and peripherals, and consumer-ready agricultural products. Agricultural Commodities: In 1993, the United States exported an estimated $146 million of bulk and intermediate agricultural commodities to Guatemala, a 133 percent increase over 1992. Cotton exports, which rose 479 percent in 1993 to $14 million, should continue to grow as Guatemalan production declines further. US corn sales, up 87 percent in 1993 to $21 million, should also do well in 1994 due to tight regional supplies and growing feed grain demand. Wheat exports face stiffer competition from European sources in 1994 after increasing 123 percent in 1993 to $41 million. Agricultural Machinery and Equipment: Given the importance of agriculture production in Guatemala, this remains a growth market over the long term. Sales grew 24 percent in 1992 and another 16 percent in 1993. The United States provides over one half of this $111 million market. A related market for food processing and packaging equipment grew 15 percent last year to $81 million, with the US again accounting for over one half of the sales. Computers and Peripherals: The market for these products grew 25 percent in 1993 to a total of $33 million. US companies accounted for 80 percent of this market and should continue to do well. Continuing software piracy will limit the expansion of this sector until legal reforms are enacted and enforced. Consumer-Ready Agricultural Products: After almost doubling in 1992, US exports of these products to Guatemala grew a healthy 18 percent in 1992. Snack foods, breakfast cereals, fresh and processed fruit, and other consumer-ready products should do well in 1994. In addition to these products, major business opportunities in Guatemala will be created from the privatization and demonopolization of government enterprises that is expected to occur in coming years. Export and investment opportunities are now appearing in railroads, cellular phone communications, road construction and maintenance, airport services, and electricity generation and distribution. Electricity Generation and Distribution: With the recent abolition of the government monopoly on electricity have become major opportunities in the production, co-generation and distribution of electricity. INDE, the state-owned utility, recently signed 12 purchase contracts for 234 megawatts with projects that will come on line from 1995 to 2000. While additional contracts for electricity production can be expected, in the short-term INDE will be most interested in contracts for substations, transformers, transmission lines, and other such equipment to connect the new plants to the national grid. Telecommunications: In May 1994 GUATEL, the government telecommunications monoply, released a public invitation to participate in the development of a mobile cellular telephone system. Additionally, GUATEL plans to add 700,000 lines of switching by the end of the year 2000. The expansion plans will create opportunities for private investment as well as attractive opportunities for US telecommunications equipment exporters and service companies. Finally, Guatemala's tourism sector should be considered a major area of potential growth over the long term. 1993 earnings in this sector of $265 million placed tourism on a par with coffee as the country's largest foreign exchange earner. A construction boom in Guatemala City during the last three years substantially increased the number of available deluxe hotel rooms in the capital, and capacity has been increased at the major tourist sites as well. Improving security for tourists will be a major challenge for Guatemala, however, if the industry is to continue to develop and to recover from the setbacks of 1994. Feeding in part off the growth in Guatemalan tourism, hotel and restaurant equipment sales in Guatemala grew 25 percent to $82 million last year. E. Major Roadblocks to Doing Business Non-transparent and complicated business registration processes, plus unclear and lengthy approval processes (e.g. in awarding petroleum exploration concessions) represent a significant barrier to investment. In addition, informal approval procedures restrict market entry in service industries such as banking, auditing and insurance. A one-stop investment shop is being established by the government to address some of these difficulties. F. Nature of Local and Third Country Competition A number of local companies are active in the private generation of electricity. Israeli, Finnish, and Swiss firms have also competed for contracts to produce electricity or to provide equipment to INDE. Competition has been keen in telecommunications as well, where Italian and Swedish firms have recently won contracts to lay new telephone lines. A French-US firm is the only company currently producing petroleum in Guatemala. The Japanese dominate the retail market for new car sales, and are our principal competitors in the automotive and parts market. In 1993 the US captured 43 percent of the $47 million market for automotive parts, accessories and repair equipment, but US companies will have to fight to maintain this market share. In the past year, Guatemalan millers have begun to purchase basic grains from Europe. Vietnamese rice, a new and competitive entrant to the market, is now less available due to an apparent non-tariff barrier established by the government.