VIII. Trade and Project Financing A. Brief Description of Banking System Capital markets in Guatemala have been developing rapidly in recent years but remain fairly shallow and thin. There are now 27 private commercial banks, up from 21 just two years ago. Citibank is the sole US bank directly operating in Guatemala. There are also 11 investment firms that specialize in somewhat longer term credit, 12 bonded warehouses that issue warrants against the goods they hold, and five new exchange houses. A large number of cooperatives provide credit to a variety of small and medium businesses under the nominal supervision of the Ministry of Economy. A number of informal financial institutions also operate independently of any government supervision. These include parallel exchange houses, informal investment firms, and traditional rural moneylenders. Government intervention in the financial sector is limited to implementation of monetary policy and to prudential regulation of the banks, investment firms, bonded warehouses and exchange houses. Credit is not rationed or otherwise directed by the government with the minor exception of a small amount of lending subsidized by the government - principally for small businesses, small farms or low-income housing. Two "stock" exchanges provide a limited alternative to the traditional financial sector. The exchanges trade almost exclusively in government bonds and corporate paper, and are much smaller than the commercial banking sector. Repurchase agreements dominate the markets, accounting for over three quarters of total volume. To-date, there have been no equity issues, although several have been discussed for over a year. Three government bonds (the CENIVACUS, CERTIBONO and CDP) are now traded on the exchanges. Secondary trading of both government bonds and corporate paper is active, relative to the size of the market. Trading in currency futures has also recently begun with the liberalization of the exchange market. B. Foreign Exchange Controls Affecting Trading Guatemala maintains an open, relatively undistorted exchange regime. There are no legal constraints on the quantity for remittances or any other capital flows. In early 1994, the government ended the requirement that banks sell all their foreign exchange to the Bank of Guatemala (BANGUAT) every day. Although BANGUAT still intervenes occasionally, there are no longer any delays in acquiring foreign exchange. The government sets only one reference rate, which it applies only to its own transactions and which is based on the commercial rate. Remittances can take the form of dollar denominated government bonds, although the supply of these is rather limited. A number of banks also offer "pay through" dollar-denominated accounts; the depositor makes deposits and withdrawals at a local bank but the account is actually maintained, by the local bank on behalf of the depositor, in a U.S. bank. C. General Financing Availability The overwhelming bulk of credit is allocated by commercial banks on market terms. The assets of the five largest banks total 1.2 billion dollars - 42.3% of the total assets of the formal financial sector. Most lending takes the form of short term and/or signature loans. However, small and medium sized businesses complain that it can be difficult to find operating capital: i.e. that commercial lending is concentrated among a relatively small group of the large borrowers. Foreign borrowers face no systematic discrimination in terms or access. Under its Financial Modernization Program (FMP) with the Interamerican Development Bank, the government is attempting to make credit more widely available, stretch out the term of most lending, and make interest rates more competitive. The FMP also aims to tighten requirements for reclassifying non-performing assets, for information disclosure, and for avoiding lending to directors and owners. Accounting practices will also be made uniform and external audits will be required of financial institutions. In general, the government is attempting to improve both prudential regulation and information disclosure. Another object of the FMP is to increase the number of instruments available in Guatemalan financial markets and remove some of the restrictions on the types of services banks and other financial institutions offer. D. Financing Exports/Methods of Payments Most Guatemalan imports are financed through short term, typically 60 day, lines of credit. Generally, these are extended directly by the US exporter to the Guatemalan importer. As a result, this line of financing is used almost exclusively by the large importers. The larger Guatemalan importers frequently have their own source of capital abroad which can be used to finance, or to leverage financing for, imports. US agricultural exporters can also take advantage of the 15 million dollar PL-480 Title I or (for 1994) the 30 million dollar GSM-102 programs administered by the Agricultural Attache in the US Embassy in Guatemala. However, the GSM-102 program, as currently administered by the Bank of Guatemala, does not provide sufficient benefits to local importers to make the program attractive. As a result, it has been consistently under-utilized in recent years and may not be renewed in 1995. E. Types of Available Export Financing and Insurance U.S. export financing and insurance is available through various programs sponsored by the Export-Import Bank (EXIM) and the Overseas Private Investment Corporation (OPIC) which are autonomous U.S. government agencies. In August 1994, there were no investment insurance programs available through the World Bank's Multilateral Investment Guarantee Agency (MIGA) as Guatemala will not be a beneficiary member until Guatemalan Congress ratification has occurred. F. Project Financing Available Since domestic credit tends to be expensive unless guaranteed by a government agency, many businesses look abroad for project financing, despite the exchange risk. A large multinational recently sold bonds in Europe and the United States to partially finance an energy project. That project, and others have also been partially financed by the World Bank's IFC. However, a number of recent projects, even those of larger foreign firms, have recently encountered some difficulty in locating international funding. Smaller projects usually must be financed domestically, either out of a company's internal assets or from the formal financial system. G. Banks with Correspondent U.S. Banking Arrangements Given the importance of the United States as a trading partner, almost all of the 27 commercial banks maintain correspondent relations with US banks.