Central America Sees Foreign Investment Recover Fivefold Compared to 2020

The region captured 7,6% of foreign investment in Latin America in 2021, according to ECLAC

Foreign direct investment in 2021 was five times higher than in 2020, according to ECLAC
December 01, 2022 | 12:30 PM

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San Pedro Sula, Honduras — Mirroring what has happened in the rest of the world, in 2021 foreign direct investment (FDI) inflows into Central America recovered after the sharp drop recorded the previous year, according to a report published this week by the Economic Commission for Latin America and the Caribbean (ECLAC).

In a context of weak economic recovery, Latin America received $142.794 billion of FDI in 2021, 40.7% more than in 2020, but such growth was not enough to equal pre-pandemic levels, the regional body reported in the conclusions of its annual Foreign Direct Investment in Latin America and the Caribbean 2022 report.

After a significant drop in the first year of the pandemic, investment inflows into Central American countries recovered in 2021. Overall, the sub-region received FDI inflows that were equivalent to five times those received in 2020 and totaled $10.79 billion, 7.6% of the total FDI inflows into Latin America and the Caribbean.

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Costa Rica ranked as the top recipient in the sub-region for the second consecutive year, while in Guatemala, a large acquisition in the telecommunications sector accounted for a considerable increase, and Panama managed to recover after the heavy blow to investment in 2020.

Countries with the highest FDI growth

The increase in FDI took place in all Central American countries, with the top three recipients being Costa Rica (33% of the subregion’s total), Guatemala (32%) and Panama (13%), which accounted for 87% of the year-on-year increase.

FDI inflows to Costa Rica totaled $3.56 billion in 2021, 69% higher than the figure received in 2020 and above the average received during the last decade.

Similar to previous years, the most important component was the reinvestment of profits (53% of the total), with income exceeding by 69% the 2020 figure, while 25% of inflows were received through capital contributions, which showed the highest year-on-year growth (95%).

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In 2021, Guatemala received FDI totaling $3.47 billion, a figure that ECLAC described as ‘extraordinary’ for a country where on average in the last decade $1.15 billion entered annually. This value represents a growth of 273% with respect to 2020.

The increase occurred in all components of FDI, but was greater in the case of capital inflows, which reached 65% of inflows (while in the last decade their average share was 25%). Profit reinvestment also increased (38%) and was the second largest component of FDI (33% of the total).

FDI inflows to Panama began to recover in 2021, although they have not yet reached pre-pandemic levels. Investments of $1.35 billion were received, 163% higher than in 2020.

The behavior is explained by inflows in the form of reinvested earnings, which totaled $1.93 billion in 2021, offsetting capital outflows from inter-company loans of $638 million.

The trend in the rest of the region

During the past year, Nicaragua registered $1.22 billion FDI, 63% more than in 2020. This increase surpassed the levels of investment that the country received on average in the past decade and positioned it as the fourth largest recipient in the subregion, with 11% of total inflows.

Profit reinvestment is the main component (50% of the total), with inflows 29% higher than in 2020, while capital contributions accounted for 29% of the total, following an increase of 59%.

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Meanwhile, Honduras received four times more foreign investment than in 2020; however, the recovery was not sufficient to reach pre-pandemic levels. The total of $876 million received in 2021 is equivalent to 76% of what the country received as an annual average in the 2010s.

Profit reinvestment has been the main component of FDI entering the country for more than two decades, and 2021 was no exception, according to reports from the Central Bank of Honduras (BCH).

In El Salvador, FDI inflows in 2021 were 11.7% higher than in 2020 and reached $313 million. With this increase, the level of inflows remained below that recorded before the pandemic.

Inflows from capital contributions and reinvestment of earnings increased significantly, totaling $699 million in 2021. However, negative inflows from intercompany loans resulted in a lower balance.