Despite civil strife, El Salvador is a good market for savvy investors

When Joe Costa of Val'Dor, Inc., a New York textile firm, flipped on CNN from his hotel room in Guatemala last November, he despaired. He had just contracted some textile drawback work in San Salvador and according to the TV reports, the city was under siege from a guerrilla offensive. Despair turned to delight when the maiden shipment from El Salvador arrived in Miami on time. He has now resolved to open a plant in San Salvador. As Costa later learned, his new partners had delivered the goods to the airport in a borrowed truck in the dead of night after slipping by rebel roadblocks. David Brown of Perry Manufacturing, Inc., of North Carolina was visiting San Salvador on Nov. I I of last year, the day the offensive began. He is now starting two textile assembly plants in San Salvador which will create 700 jobs. Perry also has a plant in Costa Rica and does contract work in the Dominican Republic. In a promotional tape he recently made with the Foundation for Salvadoran Economic Development (FUSADES), he says his decision to invest in El Salvador was based on the superior work ethic of Salvadoran laborers. He also cites Salvadoran contractors' ability to perform in spite of the problems caused by the offensive as another factor.

Don Roberto Palomo founded ADOC, a shoe manufacturing concern, in the mid 1950s. Today, it is El Salvador's largest employer, with more than 3,000 workers. The firm also; has integrated retail operations, leather and rubber processing and production, and it operates El Salvador's only USDA-approved abattoire. Central America's largest manufacturer of shoes, ADOC also exports shoes to the United States under the Sebago and Florsheim labels. Because of El Salvador's civil strife, Don Roberto has left the country twice to start plants in Costa Rica and Tampa, but he always returns to El Salvador. Echoing the other investors, he maintains that he cannot find a similar work ethic anywhere else in Central America or the Caribbean.

After 10 years of civil strife, El Salvador's business community is eager to reestablish El Salvador as the most industrialized country in Central America. The war is not over, but the two sides are finally talking. The government and FMLN Insurgent negotiating teams have been meeting all summer, and the government has predicted a cease-fire agreement by this fall.

The Cristiani administration is not waiting for a peace agreement to jump-start the economy, however. Just weeks after his election, Cristiani and his economic team instituted one of the most aggressive and disciplined structural adjustment programs in Latin America. In its first year, the administration has devalued the Salvadoran colon by 28 percent, lifted price controls on more than 200 consumer products, reduced import tariffs to a 5-35 percent range, and reduced both personal and corporate taxes. This summer, the IMF endorsed the government's economic reforms by entering a stand-by agreement, which will also open the way for a Paris Club rescheduling in the fall. In the coming year, the administration is also expected to privatize the national banking system.

The government has also eliminated several bureaucratic obstacles to exporters. National coffee and sugar marketing boards have been eliminated, and the Central Bank has opened a one-stop window for exporters to complete their paperwork, reducing what was once a two-week process to a matter of hours.

Not surprisingly, the business community has reacted quickly to the reforms. Much of the growth has occurred in agriculture, still the most important sector of the economy. Agriculture represents two-thirds of the nation's exports and employs 34 percent of its labor force. A doubling of the coffee harvest from 1.8 million bags in 1988-89 to 3.6 million bags in 1989/90 has boosted coffee producer incomes by 20 percent for 1990. World coffee prices have also cooperated, hovering around 90 cents per pound. Prospects for sugar growers have also improved due to an increase in El Salvador's quota from the United States and stable world prices. Coffee and sugar growers are now glowing about expected strong 1990-91 harvests. Non-traditional agricultural exports-including melons, frozen vegetables, and sesame seeds-almost doubled in the first half of 1990 compared to 1989.

The industrial sector is also catching on. Many industrial exporters are predicting strong profits as a result of the devaluation. The Commerce Department reported a 100 percent increase in shoe exports in the first six months of 1990, compared to the same period in 1989. Other growth industries include wooden furniture and electronic capacitators. El Salvador still has virtually no textile quotas, despite a strong tradition of textile manufacture. Several new U.S. plants have opened this year to take advantage of El Salvador's liberal foreign investment regulations. New capital investment remains limited because of the uncertain political situation.

The government actively courts foreign investment to encourage diversification in the agricultural sector and growth in the industrial sector. El Salvador's legislative regime is extremely favorable to business interests, and export promotion programs are designed with the understanding that El Salvador must go to extra lengths to attract foreign capital. The Foreign Investment Promotion and Guarantee Law is one of the most comprehensive foreign investment statutes in the region. The statute affords:

Unrestricted remittance of all new profits, provided the capital is invested in other than commercial and service activities (remittance of up to 50 percent for service and commercial activities).

Unrestricted management of foreign investment.

Unrestricted remittance of both interest and capital on external loans.

0 Opportunity to open hard currency accounts in the financial system and obtain financing in El Salvador.

Guarantees that foreign currency accounts will not be converted into local currency.

Under the Export Reactivation Law of 1990, the government of El Salvador offers several incentives to investors entering export-primarily industrial-operations. Any firm located in a free zone or bonded warehouse, exporting 100 percent of its production outside of the Central American Common Market, including drawback/assembly operations, can enjoy 10-year income tax exemption; duty-free importation of machinery, equipment, tools, and spare parts; duty-free importation of lubricants and fuels; and 10-year exemption from taxes on assets and equity.

Many prospective U.S. investors have also taken advantage of FUSADES, a USAID-supported foundation for the promotion of private enterprise and investment in El Salvador. Through its finance arm, FUSADES can provide start-up funds for new investments, while its investment promotion arm helps investors locate factory sites, interview managers, obtain new phone lines, and cut through other bureaucratic red tape. FUSADES actively promotes investment in textile drawback operations, agro-industry, electronic assembly, data processing, and shrimp aquaculture.

Investment in El Salvador is not for everyone, After 10 years of war, the infrastructure is in need of restoration. Although Salvadorans have gone to the polls twice in the last six years, much remains to be done to consolidate democratic advances. For sophisticated investors who are cognizant of the political risks, however, El Salvador can be a promising investment opportunity.

For information about El Salavador, contact Paul Moore, Desk Officer for El Salvador, U.S. Department of Commerce; tel. (202) 377-2527 or fax (202) 377-3718.

El Salvador Hosts International Trade Fair

For any U.S. company considering investment in, or export to, the Salvadoran market, participation in El Salvador's International Trade Fair, Nov. 9-21 of this year, is an excellent low-cost way to test the waters and obtain market visibility. The biennial International Trade Fair of El Salvador is one of the most established commercial and industrial exhibitions in Central America. More than any other single event, the Fair reaches a wide cross-section of Salvadoran business people, industrialists, and consumers. It attracts nearly 200,000 visitors, and the U.S. Pavilion is traditionally the most popular. U.S. firms are invited to participate in the U.S. Pavilion. For information, contact Barbara Jones, Commercial Officer, U.S. Embassy San Salvador; tel. (503) 98-1666 or fax (503) 23-4067.

COPYRIGHT 1990 U.S. Government Printing Office
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