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Honduras

Page history last edited by PBworks 12 years, 1 month ago

Honduras

 

 

Ecuador and Honduras

 

EXECUTIVE SUMMARY

Based on the following study, our team of consultants will recommend making the FDI investment in Ecuador, rather than in Honduras. The data from many macro economic variables was analyzed with a very close tie, which was only broken in favor of Ecuador after analyzing the tax and capital repatriation difference between the two countries.

 

 

 

 

Guide Books for Business in Latin America

 

 

 

 

 

 

 

POLITICAL AND ECONOMIC STABILITY

In a political sense, Ecuador has been through a roller coaster ride over the past couple of years. Ecuador’s institutional instability is exemplified by the fact that no single president has completed his term in Ecuador in the last 10 years and 3 of them were ousted by the legislative branch. President Correa’s pledge to prioritize social expenditure over debt servicing, to increase the role of the state in the oil industry, and to reform the constitution is opposed by most of the legislature.

 

 

 

 

In contrast, Honduras seems politically stable. A democratic government has ruled the country for more than 3 decades. President Zelaya’s position in the polls is firm; however, corruption continues to be a significant issue. Zelaya’s challenge is to demonstrate enough results to rally public support before the opposition can take advantage of public frustration.

 

When discussing economic stability, however, Ecuador has shown to be quite stable over the past couple of years. Current Macroeconomic trends are favorable with a stable GDP growth, a trade surplus of $1.5billion and external reserves of $2 billion. Ecuador has benefited from low inflation ever since adopting the US dollar as their currency, and from historically high oil prices, of which they are a major exporter.

 

In Honduras, macroeconomic stability is indicated by solid GDP growth which is forecasted at around 4%, low levels of inflation, and with increased inflows from USA remittances. In addition, low government spending keeps the fiscal account balanced and in line with current agreements with IMF. Starting in 2007, Honduras will benefit from the IMF’s heavily indebted poor countries initiatives.

 

 

EXCHANGE RATES AND POLICY

In early 2000, Ecuador adopted the US dollar as the official currency in response to an economic crisis brought about by extreme levels of inflation. Adopting the US dollar as the official currency has brought a level of stability to the Ecuadorian economy. It has also tamed inflation and has helped improve domestic demand for goods and services. But, under this dollarization scheme, Ecuador’s central bank can no longer act as a lender of last resort. This doesn’t seem to be problem as long as the dollar doesn’t appreciate significantly.

 

Honduras manages their currency exchange regime through their central bank with a managed-floatation program and a daily auction of US currency. Ever since mid 2005, the Honduran central bank has maintained an exchange rate of L18.9:1 US$1 through this auction. A mixture of debt relief and remittances from abroad has increased international reserves, and has allowed the government the freedom to maintain this stable exchange rate.

 

Both exchange rates have remained relatively stable against the Mexican Peso over the past five years (see GRAPH 1 & 2). While Ecuador may have a fixed exchange rate with the US, it has fluctuated in value over time with the Mexican Peso. Based on this evaluation, from a Mexican perspective, we see only a minor advantage to investing in Ecuador.

 

FDI LAWS AND INCENTIVES

Both Ecuador and Honduras have liberal laws that treat foreign capital the same as local investments. Both countries have laws in place that are geared toward attracting FDI.

Both countries have independent private (non-profit) investment promotion agencies.

 

Over the past couple of years, Ecuador has been more successful in attracting FDI than Honduras (see GRAPH 3 & 4), but a vast majority of this extra money has been spent in the energy sector. As a point of reference, note that SAB Miller, a brewing company from South Africa, has brewing and bottling operations in both Ecuador and in Honduras.

 

For incentives, both countries offer generous tax and tariff incentives for export oriented FDI investments. But, since our company will not be involved in the export sector, there is little chance that we will be able to qualify for these national incentives. On a local level, various regional or city governments may offer incentives to locate in their district (bringing jobs).

 

In Honduras, the constitution states that foreign investment will receive the same treatment as local investment, with some exceptions; none of which should apply to our beer factory, as long as we do not place our factory along the coast line. There was an additional Investment law passed in 1992 that further improved the FDI climate in Honduras.

 

As apart of the “Andean Pact”; Ecuador signed laws in 1991 (Decisions 291 and 292) and then further liberalized investment laws with additional regulations in 1993 and 1997.

Although existing laws are very favorable for FDI in Ecuador, there is some risk of nationalization similar to Venezuela. But, since our investment is in the beer industry, and not in the critical energy industry, we feel that the risk of nationalization is very small. But based on this minor risk factor, we feel that Honduras has a slight advantage.

 

CAPITAL CONTROLS AND TAXES

After several new regulations and a modification of the constitution during the past decade, Ecuador general legal framework depicts a system open to capital inflows and offers almost no restrictions to foreign investment. The main requisite for building a company out of foreign capitals is to register it within 45 days with the BCE (Central Bank of Ecuador. The same applies to reinvestments, company buyouts, sale of shares, interests or rights, and the contract of external credits by private sector companies.

 

Some minor limitations by sector are still in force for security reasons or in the fishing industry where further authorization by the corresponding agency is required beforehand.

Aligned with this general openness, no restrictions weigh on capital transfers as profit remittances, loan inflows and repayment, royalties and fees other that the payment of taxes. Remittances of 100% of profits and capitals are permitted. Registration with BCE serves statistical purposes.

 

Actually, political instability and judiciary insecurity are the factors eroding the investor’s confidence in Ecuador. Government’s takeover of Oxy –an oil company then owned by an American company-, and the Hydrocarbons Reform one year ago, seem to be actions targeted to “strategic” resources like oil – in my opinion is not very likely that we might face this kind of Government intervention in our industry. Therefore, this shouldn’t affect our decision about investing or not investing in Ecuador.

 

In a very similar way to Ecuador, Honduras´ local regulation and constitution set a legal framework that welcomes FDI. Besides the registration with the BCH (Honduras Central Bank) only other minor and fast steps are required in order to form a new company from foreign capitals. Most part of FDI is received by the Maquila (offshore manufacturing for export) sector, especially for the textile industry. The investors´ confidence is increasing after DR-CAFTA took effect in April 2006.

 

No restrictions are imposed on capital transfers as repatriation of capital, profit, royalties or fees remittances, or loan inflows and repayment, but taxes have to be paid. A 35% withholding tax is levied on profit remittances from a branch to the parent company.

Ecuador and Honduras share the same basic schema for corporate taxes: a corporate income tax rate of 25% is imposed on net income. A previous mandatory 15% of the income is excised in concept of profit sharing. In Honduras, an additional 5% tax on net income is imposed to companies with profits exceeding US$ 60,000, but this tax is deductible from the income tax.

 

Honduras has a 1% net asset tax while this rate is only 0.1% in Ecuador. Another tax advantage on Ecuador’s side is that this country has double-tax treaties with several countries, including Mexico. This might reduce the company’s royalties, dividends or interest withholding tax rate from 25% to 10 or 15% depending on the case. Honduras doesn’t have double-tax treaties with any country.

 

Ecuador’s Tax Reform Law benefits companies that reinvest their profits in the country with a 10% reduction in the income tax rate to an effective 22.5%: this is of special interest for our project given our plans to reinvest 1/3 of the profits (see TABLE 1).

 

TRADE

In Honduras imports of alcohol are subject to special regulations, regulations that would be bypassed if we put our plant here. Also, one of Honduras’ most important industries is sugar which the government maintains control over the price by pressuring producer and retailers to keep prices as low as possible. Sugar is an ingredient in making beer. So this will help us by allowing us to have lower production costs. Any of the ingredients for our beer, expect for Malt can be bought domestically in Honduras or can be bought from countries that Honduras has trade agreements with.

 

The down side of putting our plant in Honduras is that whether we invest there or not, the Northern Triangle of Central American nations has opened up trade between Mexico and Honduras by abolishing tariffs on Mexican goods into Honduras over 12 years in exchange of Mexico lifting duties on exports within 10 years from the three countries which include El Salvador Guatemala and Honduras. This means that eventually we will be able to export just as easily to Honduras, El Salvador and Guatemala as if we were in Honduras itself. Another bad thing is that machinery imported into Honduras has a 15% tax. That means that the machinery we import for our beer factory will have a 15% tax on it.

 

Ecuador requires imports of alcoholic beverages to provide a certificate of origin, a sanitary registry and a pre-shipment before the first shipment is delivered. Ecuador also has an excise tax of 30.9 percent on imported beer. Excise taxes on imports are calculated on CIF value which means they calculate the value of the import plus import duties which in effect, make the price of imported beer higher than the price for domestic beer which is good for us if we invest in Ecuador because it would relieve us from the excise tax and additional paperwork and allow us to be more competitive. Ecuador uses non tariff measures that could delay shipments between six to eight weeks! Putting our plant here will allow us to bypass these delays. Ecuador produces rice, barley, sugar and corn which are all used in making beer.

 

Ecuador has set up Free Trade Zones which allows for tax free import of machinery which is great for us if we invest in Ecuador because we need to import the machinery for our plant. From a Trade standpoint we see an advantage to invest in Ecuador.

 

LEGAL SYSTEM AND DISPUTE SETTLEMENT

Ecuador’s legal system is based on civil law. The complex and corrupt legal system makes it difficult to enforce property rights. Foreign and local investors have had land seized by squatter groups over the years. Although the current agrarian law makes such seizures difficult and guarantees cash payment of the market value of expropriated property. This has also happened in mining companies who have been forced to share a percentage of their concessions to solve these disputes. Government companies, as the oil, telephone, and electricity companies, violate their contracts with private firms, with little legal protection. In some cases foreign company officials have been forbidden by court from leaving Ecuador due to pending claims against their companies.

 

Honduras’ legal system is based in civil law with increasing influence of English common law. Recent judicial reforms got rid of Napoleonic legal codes in favor of the oral adversarial system. Dispute resolution is slow and generally unsatisfactory. Investors have to hire competent Honduran legal counsel before committing to any investment or doing business in Honduras. When engaging in legal contracts, investors should consider including clauses for arbitration or other forms of alternative dispute resolution.

 

Both countries are members of the International Center for the Settlement of Investment Disputes (ICSID).From the legal perspective Honduras, with the correct local legal advice and safeguards is the better alternative to do business in, considering the long run as the country is making efforts to update its legal system, and expedite dispute settlement as a way to attract FDI, which is not perceived in Ecuador.

 

LABOR LAWS AND REGULATIONS

Investors should not only analyze the actual labor laws, but should also monitor and assess actual labor practices in those markets along with previous experiences of similar investments. According to the United Nations “Rule of law” index, both Ecuador and Honduras rank way below other countries in the region: Ecuador with -0.71; Honduras with -0.61 Transparency international ranks Honduras 111th and Ecuador in 138th, indicating that corruption continues to be a major issue. Abundant labor is available in both countries. Ecuador has a compulsory minimum wage of 195 dollars a month; whereas unqualified Hondurans get around $80 a month in the free market.

Investors must consider carefully the figures in TABLE 2 in the appendix when assessing Honduras and Ecuador side by side.

 

INTELLECTUAL PROPERTY RIGHTS

Since Honduras is a member of the WTO and CAFTA-DR, it has complied with The WTO’s trade related aspects of Intellectual Property Rights and prepared itself for regulations of CAFTA-DR regarding IPRs. In December 1999, Honduras passed laws concerning copyrights, patents and trademarks. Patents provide seventeen to twenty years coverage which meets international standards. But although steps have been made, Honduras still has a prevalent amount of piracy.

 

Ecuador improved its IPR protection by expanding the definition of patentability with the Andean Pact Decisions 351 and 486. It also complied with the WTO’s Trade-Related Aspects of the IPRs. This means that Ecuador implemented laws that recognize patents, copyrights and trademarks but only of things registered in other countries. Since our company is already registered in Mexico this should not be a problem.

 

Ecuador has a court designed to settle IPRs. Under the IP Law, violators of IPR can face anywhere from three months to three years in prison and face fines from US$1,314 to US$13,145. This would be good but the problem is that patents, copyrights and trademarks are only protected in theory and not in practice so our beer recipe would have to be kept a secret to avoid problems. Based on this evaluation, we see only a minor advantage to invest in Ecuador.

 

SECURITY

In Ecuador, drug trafficking organizations are responsible for a significant part of the criminal activity, which is moderately high, especially bordering Colombia. Corruption and bureaucracy ease smuggling products in and out of the country. There is a high terrorist threat as FARC, has established in Ecuador. They’ve carried out kidnappings, bringing from Colombia the use of a hindering drug, scopolamine. Popular insurrection is also a threat, as indigenous groups have staged demonstrations in the capital, blocking streets, burning tires, detonating explosives and firing handguns to the air.

 

Honduras has a high rate of crime, as reported by the US Department of State. Violent crime is prevalent, also being an interim destination in drug smuggling mainly to the US. High levels of corruption facilitate criminal activities, and also police lacks training and resources to effectively combat crime. 53 US citizens have been murdered in Honduras since 1995 according to the US State Department.

 

From a personal security perspective Ecuador is a safer country, except for some of the provinces on the north bordering Colombia. Although both countries pose personal safety risk Ecuador looks safer for foreigners traveling or living in the country. The number of foreigners kidnapped or murdered in Honduras is far larger than in Ecuador in the last few years.

 

 

 

more information: Bibliography

 

• The Economist Intelligence Unit, “El Salvador, Guatemala, Honduras: Country Commerce Report”, New York, July 2006

• The Economist Intelligence Unit, “Ecuador: Country Commerce Report”, New York, December 2006

 

• The Economist Intelligence Unit, “ Ecuador: Country Commerce Report”, New York December 2006

 

• U.S. & Foreign Commercial Service and US Department of State, “Doing Business in Honduras; A Country Commercial Guide for US Companies”, 2006

 

• U.S. & Foreign Commercial Service and US Department of State, “Doing Business in Ecuador; A Country Commercial Guide for US Companies”, 2004

 

• Country Watch, “Ecuador, 2007 Country Review”, Houston, TX, 2007

 

• Bureau of Western Hemisphere Affairs, Background notes, (2007, April 13th). homepage of The Us Department of State, on-line. Available: http://www.state.gov/r/pa/ei/bgn/

 

• Country Watch, (2007, April 13th). [homepage of Country Watch Inc.], on-line. Available: http://www.countrywatch.com.ezproxy.t-bird.edu/

 

 

External Links

 

 
Link Honduras History
 
Link In-Honduras
 
Link honduras.com
 
Link MCTours Honduras
 
Link Lonely Planet - Honduras
 
Link Destination Honduras 2002

 

 

 

 

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