VZCZCXRO8962
RR RUEHLMC
DE RUEHSN #0047/01 0152228
ZNR UUUUU ZZH
R 152228Z JAN 09
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 0585
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 09 SAN SALVADOR 000047 
 
DEPARTMENT PLEASE PASS USTR 
DEPARTMENT FOR EEB/IFD/OIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV ECON ETRD EFIN OPIC KTDB USTR ES
SUBJECT: EL SALVADOR: 2009 INVESTMENT CLIMATE STATEMENT 
 
REF: STATE 123907 
 
¶1. Per reftel, following is Embassy San Salvador's submission for 
the 2009 Investment Climate Statement. 
Openness to Foreign Investment 
------------------------------ 
 
¶2. The Government of El Salvador views foreign investment as crucial 
for economic growth and development and has taken numerous steps in 
recent years to improve the investment climate. However, inefficient 
and inconsistent commercial law enforcement is a weak spot in El 
Salvador's otherwise positive record for encouraging investment. The 
free trade agreement among Central American countries, the Dominican 
Republic, and the United States (CAFTA-DR) includes an investment 
chapter and other chapters that promise to strengthen investment 
dispute resolution in El Salvador. 
¶3. In 2007, the Ministry of Economy estimated that foreigners 
invested $1.1 billion in El Salvador in sectors such as finance, 
retail, hotels, and beverages. The government has announced a 
medium-term objective to become a logistics/shipping hub for Central 
America, and construction of a deep-water port in the Gulf of 
Fonseca was 97% complete in 2008.  Disputes over what percent of the 
port should remain under government ownership, however, have delayed 
the port concession. Salvadoran Central Reserve Bank statistics show 
the foreign investment stock has steadily increased, reaching $6.3 
billion by June 2008, up from $1.97 billion in 2000. Companies from 
many countries--including the United States, Panama, Mexico, Spain, 
Canada, Costa Rica, Guatemala, Germany, and Italy--have invested in 
El Salvador. 
¶4. The principal statutes governing foreign investment in El 
Salvador are the Investment Law, Export Reactivation Law, Free Trade 
Zones Law, and Services Law. Other statutes establishing the basic 
legal framework for investment include the Monetary Integration Law, 
Banking Law, Insurance Companies Law, Securities Market Law, 
intellectual property laws, special legislation governing 
privatizations, Competition Law, and Tourism Law. Additional 
information on each of these laws is available throughout this 
chapter. 
¶5. The 1999 Investment Law grants equal treatment to foreign and 
domestic investors. With the exception of small businesses (10 or 
fewer employees and sales of less than $68,571/year), foreign 
investors may freely establish businesses in El Salvador. Investors 
who begin operations with 10 or fewer employees must present plans 
to increase employment to the National Investment Office (ONI) at 
the Ministry of Economy.  The Investment Law created ONI as a 
one-stop shop to facilitate the registration of new investments in 
the country, a process that the World Bank estimates takes 17 days. 
The law establishes procedures to resolve disputes between foreign 
investors and the government and eases residence requirements for 
foreign investors who make significant investments. It also provides 
that underground resources (minerals) belong to the state, which may 
grant concessions for their exploitation. 
¶6. The government's trade and investment promotion agencies are 
organized under the Investment and Exports Promotion National 
Commission (CONADEI), headed by the Vice President. The National 
Investment Promotion Agency (PROESA) organizes investment promotion 
tours overseas and provides information and facilitation services in 
El Salvador. The National Agency for Export Promotion (EXPORTA) 
focuses on identifying niche markets for Salvadoran exports, 
especially nontraditional goods, and provides trade capacity 
building to new exporters. 
¶7. The government launched its privatization process in 1990 
starting with the banking system. Privatization has played an 
important role in attracting foreign investment, especially in 
electricity generation and distribution, telecommunications, and 
pension funds. 
¶8. The Salvadoran electricity sector is divided into generation, 
transmission, and distribution subsectors. The electricity 
generation market includes: CEL, the state-owned energy company; one 
U.S. investor that bought three thermal generation plants from CEL 
in 1999; an Indian-Israeli consortium that recently bought a thermal 
power plant from a British company; La Geo, a private-public Italian 
joint venture  geothermal power generation company; and other minor 
generators. The state-owned ETESAL provides transmission services. 
Investors from the United States, Chile, and Venezuela bought 
controlling shares in four electricity distribution companies when 
the government privatized the sector in 1998. However, two U.S. and 
British companies now provide all distribution services for the 
country. The Transaction Unit (UT), owned by market participants, 
operates the wholesale energy market.  Two U.S.-owned companies have 
delayed construction of new generation facilities, which may lead to 
problems with energy supply. 
¶9. Privatization and foreign investment have modernized Salvadoran 
telecommunications. The only remaining restrictions for foreign 
investors are on free reception television and AM/FM radio 
broadcasting, where foreign ownership cannot exceed 49 percent of 
equity. America Movil, the Mexican telecommunications giant, now 
 
SAN SALVAD 00000047  002.2 OF 009 
 
 
owns 94 percent of what was CTE, the state-owned telecommunications 
firm privatized in 1998. A U.S. long-distance telephone service 
provider had complained that regulators and Salvadoran courts were 
unable to prevent CTE from violating interconnection agreements and 
offering discriminatory interconnection rates. However, the U.S. 
company later settled its claim with CTE's parent company. 
Separately, the government is preparing new telecommunications 
regulations to implement cost-based interconnection as required by 
CAFTA-DR. On June 12, the National Assembly passed a law to 
establish a four-cent-per-minute tax on incoming international phone 
calls terminated in El Salvador (though some provisions may exempt 
phone calls from Central America),. U.S. phone companies are 
contesting this tax alleging it violates local law and several 
international commitments, including CAFTA-DR. 
¶10. The government created five privatized pension funds in 1998 
with the participation of Citibank, Spanish banks Banco Bilbao 
Vizcaya and Argentaria, and two local investors. After considerable 
consolidation in the sector, two funds remain, owned by Banco 
Cuscatlan and Banco Agricola. However, during 2007, Citigroup 
acquired Banco Cuscatlan and Bancolombia acquired Banco Agricola. 
Conversion and Transfer Policies 
-------------------------------- 
 
¶11. There are no restrictions on transferring funds associated with 
investment out of the country. Foreign businesses can freely remit 
or reinvest profits, repatriate capital, and bring in capital for 
additional investment. The 1999 Investment Law also allows 
unrestricted remittance of royalties and fees from the use of 
foreign patents, trademarks, technical assistance, and other 
services. 
¶12. The Monetary Integration Law dollarized El Salvador in 2001, and 
the U.S. dollar now freely circulates and can be used in all 
transactions. One objective of dollarization was to make El Salvador 
more attractive to foreign investors. El Salvador has long had a 
freely convertible currency and since 1994 the colon traded at 8.75 
per dollar. The Monetary Integration law fixed the colon at that 
rate. While prices are sometimes listed in both currencies, the 
colon is not used. U.S. dollars account for nearly all currency in 
circulation. Salvadoran banks, in accordance with the law, must keep 
all accounts in dollars. Dollarization is supported by family 
remittances--almost all from the United States--that were $3.7 
billion in 2007, up from $3.3 billion the year before. As of the end 
of 2008, the Central Reserve Bank reported international reserves of 
$2.2 billion. 
Expropriation and Compensation 
------------------------------ 
¶13. El Salvador's 1983 constitution allows the government to 
expropriate private property for reasons of public utility or social 
interest, and indemnification can take place either before or after 
the fact. There are no recent cases of expropriation. In 1980, a 
rural/agricultural land reform established that no single natural or 
legal person could own more than 245 hectares (605 acres) of land, 
and the government expropriated the land of some large landholders. 
While banks were nationalized in 1980, beginning in 1990 they were 
returned to private ownership. A 2003 amendment to the 1996 
Electricity Law contains a provision that, while not authorizing 
expropriation, requires energy generating companies to obtain 
government approval before removing fixed capital from the country. 
According to the government, this provision of the law is intended 
to prevent energy supply disruptions.  In December 2008, the U.S. 
subsidiary of a Canadian mining company filed a notice of intent to 
file a CAFTA-DR complaint under the indirect expropriation 
provision.  The parties will have 90 days to resolve the matter 
before more formal dispute resolution proceedings will commence. 
Dispute Settlement 
------------------ 
 
¶14. While foreign investors can seek redress of commercial disputes 
with Salvadoran companies through El Salvador's courts, investors 
have found that seeking resolution of problems through the 
slow-moving domestic legal system can be costly and unproductive. 
The course of some cases has shown that the legal system is subject 
to manipulation by private interests, and final rulings are 
sometimes not enforced. Where possible, arbitration clauses, 
preferably with a foreign venue, should be included in commercial 
contracts as a means to resolve business disputes. Investors should 
make sure that all contracts are carefully drafted and that the 
relationships with local firms are specifically defined. Some U.S. 
firms have been embroiled in major legal disputes in recent years, 
in cases where they asserted that a contract with a Salvadoran firm 
either had formally ended or never existed, but Salvadoran courts 
have ruled that the contract remained in force. On October 22, 2008, 
the Legislative Assembly passed a new criminal procedures code, 
which should enter into force on January 1, 2010.  The new code is 
designed to facilitate trials and streamline the appeals process. 
The new code also improves the way in which evidence is handled. 
¶15. El Salvador's commercial law is based on the Commercial Code and 
 
SAN SALVAD 00000047  003.2 OF 009 
 
 
the Code for Mercantile Processes. There is a mercantile court 
system for resolving commercial disputes, although there have been 
complaints about its slow processes and erratic rulings, 
particularly at the Supreme Court level. The Commercial Code, Code 
of Mercantile Processes, and Banking Law contain sections that deal 
with bankruptcy. There is no separate bankruptcy law or bankruptcy 
court. On June 12, 2008, the Legislative Assembly passed several 
reforms to the Commercial Code and the Commerce Registry Law. The 
reforms are aimed to facilitate trade and investment through a 
reduction of the steps and requirements needed to register, develop, 
and close a business. The reforms include lower capital requirements 
to open a business and fewer requirements to increase the capital of 
the business or to dissolve a business. With the reforms, all 
documents and payments can be submitted electronically to the 
Commerce Registry. 
¶16. Article 15 of the 1999 Investment Law states that disputes 
between foreign investors and the government will be submitted for 
arbitration to the International Center for Settlement of Investment 
Disputes (ICSID), a World Bank affiliated organization. In 2002, the 
government approved a law to allow private sector organizations to 
establish arbitration centers for the resolution of commercial 
disputes, including those involving foreign investors. Under 
CAFTA-DR, investor rights are protected by an effective, impartial 
procedure for dispute settlement that is fully transparent, as 
described in chapter 20 of the agreement. Submissions to dispute 
panels and panel hearings are open to the public, and interested 
parties have the opportunity to submit their views. 
¶17. The first case of commercial arbitration in El Salvador involved 
a U.S.-owned firm and the para-statal water company. The arbitration 
panel ruled in favor of the U.S-owned firm, but a legal challenge by 
the water company relating to the bidding process led the Supreme 
Court to suspend the proceedings in August 2004. In late 2006 the 
Supreme Court issued its final resolution against the U.S- owned 
firm, determining that the contract was illegal. No further 
arbitration cases have been heard in El Salvador because potential 
clients lack confidence that the courts will respect arbitral 
decisions. 
Performance Requirements and Incentives 
--------------------------------------- 
 
¶18. El Salvador's Investment Law does not require investors to 
export specific amounts, transfer technology, incorporate set levels 
of local content, or fulfill other performance criteria. Foreign 
investors and domestic firms are eligible for the same export 
incentives. Exports of goods and services are levied zero value 
added tax. 
¶19. The 1998 Free Trade Zones Law is designed to attract investment 
in a wide range of activities, although at present more than 90 
percent of the businesses in export processing zones are maquila 
clothing assembly plants. A Salvadoran partner is not needed to 
operate in a free zone, and some maquila operations are completely 
foreign-owned. 
¶20. The law established rules for export processing zones (free 
zones) and bonded areas. The free zones are outside the nation's 
customs jurisdiction, while the bonded areas are within its 
jurisdiction but subject to special treatment. Local and foreign 
companies can establish themselves in a free zone to produce goods 
or services for export or to provide services linked to 
international trade. The regulations for the bonded areas are very 
similar. 
¶21. Firms located in the free zones and the bonded areas enjoy the 
following benefits: 
- Exemption from all duties and taxes on imports of raw materials 
and the machinery and equipment needed to produce for export. 
- Exemptions from taxes for fuels and lubricants used for producing 
exports, if these are not domestically produced; 
- Exemption from income tax, municipal taxes on company assets and 
property; and 
- Exemption from taxes on real estate transfers that are related to 
export activity. 
¶22. Companies in the free zones are also allowed to sell goods or 
services in the Salvadoran market if they pay applicable taxes for 
the proportion sold locally. Additional rules apply to textile and 
apparel products. 
¶23. Under the 1990 Export Reactivation Law, firms may apply for tax 
rebates of 6 percent of the FOB value of manufactured or processed 
exports shipped outside the Central American Common Market area. 
These firms need not be located in the free zones or be exporting 
100 percent of their output. Exports of coffee, sugar, and cotton 
can qualify for this rebate if they have undergone a transformation 
that adds at least 30 percent to their original value. Firms that 
qualify for these tax rebates are also eligible for duty exemptions 
for imported raw materials and intermediate goods used in the 
assembly of the products to be exported. El Salvador extended the 
period to eliminate this WTO-inconsistent measure until the end of 
¶2009. 
¶24. The International Services Law, approved in 2007, establishes 
 
SAN SALVAD 00000047  004.2 OF 009 
 
 
service parks and centers with incentives similar to those received 
by El Salvador's free trade zones. Service park developers will be 
exempted from income tax for 15 years, municipal taxes for 10 years, 
and real estate transfer taxes. Service park administrators will be 
exempted from income tax for 15 years and from municipal taxes for 
10 years. 
¶25. Firms located in the service parks/service centers receive the 
following permanent benefits: 
- Tariff exemption for the import of capital goods, machinery, 
equipment, tools, supplies, accessories, furniture and other goods 
needed for the development of the service activities (goods and 
services such as food and beverages, tobacco products, alcoholic 
beverages, rental fees, home equipment and furniture, cleaning 
articles, luxury goods, transportation vehicles, and hotel services 
are not exempted from taxation); 
- Exemption from income tax and municipal taxes on company assets. 
The tax exemptions remain in place as long as the service operations 
are functioning. 
¶26. Service firms operating under the existing Free Zones law are 
also covered. However, if the services are provided to the national 
market, they cannot receive the benefits of the Services Law. 
¶27. The following services are covered by the Services Law: 
- International Distribution 
- Logistical International Operations 
- Call Centers 
- Information Technology 
- Research and Development 
- Marine Vessels Repair and Maintenance 
- Aircraft Repair and Maintenance 
- Entrepreneurial Processes (i.e., business process outsourcing) 
- Hospital-Medical Services 
- International Financial Services 
¶28. Beneficiaries must invest at least $150,000 during the first 
year of operations, including working capital and fixed assets, must 
hire no fewer than ten permanent workers, and must have at least a 
one-year contract. For hospital/medical services, the minimum 
investment in fixed assets must be $10 million if they are to 
provide surgical services or a minimum of $3 million if they do not 
provide surgical services. Hospital or medical services must be 
located outside of major metropolitan areas. The service must also 
be provided only to patients that are insured. 
¶29. In 2005, the government approved a tourism law to spur 
investment in the sector. The law establishes fiscal incentives for 
those who invest a minimum of $50,000.00 in tourism-related projects 
in El Salvador. Incentives include an income tax break of 100 
percent for 10 years and no duties on imports of capital and other 
goods, subject to limitations. The investor also benefits from a 
five-year exemption from land acquisition taxes, as well as a 50 
percent cut in municipal taxes over that period. To take advantage 
of these incentives, the enterprise must contribute five percent of 
profits during the exemption period to a government-administered 
Tourism Promotion Fund. 
¶30. Those who plan to live and work in El Salvador for an extended 
period will need to obtain temporary residency, which may be renewed 
periodically.  Under Article 11 of the Investment Law, foreigners 
with investments equal to or more than 4,000 minimum monthly wages 
($768,400) have the right to receive Investor's Residence, 
permitting them to work and stay in the country. Such residency can 
be requested within 30 days after the investment has been 
registered. The residency permit covers the investor and his family 
and is issued for one year, subject to extension on a yearly basis. 
¶31. Most companies employ a local lawyer to manage the process of 
obtaining residency. The American Chamber of Commerce in El Salvador 
can also help its members with the process. Labor law requires that 
90 percent of the labor force at plants and in clerical jobs be 
Salvadoran. There are fewer restrictions on the professional and 
technical jobs that can be held by foreigners. 
¶32.  U.S. companies have complained of inconsistent enforcement of 
customs regulations and variable customs valuations.  A fast-track 
system for shipments via express courier companies has not been 
fully implemented. 
Right to Private Ownership and Establishment 
-------------------------------------------- 
¶33. There are restrictions on land ownership. No single natural or 
legal person--Salvadoran or foreign--can own more than 245 hectares 
(605 acres). Rural lands cannot be acquired by foreigners from 
countries where Salvadorans do not enjoy the same right. Foreign 
citizens and private companies can freely establish businesses in El 
Salvador. The only exception for this is in some cases involving 
small business. A 2001 fishing law allows foreigners to engage in 
commercial fishing anywhere in Salvadoran waters providing they 
obtain a license from CENDEPESCA, a government entity. 
Protection of Property Rights 
----------------------------- 
 
¶34. Private property, both movable and real estate, is recognized 
and protected in El Salvador. Companies that plan to buy land or 
 
SAN SALVAD 00000047  005.2 OF 009 
 
 
other real estate are advised to conduct a thorough search of the 
property's title prior to purchase. 
¶35. In 2005, El Salvador revised several laws to comply with 
CAFTA-DR's provisions on intellectual property rights (IPR). The 
Intellectual Property Promotion and Protection Law (1993, revised in 
2005), Law of Trademarks and Other Distinctive Signs (2002, revised 
in 2005), and Penal Code establish the legal framework to protect 
IPR. Investors must register trademarks, patents, copyrights, and 
other forms of intellectual property at the National Registry 
Center's Intellectual Property Office to protect their investments. 
Reforms passed in 2005 extended the copyright term from 50 to 70 
years. In 2008, the government enacted test data exclusivity 
regulations for pharmaceuticals and agrochemicals, which will be 
protected for 5 and 10 years respectively, and ratified an 
international agreement extending protection to satellite signals. 
¶36. The Attorney General's office and the National Civilian Police 
enforce these rights by conducting raids against distributors and 
manufactures of pirated CDs, cassettes, clothes, and computer 
software.  The 2005 reforms authorize the seizure, forfeiture, and 
destruction of counterfeit and pirated goods and the equipment used 
to produce them.  They also allow authorities to initiate these 
raids ex-oficio, and piracy is now punishable by jail sentences of 
two to six years.  However, using the criminal and mercantile courts 
to seek redress of a violation of intellectual property is often a 
slow and frustrating process.  In 2008, the local Blockbuster Video 
franchise shut down, citing piracy concerns. 
¶37. There has been no progress in a significant intellectual 
property and related contractual dispute involving trademark and 
copyright infringement by an ex-franchisee. In December 2005, an 
appeals court ignored important evidence to rule in favor of the 
ex-franchisee on a contractual issue, ordering the U.S. company to 
pay $24 million in losses and damages. The U.S. company has appealed 
the decision to the Supreme Court. Judiciary and regulatory 
enforcement continue to be the weakest pillars of intellectual 
property protection in El Salvador. 
¶38.  El Salvador is a signatory of the Bern Convention for the 
Protection of Literary and Artistic Works, the Paris Convention for 
the Protection of Industrial Property, the Geneva Convention for the 
Protection of Producers of Phonograms Against Unauthorized 
Duplication, the World Intellectual Property Organization (WIPO) 
Copyright Treaty, the WIPO Performance and Phonograms Treaty, and 
the Rome Convention for the Protection of Performers, Phonogram 
Producers, and Broadcasting Organizations. 
Transparency of Regulatory System 
--------------------------------- 
 
¶39. The laws and regulations of El Salvador are relatively 
transparent and generally foster competition. Bureaucratic 
procedures have improved in recent years and are relatively 
streamlined for foreign investors. Regulatory agencies, however, are 
often understaffed and inexperienced, especially when dealing with 
complex issues. New foreign investors should review the regulatory 
environment carefully. 
¶40. The Superintendent of Electricity and Telecommunications 
(SIGET), a regulatory agency modeled after a public utilities 
commission, regulates electricity and telecommunications. SIGET 
oversees electricity rates, telecommunications, and distribution of 
electromagnetic frequencies. SIGET's processes and procedures have 
been criticized by private electricity companies as arbitrary and 
populist. 
¶41. In 2003, the government amended the 1996 Electricity Law with 
the intention of reducing volatility in the wholesale market and 
thereby stabilizing retail electricity prices. The new law allows 
the regulator, SIGET, to develop a cost-based pricing model for the 
electricity sector to replace the existing competition-based system. 
The new system would allow the adoption of long-term contracts and 
may alleviate current market distorting regulations and intervention 
by the regulator, SIGET, and politicized management of hydro 
resources by the state-owned hydropower generator CEL. The United 
States has raised concern that uncertainty regarding the impact of 
re-regulation and the regulator's seemingly arbitrary 
decision-making processes are deterrents to U.S. electric energy 
investments in El Salvador. The government's decision to freeze 
electricity rates and increase subsidies through mid-2009 has 
increased the likelihood that regulatory reforms will be delayed. 
Energy sector companies have warned that the rising subsidies are 
eroding the financial stability of the power sector and discouraging 
needed investment in new generation capacity. Electricity companies 
are pressing the government to reduce the subsidies and schedule 
more frequent payments.  Two U.S. manufacturers have complained that 
the state-owned geothermal plant was not honoring the electricity 
rates stated in their supply contracts.  One of these cases has been 
resolved. 
¶42. In December 2007, distribution companies requested an injunction 
from the Supreme Court to block SIGET from applying the new rates 
which they say will reduce their revenues by 30% and damage the 
energy sector. They argue that SIGET violated their due process 
 
SAN SALVAD 00000047  006.2 OF 009 
 
 
rights and committed multiple technical and legal errors to 
underestimate their assets and costs during the rate review process. 
 The companies reached a settlement with the government in March 
2008 to limit the rate cuts, but not before ratings agencies 
downgraded the credit rating of both distribution companies citing 
increased risk of political interference in the regulatory process. 
¶43. The 2004 Competition Law defines a series of anticompetitive 
practices such as collusion to fix prices, limit production, or rig 
bids. Vertical arrangements, tying (conditioning the sale of one 
product on the sale of another), and exclusive dealing are also 
outlawed. Certain abuses of dominant market position are also 
illegal, for example, creating barriers to entry by other firms, 
predatory pricing to drive out competitors, price discrimination and 
similar actions when intended to limit competition will be illegal. 
The law created an autonomous Superintendent of Competition 
responsible for enforcing the law, which took effect in January 
¶2006. 
¶44. The Superintendent of Competition's decisions against the 
gasoline and energy companies resulted in four lawsuits filed 
against the Government of El Salvador in 2007. Electricity 
distributors appealed the Superintendent finding that they blocked 
two companies from entering the power distribution business. Two 
international oil companies appealed the Superintendent's ruling 
that they abused their dominant position and engaged in 
anti-competitive practices. The companies have questioned the 
determination that they had a dominant position in the Salvadoran 
market due to their parent companies' joint ownership of a refinery. 
They also argue that the alleged uncompetitive practice, zone 
pricing, is actually pro-competitive and beneficial to consumers. 
Efficient Capital Markets and Portfolio Investment 
------------------ ------------------------------- 
 
¶45. The Superintendent of the Financial System supervises banks and 
nonbank financial intermediaries. Interest rates are determined by 
market forces and have decreased significantly since dollarization 
was implemented. Foreign investors may obtain credit in the local 
financial market under the same conditions as local investors. 
Accounting systems are generally consistent with international 
norms. December 2004 fiscal reforms require that applicants for 
credit at Salvadoran financial institutions prove they are current 
in their tax obligations with the Salvadoran Government. 
¶46. El Salvador's banks are among the largest in Central America and 
owned by foreign financial institutions. The banking system is sound 
and in general well managed and supervised. The banking system's 
total assets as of October 2008 were $12.8 billion. 
¶47. Under the 1999 Banking Law and amendments made in 2002, foreign 
banks are afforded national treatment and can offer the same 
services as Salvadoran banks. They can open branches and buy or 
invest in Salvadoran financial institutions. The law strengthened 
supervisory authorities and provided more transparent and secure 
operations for customers and banks. The law also established an 
FDIC-like autonomous institution to insure deposits, increased the 
minimum capital reserve requirement for a bank to 100 million 
colones ($11.4 million), and sharply limited bank lending to 
shareholders and directors. 
¶48. The Non-Bank Financial Intermediaries Law regulates the 
organization, operation, and activities of financial institutions 
such as cooperative savings associations, nongovernmental 
organizations, and other microfinance institutions. The Money 
Laundering Law requires financial institutions to report suspicious 
transactions to the Attorney General and the Superintendency of the 
Financial System. 
¶49. The 1996 Insurance Companies Law regulates the operation of 
local insurance firms and accords national treatment to foreign 
insurance firms. Foreign firms, including U.S., Colombian, Canadian, 
and Spanish companies, have invested in Salvadoran insurers. 
¶50. The 1994 Securities Market Law established the present form for 
the Salvadoran securities exchange, which opened in 1992, and has 
played an important role in the privatization of state enterprises 
and facilitating foreign portfolio investment. Stocks, government 
and private bonds, and other financial instruments are traded on the 
exchange, which is regulated by the Superintendency of Securities. 
In 2007 the Legislative Assembly approved a securitization law, but 
it has not yet been widely used.  Foreigners may buy stocks, bonds, 
and other instruments sold on the exchange and may have their own 
securities listed, once approved by the Superintendent. Companies 
interested in listing must first register with the National Registry 
Center's Registry of Commerce. The exchange has averaged daily 
volumes of about $30 million. Government regulated private pension 
funds, Salvadoran insurance companies, and local banks are the 
largest buyers on the Salvadoran securities exchange. 
Political Violence 
------------------ 
¶51. El Salvador's 12-year civil war ended in 1992 with a peace 
agreement. The former guerrilla organization, the FMLN, became a 
political party and has participated in elections since 1994. There 
has been no political violence aimed at foreign investors, their 
 
SAN SALVAD 00000047  007 OF 009 
 
 
businesses, or their property. However, general levels of crime, 
including gang activity and extortion, are high and a major concern 
to the business community. 
Corruption 
---------- 
¶52. Soliciting, offering, or accepting a bribe is a criminal act in 
El Salvador. The Attorney General has a special office, the 
Anticorruption and Complex Crimes Unit, which handles cases 
involving corruption by public officials and administrators. The 
Constitution also established the Court of Accounts that is charged 
with investigating public officials and entities and, when 
necessary, passing such cases to the Attorney General for 
prosecution. In 2005, the government issued a code of ethics for the 
executive-branch employees, including administrative enforcement 
mechanisms, and it established an Ethics Tribunal in 2006. El 
Salvador ratified the Inter-American Convention Against Corruption 
in 1998. 
¶53. While improvements have been made, corruption remains a problem. 
 When it occurs, corruption is usually at lower governmental levels. 
 However, there have been some recent corruption scandals; one 
involved a member of the Legislative Assembly and another involved 
senior officials of the Salvadoran water authority, including its 
former president.  There have also been credible complaints about 
judicial corruption, while another ongoing corruption scandal 
involves municipal governments and waste disposal contracting. There 
is an active, free press that reports on corruption. 
Bilateral Investment Agreements and Free Trade Agreements 
-------------------------- ------------------------------ 
¶54. The United States - Central America - Dominican Republic Free 
Trade Agreement (CAFTA-DR) entered into force for the United States 
and El Salvador on March 1, 2006. For Honduras and Nicaragua it 
entered into force on April 1, 2006, for Guatemala on July 1, 2006, 
for the Dominican Republic on March 1, 2007, and for Costa Rica on 
January 1, 2009. CAFTA-DR's investment chapter provides protection 
to most categories of investment, including enterprises, debt, 
concessions, contract, and intellectual property. U.S. investors 
enjoy, in almost all circumstances, the right to establish, acquire, 
and operate investments in El Salvador on an equal footing with 
local investors. Among the rights afforded to U.S. investors are due 
process protection and the right to receive a fair market value for 
property in the event of an expropriation. Investor rights are 
protected under CAFTA-DR by an effective, impartial procedure for 
dispute settlement that is fully transparent and open to the 
public. 
¶55. El Salvador also negotiated trade agreements with Colombia and 
Taiwan and is negotiating a trade agreement with Canada; these 
agreements will contain investment provisions. El Salvador, with the 
other Central American countries, is also negotiating an Association 
Agreement with the European Union that will include the 
establishment of a Free Trade Area. The five Central American Common 
Market countries, which include El Salvador, have an investment 
treaty among themselves. In addition, the free trade agreements that 
El Salvador has with Mexico, Chile, and Panama include investment 
provisions. 
OPIC and Other Investment Insurance Programs 
-------------------------------------------- 
 
¶56. OPIC insures against currency inconvertibility, expropriation, 
and civil strife and can also provide corporate project financing 
and special financing oriented to small business. The Overseas 
Private Investment Corporation (OPIC) has a bilateral agreement with 
El Salvador that requires the Government of El Salvador to approve 
all insurance applications. A new agreement is being negotiated that 
will eliminate this requirement. In 2006, OPIC signed an agreement 
with the National Investment Promotion Agency of El Salvador 
(PROESA) to improve outreach to U.S. small business investors in El 
Salvador. Because El Salvador uses the U.S. dollar, full 
inconvertibility insurance may be unnecessary, but investors do 
insure against inability to transfer funds. El Salvador is a member 
of the Multilateral Investment Guarantee Agency (MIGA). 
 
Labor 
----- 
 
¶57. El Salvador has a labor force of approximately 1.72 million. 
Salvadoran labor is perceived as hard working and receptive to 
training and advanced study. The general educational level is low, 
and the skilled labor pool is shallow, which may pose problems for 
investors needing skilled, educated labor.  According to many large 
employers, there is a lack of middle management-level talent, which 
sometimes results in foreigners being brought in to perform such 
tasks. Employers do not report labor-related difficulties in 
incorporating technology into their workplaces. 
¶58. The Constitution guarantees the right of employees in the 
private sector to organize into associations and unions. Employers 
are free to hire union or non-union labor. Closed shops are illegal. 
Labor law is generally in accordance with internationally recognized 
 
SAN SALVAD 00000047  008.2 OF 009 
 
 
standards, but is not enforced consistently by government 
authorities. The International Labor Organization's Committee on 
Freedom of Association has expressed concern in a number of cases 
about the government's failure to apply the protections of workers 
rights to organize and bargain collectively, as required by 
International Labor Organization conventions. 
Foreign Trade Zones/Free Trade Zones 
------------------------------------- 
¶59. As of December 2007, there were 13 free zones operating in the 
country. Maquila textile operations constitute the businesses of 12 
of the free zones. These firms, mostly owned by Salvadoran, U.S., 
Taiwanese, and Korean investors, employ approximately 58,000 people. 
The section on Performance Requirements and Incentives outlines the 
benefits available to investors in these zones. 
Foreign Direct Investment Statistics 
------------------------------------ 
¶60. Accumulated Foreign Investment by Country of Origin (Millions of 
Dollars) 
Country         2004     2005     2006     2007 
-------         ----     ----     ----     ---- 
United States  1,026.7  1,358.9  1,371.8  1,870.9 
Panama           102.5    144.5    212.3  1,053.5 
Mexico           614.7    647.8    655.0    714.4 
Virgin Islands    56.2    356.2    355.9    356.6 
Spain            195.0    195.2    195.3    205.4 
Canada            56.0    130.3    145.3    153.6 
Costa Rica        68.8     67.4     70.1    104.2 
Guatemala         60.1     70.4     93.4     93.6 
Germany           84.9     89.4     92.2     93.6 
Bahamas           67.8     68.6     74.9     75.2 
Italy             26.6     26.6     74.0     74.0 
Taiwan            57.3     58.6     58.3     58.3 
Singapore         32.5     36.5     37.3     45.0 
Netherlands       39.1     55.0     56.3     42.0 
Nicaragua         20.4     21.3     27.8     35.5 
Korea, South      23.5     26.0     22.0     30.0 
Honduras          21.0     21.6     21.8     22.0 
Japan             14.2     14.2     14.0     18.7 
Switzerland       15.6     16.8     16.8     16.8 
Aruba             15.0     15.0     15.0     15.0 
Brazil             0.0      0.0      4.3     13.7 
Bermuda           11.8     12.3     13.3     13.3 
England            7.4      8.2      9.7     12.7 
France             5.8      5.8      6.0      4.5 
Israel             2.3      1.0      1.5      2.5 
Peru              22.3     22.3     22.3      1.8 
Chile              0.7      0.3     24.8      0.8 
Ecuador            9.0      9.0      9.0      0.0 
Venezuela        309.5      0.0      0.0      0.0 
Other             29.6     29.6     34.4     52.2 
Total:         2,996.1  3,508.1  3,735.0 
5,182.5Source: Central Reserve Bank of El Salvador. 
 
¶61. Annual Foreign Investment Flows in Selected Sectors (Millions of 
Dollars) 
 
Sector          2004   2005   2006    2007 
------          ----   ----   ----    ---- 
Industry        40.8  316.6   16.7    21.4 
Retail          39.1   26.7   51.3    41.0 
Services        -0.1   14.4   11.9    40.1 
Construction     0.0    0.0    0.0    -0.1 
Communications 334.7   47.8    0.1    66.7 
Electricity    -48.0    0.0   47.4     0.0 
Agriculture and 
griculture and 
Fishing         21.8   -1.5    0.6     1.9 
Mining           0.0    1.5   28.0     8.3 
Financial      -13.0  102.3   71.5 1,167.5 
Maquila         31.4    4.2   -0.4   100.6 
Total:         406.9  512.0  226.9 1,447.5 
 
Source: Central Reserve Bank of El Salvador. 
 
¶62. Foreign Direct Investment as a Percentage of GDP (Millions of 
Dollars) 
 
                 2004       2005       2006       2007 
                 ----       ----       ----       ---- 
GDP             15,798.3  17,070.2   18,653.6   20,372.6 
FDI stock        2,996.1   3,508.1    3,735.0    5,182.5 
FDI flows          406.9     512.0      226.9    1,447.5 
FDI stock as 
a percentage 
of GDP              19.0      20.6       20.0       25.4 
FDI flows as 
a percentage 
 
SAN SALVAD 00000047  009.2 OF 009 
 
 
of GDP               2.6       3.0        1.2        7.1 
 
Source: Central Reserve Bank of El Salvador. 
¶63. Partial List of Major Foreign Investors 
AES Corporation (USA) -- Electricity distribution 
AIG (USA) -- Insurance 
AMNET (USA)- Cable television, telephone and Internet 
Avery Dennison (USA) -- Labels for clothing 
Bayer de El Salvador (German) -- Pharmaceutical processing plant, 
fertilizer plant 
Decameron International (Colombia) - Tourism/hotels 
DELSUR (USA)-Electricity distribution 
Citigroup (USA) - Banking 
Scotiabank (Canada) - Banking 
Digicel (Caribbean) -- Cellular telephone service 
Dell Computer (USA) -- Customer service/sales call center 
Duke Energy (USA) -- Thermal electricity generation plants 
Elf (France) -- Propane gas 
Globaleq (USA) -- Owner/operator of the Nejapa power/generating 
plant 
EMEL S.A. (Chilean/USA) -- Electricity distribution 
Esso Standard Oil (USA) -- Gas stations/small refinery at Acajutla 
America Movil (Mexico) -- Fixed and wireless telephone, retail 
Fruit of the Loom (USA) - Apparel assembly 
Grupo Calvo (Spain) -- Tuna fishing/processing 
Holcim (Swiss) - Cement 
Intelfon (Panama/El Salvador) - Telecommunications 
International Paper (USA) -- Packaging 
Lacoste (France) -- Textiles/apparel 
Kimberly Clark de C.A. (USA) -- Distribution facility 
Maseca (Mexico) -- Corn Milling 
Max (Guatemala) -- Appliance retailing 
Petenatti (Brazil) - Textiles PriceSmart (USA) -- Member discount 
store and supermarket 
SABMiller (South Africa) -- Beer, sodas, and other beverages 
Sara Lee Knit Products (USA) -- Apparel assembly 
Shell El Salvador (Netherlands/U.K.) -- Oil refinery (with Esso); 
Service stations/grocery marts throughout the country. 
Telefonica de Espana (Spain) -- Cellular telephones 
Telemovil (USA/Luxembourg) -- Cellular telephones 
Texaco Caribbean (USA) -- Fuel storage and lubricant blending plant 
in Acajutla, and service station/grocery markets. 
Unisola-Unilever (UK) -- Food products 
WalMart (United States) -- Supermarkets 
¶63. Web Resources 
Foreign Direct Investment Statistics, Central Bank: 
http:// 
www.bcr.gob.sv/estadisticas/series_estadistic as.html 
Investment Promotion Agency, PROESA: http://www.proesa.com.sv/ 
Country Investment Climate and Economic Outlook, Think Tank NGO, 
FUSADES: http://www.fusades.com.sv/i_index.html 
Investment Office, Ministry of Economy: 
http://www.minec.gob.sv/oni/index.html 
Capital Market Regulatory Agencies: http://www.superval.gob.sv/ and 
http://www.ssf.gob.sv/ 
Investment Financing: http://www.opic.gov/ 
Mediation Center, Chamber of Commerce - El Salvador: 
http://www.mediacionyarbitraje.com.sv/ 
Intellectual Property Rights, Office of Registration: 
http://www.cnr.gob.sv/proi.asp?n=0 
Trade Agreements, Ministry of Economy: 
http://www.minec.gob.sv/default.asp?id=31&mnu =31/ 
CAFTA, Ministry of Economy: 
http://www.minec.gob.sv/default.asp?id=70&mnu =70/ 
Trade Agreements, Organization of American States: 
http://www.sice.oas.org/trades.asp#MCCA/ 
http://www.sice.oas.org/ctyindex/ESVpg.asp#AT / 
Labor regulations, Ministry of Labor: http://www.mtps.gob.sv 
Regional Labor Information: http://www.laboral.sieca.org.gt/ 
Infrastructure Map (Ports, Airports, Highways, Customs and Free 
Trade Zones): http://www.proesa.com.sv/map.asp 
Monetary Integration: 
http://www.bcr.gob.sv/ingles/integracion/ley. html