Central America Automotive Market Trends Downward

Looking at three countries located in key parts of Central America — Panama at the southern border, Guatemala at the north, and Costa Rica, the bottleneck between — it’s easy to see how changes in import laws and taxes coupled with political and human rights issues can affect a region, even when those events are isolated to certain areas. 

Regional Overview

Economy and Auto Imports From 2010 to 2015, auto imports in Costa Rica were often hitting double-digit increases year over year, ranging anywhere from 5% to 37%, according to the Costa Rican Ministry of Finance. 

In 2016, however, that began to drop starting at a decrease of 4.9% compared to 2015. More telling is that, during the same year, the customs value of those sales increased by 20.4% while the taxes increased by 22.3%. 

There has been some positive news for rental fleets in Costa Rica in more recent years. 

Certain airlines have expanded their flights to Costa Rica, leading to a surge in tourism, which has resulted in a growing need for rental vehicles. Because of this growth in tourism, certain rent-a-car companies have invested in improving and expanding their vehicle fleet, according to CentralAmericaData.com. 

In fact, tourism has been such a big driver for the Costa Rican economy that a new rent-a-car company, E.C. Rent a Car, has left its home base of Nicaragua to operate in Costa Rica. 

The company’s operations in Costa Rica began in February 2019. It now operates a 120 vehicle fleet, but plans to grow that number to 600 in the next three years. 

Panama’s vehicle segments have fared no better, decreasing by nearly 14% in 2017 and again in 2018, according to Panama’s controller general. Worst hit has been passenger vehicles, for which registrations decreased more than 20% during that span. 

One local newspaper headline from Q Media in May 2018 even claimed that Panama’s “new-car sales bonanza is history.” There are around 880,000 vehicles total in Panama as of December 2018, according to Automotive Fleet calculations.

Guatemala, on the other hand, has seen a steady rise in vehicle imports with a total registered vehicle count of 3.5 million in 2018, up from just over 1 million in 2005, according to the federal Superintendency of Tax Administration. Guatemala now has the largest number of vehicle registrations across all seven countries in Central America. 

Since 2016, first-time vehicle registrations have ranged from about 340,000 to 380,000 vehicles per year. In 2018, new vehicles accounted for 63% of registrations. 

Guatemala’s numbers can be the most deceiving, however. The country is currently dealing with political unrest and historic levels of migration from rural areas. It should be noted that a large majority of these vehicles are going into the capital, Guatemala City, rather than crossing north. The development of new roads has also been at a minimum, though promises of new infrastructure — including tunnels, wider roads, and improved public transportation systems — are reportedly in the works. 

Lacking infrastructure is an issue affecting fleets throughout Central America. In a global study of 38 countries, the Waze driving app released a global driver satisfaction rating, which ranked Costa Rica No. 29, Panama No. 35, Guatemala No. 36, with El Salvador bringing up the rear at No. 38; these were the only Central American countries included on the list. Traffic and driver services brought rankings down for these counties. In Guatemala, for example, one of the top roadway hazards is drivers running out of fuel. 

Costa Rica Market Overview

Despite some uneasiness in the numbers, Costa Rica’s economy is still considered fairly strong. For the automotive industry, it’s a matter of focus.

Costa Rica’s most recent push is to encourage the development of electric vehicle infrastructure and EV adoption, and this shouldn’t be taken lightly. In the last few months of 2018, the main power company in the area began installing EV fast-charging stations with the goal of installing a total of 28 by the end of 2019. 

Consumption data will be used to help identify additional infrastructure development. The Costa Rica Electricity Institute (ICE) also stated in December that it would start installing 40 stations in 2019 at eight per year. 
Costa Rica considers itself a “decarbonization laboratory” since its main energy source is renewable energy. 

In December 2018, ICE announced that it had produced 300 consecutive days of 100% renewable energy generation to meet the country’s electricity demands, meaning at no point did it have to rely on diesel or thermal energy backups. 

The transportation industry is one of the last areas the country needs to address to further reduce emissions; more than half of carbon dioxide emissions currently come from the transportation sector as well as two-thirds of all hydrocarbon emissions. 

Out of the 1.4 million vehicles, about 600 are electric but industry experts expect that to hit about 1,800 by the end of 2019. 

This trend can already be seen in government purchases, in which ICE itself has contracted for 100 EVs to replace gasoline or diesel vehicles, and the Costa Rican postal service has purchased 20 EV motorcycles for delivery services.

The Chevrolet Spark EV and other EVs from Nissan, Hyundai, and BMW have been the most popular so far. Tax exemptions for EV imports have been put in place to make the cost more feasible for everyday Ticos, though the acquisition cost of EVs is still a concern.

Panama Market Overview

In 2016, the nine-year Panama Canal expansion project was completed. The project significantly widened the canal, allowing more (and much larger) ships to pass through, and is expected to reinvigorate Panama’s economy. Multiple sources report that, heading into 2019, new contracts have been put into place and the economy has begun to recover from the $37 billion doled out in 2016 from government spending and public works projects — including the canal expansion. 

For Panamanians, these investments have been critical in forming what is in essence a young economy, having gained national control over the canal only 20 years ago. Overall, Panama’s economy is still considered to be in a state of slowdown, though there is a sense of optimism building as the nation approaches its next general election this May. 

In 2017, the country was ranked as the sixth-happiest place in the world by the Happy Planet Index.
Panama has a strong service economy for trade businesses, such as logistics and banking, and is also home to Central America’s only urban rail system, which was completed in 2014. However, Panama also suffers from an overabundance of unskilled labor, resulting in the one of the worst income distributions in all of Latin America. 

This disparity becomes evident when splicing out auto sales: Every vehicle segment has fallen — sedans, pickups, minivans, trucks, buses — while luxury cars have increased slightly. Some industry experts say this could be a good thing in a country where unpaved roads outnumber paved ones.

Guatemala Market Overview

While the numbers in Guatemala appear strong at first glance, a closer look at current events in the country tells a different story. For example, the distribution of income is highly inequitable, with the wealthiest 20% accounting for more than half of overall consumption. According to the latest estimates from the CIA World Factbook, 59% of the country lives below the poverty line.

Further complicating its image on the world stage, in January, the Guatemalan government expelled a United Nations anti-corruption commission that was investigating numerous officials, including current Guatemala President Jimmy Morales and several of his family members. Protests against the president have been nearly constant in the weeks following the expulsion of the diplomats, and the dustup coincides with the end of Morales’ term, with elections set to be held in June 2019. 

Historically, elections tend to negatively impact the auto market in this region due to enhanced political and economic uncertainty.  

The government has also been recently trying to crack down on the importation of used vehicles — legal and otherwise — by setting age limits. Age limits are customary among Central American countries, but Guatemala is setting them for the first time. 

In January, attempts at changing taxes collected on vehicle imports resulted in protest caravans from the Union of Importers of Vehicles in major cities throughout Guatemala. The organization used its members’ vehicles to block major roadways, causing massive traffic jams. 

At issue are four main taxes on imported vehicles: the collection of first registration, also called the Iprima; the value-added tax (VAT) of import; the vehicle circulation tax (ISCV); and another VAT once it’s sold. The ISCV is dependent on the value of the vehicle and was set to increase the most; effectively, all four taxes would have gone up in 2019. There was no exemption planned for imported fleet vehicles. 

Following tense negotiations, on Feb. 1, the groups came to an agreement: The tax increases would go forward, but will only affect about 1% of all imported vehicles, and the Guatemalan government will provide specialized training to customs managers and personnel to ensure the new tax criteria are not applied unfairly and assist importers in calculating their tax table values. 

The agreement included clarity that the lowest value of the vehicle should be used, instead of the highest, as well as a promise that the Union will participate in forming any tax changes in 2020. 

From the perspective of North American fleet owners and operators, Central America can appear to be a somewhat homogenous subregion of Latin America. A closer look reveals a new set of trends, opportunities, and challenges across each border.