Unlocking Central America’s Infrastructure Potential
Back in November my colleagues at BMI expressed their view that Central America’s investment appeal as a region for investors is set to grow. I decided to take another look at the core tenets of this view:
- Central America exhibits enormous economic convergence potential.
- A relatively attractive business environment in light of high entry barriers in South America places Central America onto investors’ radar screens.
- However, the high level of political risk remains a major deterrent for investors and suggests that selectivity will remain key.
With the first quarter of 2010 now behind us, Risk Watchdog is also looking at the region in the context of a more favourable external economic climate. Enormous fiscal and monetary stimuli in the US have seen a strong recovery in domestic demand levels and spurred restocking, which is favourable for Central America’s re-export sector. Moreover, much of Latin America is undergoing a robust economic recovery this year. Closer economic integration in the region suggests that Central America stands to benefit from more private sector interest in infrastructural development projects, access to project financing and more favourable conditions for multilateral loan facilities.
Fertile Soil
According to BMI, Central America has a strong potential to fill a void in Latin America’s broader investment outlook, particularly given the region’s relative appeal from a scope-of-state perspective. Indeed, the region stands out globally as having among the smallest governments relative to the size of the economy. Combine the region’s small size of government interference with dollarised economies and the region’s geostrategic relevance for global trade, and the investment outlook begins to look increasingly promising. Although Central America still remains somewhat of an unchartered territory for global investors, Risk Watchdog expects this to change over the course of this decade. This is in large part due to BMI’s belief that institutional investor asset allocation into emerging markets (EM) is set to grow considerably over the coming years – as developed market returns continue to be increasingly marginal.
However, I would also point out that the Central American domestic consumer is set to grow in prominence over the coming decade, particularly in the context of the low economic base most Central American countries are emerging from. As illustrated in the accompanying chart, my colleagues at BMI expect regional GDP per capita (in US$ terms) to increase by more than 100% over the next 10 years, with regional real GDP growth set to average 3.2%.
Central America – GDP per Capita & Real GDP Growth
The Infrastructure Rush
With little financial market liquidity to speak of, exposure to Central America’s vast long-term potential must be sought via a more direct investment route. Indeed, shallow financial markets and limited regulatory protection for investors means that large international consortia serve as the primary investment vehicles to unlock Central America’s potential in infrastructure.
Indeed, much of this can already be seen across the region, just look at the US$5.25bn Panama Canal expansion project, or the fact that three out of seven consortia have been selected for the construction of a Panama City metro project, estimated to cost US$1.5bn, which looks to create a 14km metro line across the capital.
Foreign interest in Central American infrastructure is not unique to Panama, however. Guatemala is currently looking to construct the Guatemalan Technological Corridor (GTC). The corridor, which is planned to comprise a four-lane highway, freight rail link and a petroleum pipeline, is set to link the country’s Atlantic and Pacific coast, potentially rivalling the regional supremacy of the Panama Canal. Though highly ambitious at this stage, the estimated US$12bn project has already attracted some US$7mn in private sector investments for a feasibility study. The project will also entail the construction of new ports and an airport, which would benefit Guatemala’s physical infrastructure over the longer term.
Similarly, Costa Rica has also been making strides into becoming a regional hub for cargo shipments and distribution into Central America and the Caribbean by planning a US$700mn port terminal on the Atlantic coast. A successful positioning of Costa Rica as a hub where larger shipments get disbursed onto smaller vessels for regional travel could significantly boost the country’s longer-term economic potential.
Potential Vs Risk
Notwithstanding the enormous economic convergence potential and appeal of unlocking value in the region’s relatively underdeveloped physical infrastructure, Central America remains one of the worst-affected areas in the world to suffer from non-political violence. This means that investor access to the region will remain restricted to long-term infrastructure development projects, in many ways aided by multilateral financing facilities and risk-spreading investment vehicles. Failure to address such structural and institutional shortcomings will see the wider region miss out on its attractive long-term consumer profile and shifting global investor risk perceptions of EM.