Central America: Infrastructure, Development, and an Economic Update

Speakers:

• David Ramirez, Special Representative, Central America and Andean Region, Mizuho Corporate Bank, Ltd.
• Jordan Schwartz, Lead Economist, Sustainable Development, Latin American and Caribbean Region, The World Bank
• Franco Uccelli, Executive Director, Emerging Markets Research, J.P.Morgan
• Ana M. Guevara, President, Aventi Associates, LLC (moderator)

Summary

On April 30, 2010, the Americas Society/Council of the Americas held a panel discussion on infrastructure and development in Central America. Discussion centered on an economic and investment outlook for the region, infrastructure development to benefit trade, and the importance of enhancing trade relations both regionally and globally.

Economic and Investment Outlook

J.P.Morgan’s Franco Uccelli noted that global markets have emerged better than expected from the economic crisis and that recovery is well on its way. In Central America, he predicted that growth would rise from 0.6 percent in 2009 to 2.7 percent in 2010. This is considerably lower than his growth forecast for the entire Latin American region (just over 4 percent) but is still a positive indicator for these economies.

Jordan Schwartz of the World Bank and Mizuho’s David Ramirez agreed there is potential for trade growth in the region. Ramirez pointed out that Central America had a faster response to the economic crisis than previously predicted by experts and continues to maintain stable inflation rates. From a lender’s perspective, Central American countries have also maintained fiscal responsibility and good debt ratios, as well as relatively low risk levels. Moreover, the dollarization in some countries paired with the huge potential for human resources are key strengths for the region to attract investment.

Despite these positive factors, the region has a long way to go to increase foreign investment, which would multiply growth prospects. Mizuho’s David Ramirez outlined key issues Central American economies face in attracting investment: weak regulatory framework for business, slow government response to corruption, high levels of bureaucracy and lack of intellectual property enforcement. There is also a lack of skill and foreign-language ability, which might otherwise make it an attractive market for call centers and other similar businesses.

A Closer Look at the Markets

Much of the conversation on Central American growth focused on Panama and Costa Rica. Uccelli mentioned that Panama grew 3 percent in 2009 and is expected to achieve a growth rate of 5 percent in 2010. The country’s $13.6 billion five-year investment related to the Canal is expected to benefit numerous infrastructure projects, including highways and bridge construction. Ramirez also highlighted investment opportunities in agri-businesses in Panama, which exports between $1.2 and 1.7 billion in fruit alone. As for tourism, $800 million will be invested toward developing this sector.

Costa Rica is also developing the luxury and business tourism sectors. However, Ramirez cautions that this country, historically a favorite for private investment in the region, is becoming increasingly bureaucratic. Meanwhile, he suggests taking another look at Nicaragua, which is opening its energy sector and creating an entrepreneur friendly economy. Investors should not be put off by the government’s reputation, he said, but rather see Nicaragua as a new investment opportunity.

On the other hand, Uccelli raised the fact that the fiscal deficit in El Salvador escalated to 5 percent last year and suggested the country seek assistance from global institutions. Schwartz has a more optimistic outlook and believes that, within a decade, growth in El Salvador will increase due to the country’s diversification of export products.

Transport Services and Increasing Trade

Schwartz highlighted the importance of investing in sectors such as transport services that directly stimulate growth in Central American economies. He noted that the World Bank’s interest in logistics may not be as obvious as their interest in education and technology, or even infrastructure. But developing physical infrastructure alone is not enough to generate growth so it is important to monitor advances in transport services as a way to end obstacles to trade and growth.

Schwartz noted that logistics costs are 5 to 10 times higher in Central America than in the rest of the world. While he predicted that infrastructure investment will focus primarily on the development of ports, he suggested other developments to improve border ties, such as standardizing customs processes to reduce delays and raising speed limits. Standardizing these processes for interregional trade and developing border relations comparable to those in Europe would greatly increase economic activity and growth for the entire region. Schwartz stressed that currently Nicaragua does not benefit from being next to Costa Rica in the same way that, for example, France benefits from being neighbors with Belgium and Germany. This is partly because roads are the only infrastructure linking the region’s cities, and ports are not being expanded enough to enable other markets to capitalize on proximity to Panama’s enhanced Canal.

Finally, Ramirez noted that integration with the United States has been a blessing and problem for the region. A heavy dependence on U.S. trade, tourism, remittances, and currency means the region is vulnerable to changes in U.S. policy and dips in its economy. Schwartz therefore encouraged diversification and increasing trade relations with other regions, especially Asia.