New Market Report: Central America Infrastructure Report Q4 2013

Construction sector growth remains on the whole unattractive across the region. Growth is expected to slow in Nicaragua and Costa Rica in the near term, whilst we believe Panama's current industry boom as a limited time horizon. El Salvador, Guatemala, Belize and Honduras are all struggling to post positive growth, and considering their small industry sizes are significant underperforming. Consequently, we see high risks, small scale and limited growth opportunities across the region as a whole. That said, we do see potential growth in a number of sub-sectors, including social housing, renewables and hydropower, gas conversion, and airports and ports. Local and regional companies, as well as Chinese construction companies, will be most likely to benefit.

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Central America presents a range of small scale opportunities across the infrastructure and wider construction sectors as infrastructure deficits across the region are addressed. However, it also poses significant risks. Home to deep-run corruption, high crime rates and unsophisticated institutions, the generally small industry sizes offer little to make those risks palatable. However, we do see sporadic growth opportunities, and highlight ports, airports, power and social infrastructure as key areas of growth.

These opportunities are most likely to be picked up by a combination of smaller domestic players, regional players from Mexico and Brazil, Spanish companies which have a strong presence in the region already, and Chinese companies, which can provide their own financing and have higher tolerances for risks. Broadly speaking, opportunities can be found across the region, with a handful of sectors having a positive medium-term growth outlook:

* Public-Private Partnerships: A number of countries in the region are pursuing public-private partnerships (PPPs) to develop infrastructure. In addition to Guatemala, which established a PPP agency in November 2011 is hoping to launch its first concession for Line 1 of the Guatemala City passenger railway in 2014. El Salvador announced in December 2012 that a PPP will be used to develop the Cuscatlan International Airport, and in May that one would be used for a wind farm. In April 2013, Honduras' public-private promotion agency, Coalianza, released the tender for construction and operation of the Palmerola Airport, with a contract hoped to be awarded in September 2013. However, on the whole, regulations across the region are largely in their infancy, and the longer-term policy environment does not instil enough confidence to attract long-term commitments from investors. Securing financing for investments in the region would also be a tall order. However, if we see a couple of projects move forward successfully, an encouraging precedent would be set.

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