www.iadb.org/macroreport Eduardo A. Cavallo, Principal Economist Project Finance & Capital Markets Latin America 2020 Miami, FL. February 10 th , 2020
Latin America and the Caribbean: continuing to lose share in world GDP 7.0 The world is growing faster 5.9 5.8 6.0 5.6 than LAC 5.0 4.0 Percent 3.5 3.5 3.4 3.3 3 3 3.0 2.4 2.3 1.9 2.0 1.6 0.8 1.0 0.1 0.0 2019 2020 2021 Latin America and the Caribbean Latin America and the Caribbean (ex Venezuela) Sub-Saharan Africa World Emerging and Developing Asia Source: IDB staff calculations based on IMF World Economic Outlook, October 2019 2
Plan of the presentation • Infrastructure as an engine of growth • The financing of infrastructure • Conclusions 3
Infrastructure gaps are significant in Latin America and the Caribbean Middle East and North Africa Europe and Central Asia South Asia East Asia and the Pacific Latin America and the Caribbean Sub-Saharan Africa 0 1 2 3 4 5 6 Latin America and the Caribbean scores poorly in the World Economic Forum’s surveys on infrastructure quality Source: IDB staff estimates based on World Economic Forum’s Global Competitiveness Report dataset. See also Castellani et al. (2018). 4
Heterogenous gaps within the region: i.e., Energy 50 A positive gap suggests that the sector indicators used for the 40 analysis, on average, are above the model's predictions, given the country's per capita income 30 20 10 0 -10 Advanced Economies Emerging Asia Latin America and the Caribbean Sub-Saharan Africa -20 -30 -40 -50 In the case of the energy sector, Latin America and the Caribbean are located near emerging Asia and, in fact, slightly above the expected values 5 Source: IDB staff calculations
Not investing more in infrastructure has large costs in terms of forgone GDP growth… Estimated impact of disinvestment in infrastructure sectors on GDP (from t to t+10) 0 Percentage Points -5 -10 -15 -20 -25 -30 Peru Bolivia Average Costa Rica Chile Argentina Jamaica Source: IDB staff calculations • Not investing more in infrastructure can cost 1pp of forgone growth in the first year • The cost rises to 15pp ($900 bn) in forgone growth if the gap persists for 10 years 6
…and affects the high productivity manufacturing sector more… Estimated impact of disinvestment in infrastructure sectors on sector- level GDP (cumulative 10 year effect) 0 -10 -20 -30 Percentage Points -40 -50 -60 -70 -80 -90 -100 Peru Jamaica Costa Rica Bolivia Argentina Chile Average Agriculture and mining Manufacturing Services (excluding infrastructure) Source: IDB staff calculations Notes: Units in the figure are the cumulative differences in percentage points of sector-level GDP growth between the benchmark and the counterfactual scenarios in year t+10 7
…and it is regressive Estimated impact of disinvestment in infrastructure sectors on real incomes (cumulative 10 year effect) Income quintiles 4 and 5 (high income) Income quintiles 1 and 2 (low income) Jamaica Argentina Chile Average Costa Rica Bolivia Peru -20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 Percentage Points Source: IDB staff calculations 8
What type of infrastructure is the most appropriate? Long-run Impact of Labor Productivity Increases in Infrastructure Sectors on Labor Productivity of Economic Sectors ECONOMIC SECTORS AGRICULTURE MINING MANUFACTURING BANKING COMMERCE INFRAESTRUCTURE ENERGY TYPE OF TRANSPORTATION CONSTRUCTION Source: IDB staff calculations based on Ahumada and Navajas (2019). If LAC countries increased labor productivity growth in these infrastructure sectors to those of OECD countries, then the economy-wide productivity growth could increase by 75 percent with respect to the historical average. This implies that the region’s income per capita could double in half the time
Plan of the presentation • Infrastructure as an engine of growth • The financing of infrastructure • Conclusions 10
The region has low investment in infrastructure but “private” Investment is growing Private investment includes banks, Average infrastructure investment is low companies and funds. 25 4.0 3.8 Private investment 20 3.6 3.4 % of GDP 3.2 15 US $ Bn 3.0 2.8 10 2.6 2.4 5 2.2 2.0 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 2018 MDB Other Private Public non-LAC Total Public Source: IDB staff calculations based on data from IJ Global. Note: In the left graph, Public is sourced from InfraLatam dataset and focuses on budgeted public investment. The total includes private investment, investment from state entities from within and beyond the region and non sovereign MDB lending . 11
Most non-public financing comes from commercial banks 13% 7% 10% 59% 1% 10% Banks Non-regional state entities Investment funds MDB Private companies Other Two thirds of this investment is in eight countries: Argentina, Brazil, Mexico, Chile, Argentina, Peru, Colombia, Uruguay and Panama Source: IDB staff calculations based on data from IJ Global. 12
Closing infrastructure gaps between countries • A bottleneck is the identification and development of projects • Given the fiscal restrictions, a second bottleneck may be the availability of financing • To attract private financing • Projects must be viable (adequate funding) • An adequate institutional framework is needed • Risks must be understood and managed correctly • The importance of commercial banks is notable, possibly because of their project- finance skills, including the ability to monitor • But commercial banks say that long-term loans are increasingly difficult due to regulatory pressure (incl. Basel III capital and liquidity ratios). It would be important to attract more financing from institutional investors 13
Typology of Risks in Infrastructure Projects Exogenous Insure with market i.e. rain pattern i.e. exchange rate instruments if available; government affecting a hydro devaluation Diversify risks across and/or MDB investors enhancements may project help create such markets or instruments if missing Systemic Idiosyncratic Control through governance Most challenging; contractual structures; MDB enhancements design of any may be most i.e. contract guarantees should approriate, especially i.e. delays due to take into account if the source is renegotiations potential moral government support bad contractors hazard Endogenous 14
A possible solution • A country-level fund with an associated facility to: • Provide knowledge (project identification and development) • Issue infrastructure bonds to provide more financing • To manage the risk of individual projects through special purpose vehicles (SPVs) • This type of instrument can favor a greater participation of institutional investors 15
Plan of the presentation • Infrastructure as an engine of growth • The financing of infrastructure • Conclusions 16
Conclusions • Given current projections, Latin America and the Caribbean will experience relatively modest growth in the coming years • Even those modest growth rates are subject to external risks • Internal policy challenges include continuing fiscal adjustments while protecting public investment. • Better and greater investment in infrastructure could significantly increase productivity and growth in the region • Private investment is growing but there is a need to attract more investors to close the identified infrastructure gaps 17
A relatively small boost in infrastructure spending in each of five large economies could have significant regional growth impacts A growth shock of US$13bn Growth shock from greater infrastructure investment Results in US$70+bn of GDP in 14 LAC countries Impact on regional GDP 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 US$ Billion Southern Cone Andean Region Central America, Mexico and The Caribbean Source: IDB staff calculations employing a statistical G-VAR model incorporating a 0.3% of GDP growth shock in five large LAC economies. 18
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