www.iadb.org/macroreport Eduardo A. Cavallo, Principal Economist - - PowerPoint PPT Presentation

Eduardo A. Cavallo, Principal Economist Project Finance & Capital Markets Latin America 2020 Miami, FL. February 10th, 2020

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Latin America and the Caribbean: continuing to lose share in world GDP

Source: IDB staff calculations based on IMF World Economic Outlook, October 2019

2

0.1 1.6 2.3 0.8 1.9 2.4 3.3 3.5 3.5 3 3 3.4 5.6 5.8 5.9

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 2019 2020 2021

Percent

Latin America and the Caribbean Latin America and the Caribbean (ex Venezuela) Sub-Saharan Africa World Emerging and Developing Asia

The world is growing faster than LAC

Plan of the presentation

• Infrastructure as an engine of growth
• The financing of infrastructure
• Conclusions

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Infrastructure gaps are significant in Latin America and the Caribbean

1 2 3 4 5 6

Sub-Saharan Africa Latin America and the Caribbean East Asia and the Pacific South Asia Europe and Central Asia Middle East and North Africa

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

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Source: IDB staff calculations

• 50
• 40
• 30
• 20
• 10

10 20 30 40 50 Advanced Economies Emerging Asia Latin America and the Caribbean Sub-Saharan Africa

A positive gap suggests that the sector indicators used for the analysis, on average, are above the model's predictions, given the country's per capita income

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

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)

Source: IDB staff calculations

• 30
• 25
• 20
• 15
• 10
• 5

Peru Bolivia Average Costa Rica Chile Argentina Jamaica Percentage Points

• 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

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…and affects the high productivity manufacturing sector more…

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• 100
• 90
• 80
• 70
• 60
• 50
• 40
• 30
• 20
• 10

Peru Jamaica Costa Rica Bolivia Argentina Chile Average

Percentage Points

Agriculture and mining Manufacturing Services (excluding infrastructure)

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 Source: IDB staff calculations

Estimated impact of disinvestment in infrastructure sectors on sector- level GDP (cumulative 10 year effect)

…and it is regressive

• 20
• 18
• 16
• 14
• 12
• 10
• 8
• 6
• 4
• 2

Peru Bolivia Costa Rica Average Chile Argentina Jamaica

Percentage Points

Income quintiles 4 and 5 (high income) Income quintiles 1 and 2 (low income)

Estimated impact of disinvestment in infrastructure sectors on real incomes (cumulative 10 year effect)

Source: IDB staff calculations

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What type of infrastructure is the most appropriate?

Long-run Impact of Labor Productivity Increases in Infrastructure Sectors

• n Labor Productivity of Economic Sectors

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

Source: IDB staff calculations based on Ahumada and Navajas (2019).

AGRICULTURE MINING MANUFACTURING BANKING COMMERCE ENERGY TRANSPORTATION CONSTRUCTION ECONOMIC SECTORS TYPE OF INFRAESTRUCTURE

Plan of the presentation

• Infrastructure as an engine of growth
• The financing of infrastructure
• Conclusions

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The region has low investment in infrastructure but “private” Investment is growing

2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 2010 2011 2012 2013 2014 2015 2016 2017 % of GDP Total Public 5 10 15 20 25 2010 2011 2012 2013 2014 2015 2016 2017 2018 US $ Bn MDB Other Private Public non-LAC

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.

Average infrastructure investment is low Private investment includes banks, companies and funds.

Source: IDB staff calculations based on data from IJ Global.

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Private investment

Most non-public financing comes from commercial banks

59% 10% 1% 10% 7% 13%

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.

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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

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Typology of Risks in Infrastructure Projects

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Diversify risks across investors Insure with market instruments if available; government and/or MDB enhancements may help create such markets or instruments if missing Control through governance contractual structures; design of any guarantees should take into account potential moral hazard Most challenging; MDB enhancements may be most approriate, especially if the source is government support

Exogenous Systemic Endogenous Idiosyncratic

i.e. rain pattern affecting a hydro project i.e. delays due to bad contractors i.e. exchange rate devaluation i.e. contract renegotiations

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

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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

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A relatively small boost in infrastructure spending in each of five large economies could have significant regional growth impacts

Source: IDB staff calculations employing a statistical G-VAR model incorporating a 0.3% of GDP growth shock in five large LAC economies.

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5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 Impact on regional GDP Growth shock from greater infrastructure investment US$ Billion Southern Cone Andean Region Central America, Mexico and The Caribbean

A growth shock of US$13bn Results in US$70+bn of GDP in 14 LAC countries

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