Latin America and Caribbean GDP growth was sluggish in 2018 and 2019, rising respectively only by 1.1% and 0.1%. The latest IMF forecasts for 2020 point to an acceleration to 1.6%, just slightly above the population growth rate. However, the region still has the slowest pace of growth among emerging markets. In order to boost economic activity, investment in infrastructure is essential.
In most of Latin American countries, the dire state of public finances limits government investments to suboptimal levels and increases the still large infrastructure investment gap, estimated as at least 2.5% of GDP or $US150 billion per year by the IADB. Privately financed projects in LAC region (Latin America and the Caribbean) already account for nearly 40% of the total but there is still room for growth.
In 2019 social unrest across Latin America increased risks to infrastructure development in several of the region’s most attractive markets while threatening to weaken investor sentiment towards the region more broadly and deeply.
Indeed, political instability provides a strong disincentive for investments in long-term projects, potentially impacting nearly all their life cycles, from the planning phase to completion. The swell of protests across Latin America mostly affects the execution stage and triggers the need for leaders to find new ways to build consensus, particularly on greenfield projects.
Which markets were hit the hardest in 2019 among major Latin American economies? First of all, Chile, the most attractive market in the region. In October 2019 unprecedented, massive nationwide protests following an increase in public transportation fares led to disruption and substantial property damage, shrinking investors’ confidence. The SACE political risk index saw an uptick from 19 points out of 100 to 25. That is still a low score because the institutional framework is one the strongest in Latin America and the Pinera administration promptly addressed the protesters’ demands. In December 2019 the Chilean government announced the Plan de Protección del Empleo y Recuperación Economica, a $US 5.5.bn program including, among other social measures, $US1.5 bn for the Santiago-Melipilla rail project and $US 380 mn for reconstruction of the damaged Santiago metro. However, in the short term the government stimulus efforts will hardly be able to compensate for falling private investments resulting from increased uncertainty in the business environment. The national plebiscite scheduled for the end April 2020 and the following process of drafting a new constitution up to mid-2021 will probably keep uncertainty high until the next presidential elections in autumn 2021.
A sharp change in political direction led to the rise of policy uncertainty in another two of Latin American biggest economies: Mexico and Argentina. In Mexico, since taking office on December 1, 2018, Obrador’s government marked a significant shift away from the pro-business infrastructure policies of the previous administration, most notably with the decision to cancel the $US 13 bn New Mexico City International Airport project, already built for a third. This reversal has exposed firms active in the market to rising risk weighing on private investors’ confidence. In 2020 the SACE political risk index saw a slight deterioration because the political uncertainty arising from the new government’s first decisions was not dissipated by subsequent moves. The abandonment of oil and gas auctions, backtracking from the historical 2013 energy reform, confirmed the return to a central role for the state in strategic sectors. Nonetheless, in November 2019 President Obrador launched a $US 43 bn Plano Nacional de Infraestructura 2020-2024 including 147 projects related to transport, telecommunication, water, sanitation, tourism and health. These projects will be advanced largely via funding from the private sector and will not result in new debt for the government. How to combine infrastructural development with macroeconomic commitment will be a dilemma to overcome in 2020.
In October 2019, Argentina saw the return to power of Peronists, led by Alberto Fernandez, former Chief of Cabinet during the presidency of Nestor Kirchner and the initial presidential term of his wife Cristina Fernandez de Kirchner, now serving Fernandez as vice president. The rise of leftist factions in the country brought with it a surge in policy uncertainty from the pro-business stance of former president Macri to a less clear direction. In fact, the dramatic rise in the SACE political risk index from 59 points to 70 in 2020 comes mainly from the reintroduction of capital controls in September 2019, which put foreign currency transfer at risk. Moreover, due to the prolonged economic recession, many infrastructure projects are facing delays related to public funding issues, the most impacted being brownfield projects. In such a context it is very difficult for the new cabinet to regain long-term investors’ confidence. A poor expropriation track record in strategic sectors is another factor penalizing Argentina’s score. In the LAC region only Venezuela, Haiti, Cuba and Nicaragua got a worse score on the SACE political risk index in 2020.
Last year political risk worsened somewhat even in Peru: the SACE political risk index increased by 3 points to 42. Why did this happen? Peru stands out in Latin America for impressive growth performance over the last twenty years. Nonetheless, the infrastructure gap of the Andean country is larger than that of its peers: the reasons for this weak outcome do not lie so much in a lack of financial resources or shortcomings in the planning stage as in in issues related to execution, ranging from socio-political tensions to the grip of corruption. These problems brought about several projects delays or even cancellations in recent years: the $US 7 bn Gasducto sur Peruano project stands out among them.
It is not disputed that these problems are not related only to Peru but are common to many other countries in the region and these obstacles highlight the need for political leaders to establish new forms of dialogue with citizens.
Colombian leaders are trying to find new forms of communication with inhabitants in order to speed up the implementation of infrastructural projects. This strategy could primarily benefit the 4G program, which has long been affected by stop-and-gos for various reasons, including the financial. The SACE political risk index is unchanged at 45 points, given the pro-business stance of the current Duque administration, but security-related issues are still present in various parts of the country. The results of the October 2019 municipal elections in Colombia’s major cities (Bogotá, Medellín and Cali, together accounting for nearly 30% of the total population) could mark a substantial shift in Colombia’s infrastructure sector policy, putting more emphasis on urban areas’ mobility and sustainability. This could be a means to revitalize the stagnant residential construction sector supporting Colombia’s buoyant momentum.
Finally, another bright spot in the Latin American landscape is Brazil. The SACE political risk index showed an improvement in 2020 from 50 points to 45. The progress has been mainly led by the strengthening of the rule of law due to the pro-business policies of the Bolsonaro administration. Minimal fiscal spaces of the leading Latin American economy have pushed the new government to focus even more on private initiatives through a vast program of concessions and privatisations. This is the way chosen to improve poor infrastructure quality in a country almost twice as large as the European Union. However, how to address ESG issues will remain a key challenge in 2020.
 IMF, World Economic Outlook update (January 2020)
 IADB, Latin American and Caribbean Macroeconomic Report (2019)
 IADB, Bankability through the lens of transparency (May 2019)
 Fitch solutions, Latin America Infrastructure Risk/Reward Index
 SACE’s political risk indicator is the average of expropriation and breach of contract risk, war and civil disturbance risk and transfer and convertibility risk. All risks are expressed from 0 to 100; the lower the score the smaller the political risk in a country
 SACE, Perù, la rising star dell’America Latina (2019)