Latin America needs a financing boost to restart the economy - Comment & Profiles -

The president of CAF, the Development Bank of Latin America, says the post-pandemic era is the perfect opportunity for investment in the region’s infrastructure.

Mr Carranza

Luis Carranza Ugarte

The Covid-19 crisis has disrupted the main engines of global growth, and the second wave of the pandemic has hit Europe and the US hard. Though case numbers started to decline in Latin America in late September, it remains one of the world’s worst-affected regions. 

The numbers reveal how dire the impact of the health crisis has been on the region’s economies. Gross domestic product (GDP) growth is expected to contract by 8% in Latin America in 2020, causing massive job losses and putting more than 28 million people at risk of poverty.

With the recent announcements of two effective vaccines that will be rolled out in the next six to 12 months, it appears that the virus that has damaged the world in unimaginable ways might soon be vanquished. Now it is necessary to start planning for the post-Covid world.

A golden opportunity

Over the past four decades, economic growth was mostly propelled by globalisation, and international co-operation holds the key to putting the global economy back on track. The recovery from this economic shock offers an opportunity to reduce income inequality and broaden access to quality healthcare, clean water, better sanitation and quality education. 

A global recovery needs to take into account the needs of emerging countries, whose economies are some of the hardest hit by the pandemic. 

The recovery agenda should focus on avoiding the traps that have led to boom-and-bust cycles for generations. The goal should be to foster changes that will bring about sustained and more inclusive long-term growth. This means financing infrastructure that will allow developing economies to avoid the recovery cycles that have plagued them.

The lack of infrastructure has long constrained Latin America’s development. There is a list of requirements for bringing the region into the 21st century: better highways, railroads, ports and other modes of transportation; more efficient energy production and distribution; better and more inclusive educational opportunities; wider access to clean water and functioning sanitation utilities; and broader and faster internet connectivity. 

According to CAF, the Development Bank of Latin America, the region’s annual investment in infrastructure totals $34bn. To bring that up to the level of economies in the developed world, investment should be at least seven times greater, around $220bn annually. Such funds would enable Latin America and the Caribbean to build highways, ports and airports to promote trade both within the region and internationally, making it more globally competitive.

The large multinational construction companies that can help build these facilities are in Asia, Europe and North America, and they should be encouraged to work closely with Latin American partners. These partnerships could boost growth and the expansion of Latin America’s working and middle classes, which could become attractive markets for companies around the world that produce consumer goods.

In this way, investments would create a virtuous cycle whereby consumer demand propels economies in Latin America to new heights.

Bridging the gap

The average annual investment in transportation infrastructure (roads, railways, ports and waterways) in the region over the past decade has been around 1.3% of regional GDP. Recent estimates indicate that number should be as high as 3.7% over the next 20 years for the region to catch up with the developed world. In the energy sector, the situation is better. Most countries in Latin America have already secured an adequate electric power supply, and the recent boom in renewables made power generation cleaner and cheaper. Despite this success, the Global Infrastructure Hub calculates that there is an investment gap of 0.3% of regional GDP over the next 20 years for achieving quality and coverage compatible with the UN’s Sustainable Development Goals.  

Another problem that plagues the Latin America and Caribbean region is the lack of  integration. Studies of intra-regional economic flows in commerce and finance show that it lags behind other continents, with the exception of Africa. The absence of adequate infrastructure is one cause of this shortfall. The Initiative for the Integration of the Regional Infrastructure of South America’s project database lists a pipeline of 402 projects, worth a total of $149bn, to modernise the levers of regional integration. Most of these initiatives, some 75%, are in the transportation sector.

Access all areas

As far as regional internet access is concerned, the yearly investment needs to be increased by a multiple of four – from $23.8bn to $95.6bn – for at least the next five years to approach the quality found in the industrialised countries of the Organisation for Economic Co-operation and Development for digital access and quality. When the needs of big data, cloud computing and other advances are taken into account, the target investment increases to $110.8bn annually.

It is important to imagine Industry 4.0, a world where telework is optimised and financing will be available to a broader section of the population. If Latin America is to build smarter cities that improve the lives of their citizens, it needs to improve access to education and telemedicine. 

The region also lags behind on other investments in technology. According to CAF, the region needs to invest around $478bn to close that gap: there are currently 200 million potential internet users without access. This is a huge market that the world’s leading technology companies can tap. 

Up to the challenge?

The challenge is raising capital to meet such large investment demands. While some projects may be attractive for private capital or public-private-partnerships, public investment will play a key role in this. It is crucial that Latin American economies avoid a fiscal cliff if there is an untimely removal of stimuli that could hamper the recovery. 

That is difficult, given that most countries in the region had limited fiscal resources even before the crisis. Therefore, countries need to follow a consolidation path to stabilise debt and guarantee sustainability. To put things in perspective, the average fiscal deficit in countries across the region is expected to exceed 10% of GDP in 2020, while financial needs to cover the deficit and debt repayments soared from 8% of GDP in 2019 to 14% in 2020. Debt ratios will thus increase by least 10 percentage points in 2020.

To pave the way for a gradual and credible consolidation process that does not derail the recovery, Latin America should take measured steps. First, as the economy recovers, emergency stimulus should be carefully withdrawn. Emergency money transfers that supported families and small businesses could gradually be redirected to public infrastructure projects. Second, countries need to strengthen fiscal institutions to signal their commitment to sustainability by rethinking and improving fiscal rules, and undertaking tax and pension reforms where needed. Third, countries should take advantage of financial markets, which are offering loans at lower rates to assist in the economic recovery. But not all countries can access markets at low cost and uncertainty may well put an end to the favourable lending climate.

With this in mind, CAF proposes setting up a Financial Support Fund empowered to issue debt on international markets – guaranteed by developed countries in Asia and Europe – and grant long-term loans at competitive rates to develop infrastructure and bridge the digital divide. This initiative would help revive economies, improve long-term productivity and strengthen trade relationships in the region, while encouraging multinationals to invest where there are growing populations and a growing consumer class.

Consensus across the region is difficult, but we can all agree that through co-operation we have a better chance of achieving the goal of shared prosperity. Stronger international co-operation is crucial to overcome periods of severe economic disruption and social distress. The deep crisis we are experiencing due to the pandemic is no exception.

Latin America needs to reignite growth and reduce inequality to protect the most vulnerable segments of society, and to promote productive investments that contribute to long-term growth and the wellbeing of its citizens. Investment is needed, affordable financing is needed and co-operation is essential. 

Luis Carranza Ugarte is the president of CAF, the Development Bank of Latin America.

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