Countries covered: Central America
BMI View: Opportunities are available across the Central America region; however, the fragmentednature of the region and the high risks inherent in some markets make it far from a unified positiveoutlook. We highlight Panama, Costa Rica and Nicaragua as outperformers and note that Spanish,Chinese and regional companies will be best placed to capitalise on growth sectors.
Central America presents a broad range of opportunities across the infrastructure and wider constructionsectors 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 smallindustry sizes offer little to make those risks palatable.
Domestically, there is insufficient capacity and technical ability to support the complex projects beingdeveloped across the region. As a result, with significant opportunities and limited competition forinternational construction companies to enter the market. Best placed to capitalise will be regionalplayers, which have the ability to build on proximity to market to access contracts. Some of the highestpotential is offered to the large construction players in Mexico and Brazil (such as ICA and Odebrecht).
We also see a growing Chinese presence in the region, especially in Costa Rica. High-risk tolerance andthe ability to secure cheap and abundant capital have seen Chinese companies make a dent in theregion; Sinohydro, for example, is active in a number of power projects.
Some of the first movers into the region have been Spanish companies, which are capitalising on culturalties to incorporate Central America into their successful and broad international expansion plans. Many ofthe Spanish companies are building on their existing presence in Mexico or the Southern United States toaccess the Central America market, with Acciona and Iberdrola both having a presence. We see littlepotential for the other European majors to target the region, given the limited scale and cost ofestablishing operations.
These companies are finding opportunities across a wide range of sectors. Social infrastructure is asignificant growth area as the region's governments seek to address the wide housing deficits. At the sametime, economic infrastructure is being built up to cater for the ongoing expansion of the Panama Canal,including new ports in the region, as well as an ambitious plan to build a rival canal in Nicaragua.Building up electricity generating capacity is also seeing growth, as companies seek to capitalise on theregion's indigenous and lucrative renewable resources, as well as providing electricity to supportindustrial growth.
In particular we highlight opportunities in Panama, Nicaragua and Costa Rica:
By far exceeding the rest of the region in growth terms are Panama and Nicaragua, which weestimate recorded 2012 real growth of 20.2% and 18.6% respectively. Whilst we do notanticipate growth to continue at this rapid pace, it should remain robust in 2013 (11.4% and7.8% respectively). Panama is being boosted by the canal expansion, while a housing boom isstoking industry value growth in Nicaragua.
Our outlook for Nicaragua could vastly improve if further signs of progress are seen on theUS$6.5bn refinery, and the US$30bn Nicaragua Canal, which has long been considered a pipedream but appears to be seeing investment into feasibility studies.
Costa Rica is posting far lower growth figures than Nicaragua and Panama, with the industryhaving posted its first positive growth figures in H112 since 2009. However, we highlight CostaRica as an outperformer in terms of business environment and sustainable growth potential. Thecountry has a decent portfolio of projects in the pipeline, including transport concessions,although the ability to tap into private capital will be reliant on leveraging its more sophisticatedbusiness environment.
Despite highlighting three countries as outperformers, opportunities can be found across the region, witha handful of sectors having a positive medium-term growth outlook:
Public-Private Partnerships: A number of countries in the region are seriously consideringusing public-private partnerships (PPPs) to develop infrastructure. In addition to Guatemalahaving established a PPP agency in November 2011, El Salvador announced in April 2012 that itis considering using a PPP to develop the Cuscatlán International Airport, and in July 2012,Honduras announced it was hoping to negotiate a PPP for the Palmerola Airport. On the whole,regulations across the region are largely in their infancy, and the longer-term policy environmentdoes not instil enough confidence to attract long-term commitments from investors. Securingfinancing for investments in the region would also be a tall order. However, if we see a couple ofprojects move forward successfully, an encouraging precedent would be set.
Power: New electricity generating capacity is seeing considerable investment in CentralAmerica. Hydropower is the dominant source of electricity and will remain so, given the numberof projects being developed across the region. Key hydropower projects include the US$300mnPatuca III in Honduras, the US$700mn Tumarin project in Nicaragua, the Tres Ninas project inGuatemala, the 138 megawatt (MW) Paz hydropower project in El Salvador and the 223MWChanguinola in Panama. The largest potential project in the region, Nicaragua's long-delayedUS$1.1bn 235MW Tumarín Dam, has progressed, with construction now due to begin inFebruary 2013. The Central American Electrical Interconnection System (SIEPAC) is alsonearing completion, with a number of sections becoming operational over 2012.
Renewables: Indigenous wind and geothermal potential in the region are both attractinginvestors that are desperately seeking new markets for renewables. The completion of Gamesaand Iberdrola's 100MW Cerro de Hula Wind Farm in Honduras is the first of many projectsplanned in the region. Honduras will continue to lead the way, with two more windfarms boasting a combined 100MW capacity seeking government approval. El Salvador ishoping to start its first commercial wind farm in 2016/17 and Acciona is building a 49MWproject in Costa Rica. Costa Rica's state-owned utility announced plans in June 2012 to develop100MW of wind by 2014. Geothermal potential is also being explored, Panama has called forcompanies to register interest in geothermal concessions and Ram Power has completed the firstphase of expansion of its San Jacinto-Tizate geothermal plant, with the second phase due to havebeen completed in December 2012. Nicaragua and Costa Rica are also working to capitalise ontheir significant geothermal potential.
Ports: Port infrastructure appears to be a priority area of investment across the region. The mostimportant project is undoubtedly the expansion of the Panama Canal. The US$5.2bn project willsignificantly alter the regional trade and shipping dynamics. Delays have been reported on theproject, with the completion date, as expected, now officially pushed back to Q215. Othernotable projects include the US$1bn Moin Container Terminal in Costa Rica, to be built andoperated by APM Terminals, which is on track to start construction in 2013, and the US$500mnplan for a port at Monkey Point in Nicaragua, for which Andrade Gutierrez was contracted fora feasibility study in August 2011.
Airports: Opportunities are anticipated in the region's airport sub-sector. Honduras hasannounced a US$300mn plan to invest in five airports, whilst El Salvador, Nicaragua andHonduras all have projects under way or in the pipeline. The biggest project in the region -Panama's Tocumen Airport upgrade - was awarded to Odebrecht in September 2012, which bidUS$679.4mn.
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