Central America Infrastructure Report Q2 2012

BMI View: The Central America region is a mixed bag; whilst opportunities are on offer across the region, the risks in some countries are prohibitive.

Escalating violence and exposure to international instability makes the region a risky bet, particularly considering the small scale of industries.

However, we do expect some sectors to provide attractive opportunities.

The Panama Canal in itself is creating a dynamic industry in Panama, with the country set to outperform in terms of industry growth, in addition to investing in ports and airports across the region.

The power sector is the other major growth area, with renewable investors likely to find fertile ground in the region.

Key Regional Themes: Power: New electricity generating capacity is receiving sizeable investment in Central America.

Hydropower is the dominant source of electricity and will remain so, given the number of projects being developed across the region.

Key hydropower projects include: the US$300mn Patuca III in Honduras, the US$700mn Tumarin project in Nicaragua, the Tres Ninas project in Guatemala, the 138MW Paz hydropower project in El Salvador and the 223MW Changuinola in Panama.

In addition, the Central American Electrical Interconnection System (SIEPAC) is due to be completed in March 2012.

.. Renewables: Both wind and geothermal potential in the region are attracting investor, given the untapped potential for both and the hope of reducing reliance on imported fuels.

The completion of Gamesa and Iberdrola’s 100MW Cerro de Hula Wind Farm in Honduras is the first of many projects planned in the region.

El Salvador is hoping to start its first commercial wind farm in 2016/17 and Acciona is building a 49MW project in Costa Rica.

Geothermal potential is also being explored, Panama has called for companies to register interest in geothermal concessions and Ram Power has completed the first phase of expansion of its San Jacinto-Tizate geothermal plant.

In February 2012, Ram Power released a statement saying that phase II of the plant is ‘approximately 60% completed, with final completion expected in December 2012’.

.. Airports: Opportunities are anticipated in the region’s airport sector.

Honduras has announced a US$300mn plan to invest in five airports and El Salvador, Nicaragua and Panama all have projects underway or in the pipeline.

.. Ports: Port infrastructure appears to be a priority area of investment across the region.

The most important project is undoubtedly the expansion of the Panama Canal.

The US$5.2bn project, to be completed in 2014, will significantly alter the regional trade and shipping dynamics.

Other notable projects include the US$1bn Moin Container Terminal in Costa Rica, to be built and operated by APM Terminals, and the US$500mn plan for a port at Monkey Point in Nicaragua, for which Andrade Gutierrez was contracted for a feasibility study in August 2011.

Despite a number of opportunities across a variety of sectors, there are pertinent risks to investment.

The biggest is the growing threat of violence from drug cartels.

This has impacted Honduras, Guatemala and El Salvador the most, with no sign of easing over the near-term.

.. Whilst Guatemala saw some improvements over 2011, with Molina taking office in January 2012 we could create a short-term spike in risk as he vows to wage war against the drug cartels.

Given that Guatemala is trying to develop its PPP sector, this is bad news for the business environment.

.. Finally, we highlight concerns over vulnerability to international instability.

The region is highly reliant on export revenues, especially from agri -products, and therefore any economic slowdown prompted by Europe or China could impact government revenues.

At the same time, the region is exposed to fluctuations in commodity prices, raising inflation concerns.

The region is highly exposed to energy and industrial metals prices, which could raise the cost of construction materials and stoke inflation concerns.