Central America: Few Bright Spots As Business Environment Weighs On Growth


The Central American region has a vast variation in performance and the opportunities available in the construction sector. Panama and Nicaragua's construction industries posted plus 20% growth in 2012, however, growth remained weak in Honduras, Guatemala and El Salvador. The outlook over the medium term is less mixed, with base effects in the worst performers driving industries back to growth, albeit minimal in some cases, and the outperformers seeing growth slow as project pipelines shrink and risks increase. Panama will remain the regional outperformer; this is followed by Costa Rica and Nicaragua, where strong investment project pipelines should support growth.

Costa Rica had the largest industry size in the region in 2011, according to BMI data. That said, weak growth outlook saw it overtaken by Panama in 2012. Buoyed by high-value projects like the Panama Canal expansion and the Panama City Metro, Panama experienced considerable expansion in its industry value, with year-on-year (y-o-y) growth of 29%, becoming the largest in the region in 2012, with a value of US$2.6bn.

Panama Storms Ahead
Construction Industry Value, US$bn

The number of attractive countries in the region is largely outweighed by the less attractive investment destinations. Rising violence, small industry scales and weak project pipelines are weighing heavily on the region. Although we see some sectors in certain countries outperforming, in general, the risks outweigh the rewards as the scope of opportunity remains small.

The Underperformers

The outlook for these countries over the medium term is mixed:

Guatemala has a promising pipeline of projects; however, the potential for these to be procured over the medium term has taken a hit as a result of the deteriorating political environment. President Otto Pérez Molina has encountered political division in the country, which we expect to worsen over the medium term. This is having a direct impact on infrastructure. In April 2012, it was reported that the country was on the verge of missing out on US$179mn in infrastructure loans because of congressional delays in approving them. Indeed, both the Bank of Guatemala and the Guatemala Construction Chamber have downgraded their growth outlooks for 2013 in early Q2 2013 based on a weak investment outlook, both domestically and from international companies.

That said, the construction sector posted stronger than expected performance in the latter half of 2012 and we expect this momentum to continue in to 2013. Plans for US$2bn in roads and bridges and port projects, hydropower plants, several prisons and an OPIC supported fund for mortgages have improved the investment outlook. These developments support a healthy pipeline of projects which should sustain construction sector real growth in positive territory, although the adverse business environment will cap this at around 2.5% on average between 2013 and 2017.

The first batch of public-private partnerships (PPPs) to be launched under the country's PPP programme will be a key test for investor appetite for the country. A number of projects have been earmarked for PPP execution, including a highway linking Pedro de Alvarado to the Mexican border, a metro between Ciudad Capital and Antigua, and an airport at Retalhuleu. If these projects move forward successfully, they will present significant upside potential for our muted medium-term forecast outlook, however we remain unconvinced that the investment environment will be attractive to bidders.

El Salvador was unable to sustain strong growth in 2011 into 2012, with just 1.4% registered for the year. After the impact of reconstruction has subsided, there are only few projects in the pipeline to sustain growth. A high level of violence, coupled with elections in March 2012, led to policy deadlock, which is delaying both public and private sector investment into infrastructure. With a PPP bill being discussed in the country's legislative assembly, there is potential for a real impact on infrastructure investment. In December 2012, it was announced that a PPP will be used to develop the Cuscatlán International Airport, however no updates have been seen since and given the country's business environment, this is anticipated to be a drawn out process. Whilst we still expect construction sector growth to pick up in 2013, the growth rate has been downgraded to 2.1%. We expect weak growth again in 2014 (1.6%), as the presidential election (due in February) will likely result in a slowdown in public approvals of capital for infrastructure.

Therefore, whilst we maintain our view that El Salvador's construction industry will not slip back into recession, we have further revised down our medium term outlook to 2.6% on average, per year, between 2013 and 2017.

Struggling To Stay Positive
Construction Industry Real Growth, % y-o-y

We expect growth in Honduras' construction sector to continue to decelerate in line with a weak business environment, which is the least appealing in the region. Our near term outlook has deteriorated after public sector construction work ground to a halt in Honduras in early February 2013, after unpaid bills forced workers to down tools. The government owes the industry an estimated US$100mn in payment for work, a symptom of the growing fiscal crisis underway in the country. The work stoppage has prompted a downward revision in our already weak 2013 growth outlook for the sector, to 1.5% for the year.

Over the medium term, there is growth potential, especially in the power sector. Following the completion of a US$300mn wind farm, further renewable energy investments could be on the cards. The transport sector is also set to experience growth. Airports are to receive considerable attention, following a plan to invest US$296mn in projects, with US$161mn of this to be seen in the first five years. The plan is hoped to improve the country's four international airports to international standards and expand capacity in tune with growth in demand, with passenger traffic up 12% in H211. The plan is focused on two elements: firstly, the construction of a new US$129mn international commercial airport at Palmerola (Soto Cano) military air base in Comayagua. Construction work on the airport, which will replace the Toncontin International Airport in Tegucigalpa, was due to start in December 2012.

We expect the country to remain in positive territory over our 10-year forecast period; however, we believe that a deteriorating business environment will prevent growth from taking off. Many of Honduras' infrastructure plans rely on private investors, who may be wary of entering the market as crime escalates.

Whilst Belize has posted relatively strong growth, given the very small industry size, growth rates have to be much higher to compete with the level of opportunities seen elsewhere in the region. In line with our estimates, Belize's construction sector returned to growth in 2012 following several years of recession. A positive rebound of 8.2% real growth was recorded, with very strong growth in Q2 and Q3 2012. Growth slowed in Q4 2012, leading us to downgrade our 2013 outlook to 7%. The trend remains in place however, for growth to remain positive, although slow from 2014.

The Outperformers

The two leaders in terms of anticipated industry growth in the region are Panama and Costa Rica. Whilst Nicaragua has posted the highest growth rate in the region over the past 12-18 months, we do not see growth being sustained at the same levels beyond the near term.

Exceptionally strong growth has been seen in Nicaragua's construction sector, at 32% for 2012, as a result of a residential construction boom, with square metres (m2) of private residential construction posting its eight consecutive quarter of plus-20% y-o-y growth in Q312, averaging a staggering 53% y-o-y growth in the first nine months of 2012. Growth in 2013 is expected to slow to 9.3% due to base effects and on account of the risks facing the housing programme. We expect growth to continue to decelerate over the medium term.

The most pertinent threat to the sector's growth is the impact demand is having on building material costs. Construction sector inflation reached 15% in 2011 and is estimated to have hit 20% in 2012. Developers in Nicaragua claim they can no longer build what is designated a low-income home for US$20,000, and that the cost is now closer to US$30,000 as a result of the increased cost of construction materials.

Outside of low-income housing, the biggest potential for growth over the coming years is the US$6.5bn 150,000 bbl/day oil refinery and associated pipeline crossing Nicaragua. The project, dubbed the 'Supreme Dream of Bolívar' was approved for construction in September 2012 by Nicaragua's national assembly. Initial construction on the project began in 2012, when China's CAMC Engineering Co Ltd started construction on an 1.08mn barrel oil deposit tank and submarine pipelines for the refinery. The project has received US$230mn in funding so far, however concrete progress has not been made at the project site. The refinery will be funded by Venezuela and is hoped to be completed in three and a half years.

Another project illustrating the slow pace of projects in Nicaragua is the US$500mn Monkey Point Port, for which Andrade Gutierrez was contracted, in August 2011, to carry out feasibility studies. In late 2012 the group reported that the project was not financially viable, with the costs far outweighing the benefits.

Nicaragua: From Outperformer To Underperformer
Construction Industry Real Growth, % y-o-y

Despite having lost its status as the largest industry value in Central America in 2012, Costa Rica holds significant potential for investors. A relatively stable business environment, combined with an attractive project pipeline, places the country on a robust growth path. The construction sector returned to growth in 2012 at 5.8% y-o-y. We see further upside potential for growth in 2013, which is currently estimated at 5.5% y-o-y, with strong investment into retail facilities taking place to support increased consumer demand as a result of the government's expansionary fiscal policy.

The country has one of the biggest project pipelines in the region, and is working to create a comprehensive infrastructure development plan, which should focus investment and help facilitate projects. The biggest project is the US$1bn contract for the construction and management the Moin Container Terminal in Limon, which was signed in August 2011. An appeal against the project was rejected in November 2011, and construction is due to be completed by 2016. Also being developed is a new US$1.1bn transhipment terminal at the port of Moin. The project is currently in the proposition phase, and is hoped to be contracted by 2014. There are also a number of road projects under way and in the pipeline, as well as investment pledged to the power sector. Hydropower, wind and geothermal have all seen investor interest. The country's construction sector is also benefitting from its relationship with China - Costa Rica has benefitted from significant investment into construction projects, including the national stadium and even a China Town.

However, there are some regulatory and policy concerns, especially ahead of the elections in February 2014. Indeed, in May 2012, Costa Rican president Laura Chinchilla Costa suspended Brazilian construction company OAS' US$524mn contract for the San José-San Ramón highway amidst public opposition to tolling the road.

The concern is that the project's cancellation illustrates a lack of due diligence into the demand for the project and a lack of planning or foresight. This raises concerns over future concessions in the pipeline in Costa Rica. It is unlikely that the country will be able to build these large scale infrastructure projects using public funding, and therefore it raises concerns over the country's ability to realise its project pipeline and thus places downside risk to our construction sector outlook.

Ports And Power Plants Present Potential
Value of Planned And Ongoing Infrastructure Projects: By Country (LHS), By Sector (RHS), US$mn

Panama is, without doubt, the regional outperformer. The construction industry is booming, as the country plays host to one of the biggest infrastructure projects in Latin America and the biggest in Central America. The US$5.3bn Panama Canal Locks Expansion is under construction in the country and drove the sharp acceleration in industry growth in civil engineering activity in 2011, up 37.4% y-o-y. The industry is also being boosted by a range of projects across the infrastructure sector including road construction, hydropower projects and the Panama City Metro and Tocumen Airport projects.

The Panama Canal has been the greatest force for growth in the construction sector, which posted one of the highest growth rates in the region, at 29% y-o-y in 2012. The impact of the Panama Canal expansion will now be noted over a longer period of time, as the project's completion has been delayed to Q215, following strikes and technical difficulties. Over the course of the project, and including the impact of the US$1.8bn Panama City Metro and a number of large road projects, industry value will more than double in size, from US$1.6bn (in 2010) to US$4.1bn in 2015. Beyond 2014, we have concerns over the industry's potential to maintain growth and therefore forecast a moderation in construction industry value, reaching a trough in 2016.

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