US Boosts Central American Investment - Should You?

The US government move to invest in Central America's renewable energy is just the latest reason why British investors should take another look at the region. LatAm INVESTOR explores its investment potential…

The US government’s development finance institution, Overseas Private Investment Corp (OPIC) has decided to increase its investment in clean energy projects in Central America and the Caribbean. The move partly reflects White House policy aims, yet it also highlights one of the world’s most exciting investment regions.

Firstly, a quick definition of Central America. The region is made up of Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama and is home to around 41 million people. The largest country is Guatemala with 14 million people; the smallest is Belize with just 300,000 people, while the rest have between three million and seven million people each.

"Manufacturing is now the region’s economic mainstay, accounting for 75% of exports…"

There are huge differences between the countries. For example, Panama City has a skyline to rival New York, while other regional capitals would struggle to outshine Basingstoke. Meanwhile, Nicaragua is one of the safest places in the region, unlike Honduras, El Salvador and Belize, which have murder rates to rival war zones.

But despite these differences, it’s still worth looking at the region as a whole. That’s because it’s so small and interconnected that all of the countries are being shaped by similar economic forces.

Why it’s promising

If you ever read about Central America in the British press, it’s normally because something bad has happened. The drug wars and fearsome-looking gang members – the ones with the tattoos all over their faces – generate plenty of negative headlines.

But away from the headlines the region is actually undergoing an economic transition. It is home to some of Latin America’s fastest growing economies and over the last few years, Central America has outperformed South America. That looks set to continue with the IMF expecting growth of more than 4% in both 2015 and 2016.

Manufacturing is now a major part of the Central American investment story

Most British investors assume that Central American economies are based around banana or coffee experts – and 15 years ago, they would have been right. Back in 2000, commodities still accounted for more than half of Central American exports, but since then, a transformation has taken place. Manufacturing is now the region’s economic mainstay, accounting for 75% of exports.

Central America is becoming a hub for the light manufacture of products destined for the US market. Its two main assets are low labour costs and a great location close to the US. That’s helped it thrive despite competition from China. Indeed, Central America is currently in a demographic sweet spot.

It might be a small region, but it has a young and growing population. That creates a growing labour force, which keeps wages competitive and gives industry room to expand.

Central America is powering itself with renewables

Another factor that will help Central America is energy. Central America has amazing renewable energy resources, which can produce power far more cheaply than, say, a British offshore wind turbine. As a result, there has been a spate of renewable energy projects across the region that have helped to wean it off the dependence on fluctuating oil prices. For example, Costa Rica now gets 100% of its power from renewable energy. In Guatemala, the figure is almost 70%, while in Nicaragua it is 50% and rising fast.

Renewable energy is weaning Central America off oil

Having low and stable energy costs will boost Central America’s competitive advantages as a manufacturing hub for the US market. But Central America is not just focused on the US. It recently signed a trade agreement with the EU, which will lead to a lot more Central America products ending up in British shops.

Central American exports to Europe have grown from €14bn in 2009 to more than €25bn today. That growing trade with Europe, now 8% of the total, is helping the isthmus diversify away from its traditional dependence on the United States. Moreover, it looks set to increase. Once the EU deal comes into force, tariffs on 92% of Central American imports will be cut.

Central American producers of quality value-added goods, such as rum and cigars, should also see a European sales boost. Meanwhile, textile producers, who have built their business on selling to the US, will gain another 500 million tariff-free customers.

Building growth

Finally, a huge infrastructure push across the region is improving connectivity between Central American countries and the wider world. For example, Nicaragua is building an inter-oceanic canal for an estimated $40bn, while Panama and Guatemala are spending $35bn and $8.4bn, respectively, on planned infrastructure projects.

The US is also investing heavily in Central American infrastructure projects through the clunkily-titled “Plan of the Alliance for Prosperity in the Northern Triangle”. The US will fund more than $1bn of road and power grid projects in El Salvador, Honduras and Guatemala in a bid to boost those economies and, hopefully, stem the flow of northward-bound migrants in the process.

British investors haven't always been a big presence in Central America but that's starting to change. Firms such as Cable and Wireless Corporation (CWC) have now established them as major players in the regions. Those British investors and companies that have missed out so far should make sure they attend the SICA conference taking place at Canning House on June 30.