Central America's growth prospects and the role of PPPs

The International Finance Corporation (IFC) forecasts a slowdown in economic growth in Central America this year to 3.2% compared to 4.4% in 2022, while for 2024 the projection is 3.5%.

However, according to IFC’s regional director Sanaa Abouzaid, the outlook has room for some "optimism with moderation."

BNamericas spoke with Abouzaid about the macroeconomic prospects for Central America and the biggest needs that IFC – the private sector arm of the World Bank – detects for the sub-region, such as the development of infrastructure with a public-private approach.

BNamericas: How do you envision the macroeconomic situation for Central America in 2023?

Abouzaid: I personally try to focus on a slightly more positive angle since we’ve had several years of COVID-19 and the war in Ukraine, and many quite sad issues that we’re unfortunately experiencing, but I think that the situation is not as black as how we saw it at the beginning. It’s still worrying, but there are many reasons to be more optimistic and I say this with some well-known facts. When I started in this role almost three years ago we had all these predictions from well-known economists who expected everything to go down, including remittances to Central America. Nobody thought that people were going to continue sending money and that these remittances are not only strong today but that they will continue to grow in these years. It was a very nice surprise within this crisis.

BNamericas: What do you expect regional growth to be?

Abouzaid: We think that the drop in GDP growth in the region will obviously be related to the lower growth that the United States will have due to the fact that interest rates have increased a lot, and we think that it will affect remittances, exports and foreign investment. We know that this region depends a lot on the remittances that arrive from the United States and also exports a lot to the North American market. 

Inflation was also quite high ... many products have increased in price quite a bit and it’s more or less under control in some countries, but we still have a few months to go before we see it at a reasonable level. However, the fact of having it more or less under control is obviously thanks to the efforts of the states in the region, the monetary tightening policies that we’ve seen in many countries around the world, even in this region outside of Panama and El Salvador, which are the two dollarized economies and which are obviously a little more limited in this regard. 

So just to summarize, there are prospects for modest growth of around 3% this year and next. Obviously, we’re monitoring the poorest countries in the region more – Honduras and Nicaragua – to see what the impact is.

BNamericas: Will this downward trend continue into 2024?

Abouzaid: We have forecasts for 2023 and 2024 but we’re between 2% and 3% in both years depending on the country, with the exception of Panama, which continues with a slightly higher growth rate than the rest, at 4.5%.

BNamericas: Could there be a recession in the US this year?

Abouzaid: There's a pretty strict definition that economists like to use, but we haven't seen it yet. In the United States, the policies are helping a lot and we’re going to see what will be the next percentage that the Fed is going to decide on, but we haven’t yet seen it. Even in Europe the latest figures are much better than we had anticipated, they’re not very high but they still seem a bit under control. The issue is that right now there’s a lot of uncertainty in the markets, because of the war that lasted much longer than we thought, the issue of food, with production inputs, fertilizers, the price of gasoline... so everything is very involved. We still can’t say that we’re going to enter a recession in the United States or in the region. We think that we’ll continue with relatively low growth rates, but we cannot say recession yet.

BNamericas: How could governments in the region contribute to mitigating this situation?

Abouzaid: There’s much to do. There are policies and reforms that governments can implement to accelerate private investment. We’re saying, at the end of the day, that the private sector is the one that produces and the one that’s going to lead us to a high or low percentage of investment, so what we want are government policies that support more investment in different sectors. 

If we look at the Central American region there are different areas in which we work on the IFC side that need more support from the government to create this space for the private sector, for example in infrastructure. There are many reports, including one from IFC and the World Bank that we recently published, where we see there’s a great need. If we have more investment in infrastructure, this is obviously going to impact different businesses and industries. On the subject of energy, if there is good, cheap, efficient energy that’s 100% available, it impacts a lot of industries. In transport it’s exactly the same thing, and we see enormous transport needs in all the countries of the region. If one has better roads or ports then this would help further reduce the cost of production and increase exports.

In terms of financial inclusion, a topic that we work on a lot at IFC is that of SMEs, where there are many financing needs, so it’s a fairly traditional topic that we always see not only in Central America but in the rest of the world. It’s a pity because SMEs contribute a lot to employment, but they always lack this access to financing and government policies promoting more support and investment.

BNamericas: What needs have you detected in particular regarding transportation in Central America?

Abouzaid: In general, there are many needs in the six countries, in some more than in others. There’s a lot to be done in transport and roads, and this mix of COVID-19 with some hurricanes like Eta and Iota has obviously not helped at all. The issue is that we’re facing multiple challenges: on the one hand, we need more investment in infrastructure that is climate resilient, because it’s important and we need it to be sustainable, but at the same time we’re faced with the reality that the governments of the region don’t have the ability to invest in such large projects. Obviously, we want the infrastructure to promote the private sector for exports and employment, and GDP growth. 

The fact that countries don’t have this fiscal space to invest in infrastructure tells us that the private sector must grow or promote more public-private partnerships, which are an excellent way to involve both public and private entities but without using fiscal resources of the state. It’s something that we’re promoting a lot in the region. We’re a little more advanced in Panama where we have a very extensive highway program, where we’re working with the government. We also have a program for the fourth transmission line in the country. We have projects that we’re working on these days with the government of Costa Rica and we hope that we’ll see more projects in other countries, more PPPs because it’s something that’s important to create jobs and help a little with this infrastructure gap.

BNamericas: What are the obstacles facing the development of this scheme in Central America?

Abouzaid: First you have to have a good regulatory framework, because without it the process would be very inefficient and no PPP would advance. Normally a PPP law is required that is good, fast and efficient. Without this we cannot start any program in any country. You also need the government to support the process, so you need training and knowledge of how they work and how to manage them. There’s a very important role for the state and we need this type of knowledge and experience that not many countries have, and for this reason it’s important to work with a partner that has made these PPPs, developing them in other countries such as the case of IFC, where we’ve developed ports, hospitals, schools, roads. 

In Central America we’re making good progress in Panama and Costa Rica, and we expect to see more projects in the rest [of the countries]. We’re in Panama working hand in hand with the public works ministry on a highway program of more than 2,000km. We’re now making very good progress on a part of the East Pan-American highway, which goes to Darién, and there are 246km that will link these provinces of the country. We hope to move on to the bidding part very soon.