Industry Trend Analysis - IDB Offers Upside To Construction Growth In Northern Triangle - JULY 2017

BMI View: An IDB-brokered agreement to boost infrastructure investment in Guatemala, Honduras, and El Salvador provide s substantial upside to our growth forecasts for the construction sector in all three countries. Further, the agreement aligns with our view that multilateral development banks will continue to play a leading role in opening up infrastructure sectors to private investment through de-risking projects.

An agreement brokered by the Inter-American Development Bank (IDB) to substantially increase financing for infrastructure projects in Guatemala, Honduras, and El Salvador over the next five years provides significant upside to our forecasts for construction sector growth in the Northern Triangle sub-region. The agreement, announced on June 14, provides for USD2.5bn in financing for transport, energy, water and tourism infrastructure projects over the next five years, including USD750mn pledged by the IDB and USD1.75bn to come from public and private sources within the three countries. The agreement also includes a plan to create a strategic coordination commission with IDB support to oversee project planning, selection and execution. This aspect of the agreement in particular is the latest example of the evolving role of multilateral financial institutions to increasingly offer technical support to countries in order to create a more attractive environment or private investors - a trend we have highlighted for some time ( see ' Five Key Themes For 201 5 : Infrastructure,' 10 Dec 201 4).

The terms of the agreement, if fully implemented, would benefit construction industries in the three countries in two key ways. First, the agreement would provide direct funding for projects with the IDB committing USD750mn and national governments also pledging to provide part of the remaining USD1.75bn. Second, the agreement aims to unlock new private financing for projects, particularly by de-risking private investment through improvements in project planning and oversight brought by the creation of the IDB-backed strategic coordination commission envisioned by the agreement. PPP programmes launched by the three Northern Triangle countries to attract private investment in infrastructure have met mixed success as endemic corruption and a lack of institutional capacity have weighed heavily on investor sentiment ( see 'Central America: Setbacks Derail Nascent PPP Programmes', 3 November 2015). The three countries currently score among the lowest in Latin America for FDI as well as fixed capital formation per capita ( see chart below).

New Deal Provides Upside To Forecasts
El Salvador, Guatemala and Honduras - Construction Industry Value, USDbn and Real Growth
e/f = BMI estimate/forecast. Source: National Sources, BMI

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