Poor Infrastructure To Hinder Central American Growth

BMI View: We b elieve that in the coming years Central America's poor infrastructure and lack of regulatory convergence will weigh on the regional economies' export competitiveness and growth. However, over the long term, we are more sanguine, noting increased investment into ports and our expectation for an acceleration in efforts by regional leaders to better align regulations.

We believe that poor transport infrastructure will continue to weigh on growth in the short-to-medium term. Indeed, a recent World Bank report highlights that while formal tariffs between Central American nations have fallen, the cost of shipping goods throughout the region remains high given logistical difficulties and a failure to ensure regulatory convergence. While steps are slowly being taken to improve both of these factors in the coming years and our Infrastructure team has recently highlighted increased opportunity in the region, we believe difficulty in shipping goods will remain a significant hindrance to the region's manufacturing competitiveness and attractiveness to businesses looking to build new consumer bases.

First, manufacturing competitiveness will suffer from poor road quality and port facilities. Less than one-third of roads in the region paved, slowing the transit of goods from the interior of the country. Meanwhile, operational inefficiencies mean that many of the ports, especially those in the north of the region, remain underutilised. Indeed, a lack of sufficient container cranes and other necessary equipment slow operations at El Salvador's Puerto Acajutla, Honduras' Puerto Cortés and Nicaragua's Puerto Corinto. With maritime routes being the primary means of transporting goods from Central America to the rest of the world, this means that Central American economies are not able to take full advantage of their proximity to the US market, making it a less attractive destination to manufacture in, and weighing on export growth and industrial production.

Logistical Difficulties Slow Exports
Central America - Extra Transit Time Due To Logistical Deficiencies, Minutes (LHS) And Empty Backhauls By Country, %

Second, we believe that the inadequate transportation infrastructure will deter firms which might otherwise look to take advantage of a nascent consumer market in the region. Prolonged delays crossing borders, combined with a high rate of empty backhauls (a shipment of goods carried by truckers on a return trip), the result of a regulation which prohibits foreign truckers from hauling cargo within a single country, add substantially to the expense and time spent shipping goods throughout the region. The regional economies' poor and relatively small consumer bases already make entering the Central American market a hard sell to most companies. Combined with the hardship involved in moving goods across borders - implying that it would be difficult to set up shop in one country and use it as an export hub - this is likely to act as a substantial disincentive to many firms in the coming years.

That said, as we highlighted in our recent Central America special report, over the long term, we believe an uptick in investment, combined with further efforts to bolster regulatory convergence, will help to address some of the logistical difficulties weighing on regional growth. As highlighted by our Infrastructure team, port infrastructure has become a priority area of investment across the region, with Costa Rica's Moin Container Terminal on track to start construction in 2013, and a US$500mn plan for a port at Monkey Point in Nicaragua. Moreover, we note that some steps have already been taken to improve transportation, including the adoption of a common customs regulatory framework, and we anticipate an acceleration in attempts by Central American countries to bolster regulatory convergence in the wake of the completion of the Panama Canal expansion.

This article is tagged to:
Sector: Country Risk, Infrastructure
Geography: Latin America, Costa Rica, Guatemala, Honduras, Nicaragua, Panama, El Salvador

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