Of the 75,000 Japanese corporates operating outside of Japan, only 150 are in Central America. Some 2,900 operate in Latin America and the Caribbean, and 1,300 of those are in Mexico. What are they missing, and how can the region attract more investment and trade with Asia?
Central America has long been notable for regional collaboration, and organisations such as the Central American Bank for Economic Integration have done a great deal to support capital flows into the bloc, most recently through its issuance of a social bond. However, the region still faces challenges.
Connectivity remains a hurdle for investment in Central America. Sheer geographical distance underpins the need for reliable, robust and extensive logistics infrastructure. Investment in infrastructure is often disincentivised by complicated and time-consuming procedures, unstable electricity provision and physical security concerns. Most of the individual economies are small, and business customs differ.
Japan has engaged with Central America, bilaterally or through dialogue with the Central American Integration System (SICA), providing assistance in poverty alleviation and disaster management. Among the aims is to create an environment for economic growth.
But there are alternatives to large-scale investment that may attract wealth into the region. These were examined during an OMFIF panel discussion on developments in Central America on 11 March. Green finance products have great enabling potential, as do local currency denominated products. Remittance products such as diaspora bonds are another potential avenue of growth.
The competition for capital remains fierce. Factors such as political and social stability, capability of human resources, infrastructure capability, a liberal economy, transparency and integrity can make the investment case for Central America harder. Mexico is a positive example: economic partnerships and access to North America show that collaboration and dialogue can overcome challenges including security and have led to supply chain-related growth.
Ultimately, little progress can be made without competitiveness. There is still a need for deep, efficient and integrated capital markets development. This is where multilateral organisations like the International Finance Corporation have historically had a leading role to play, for example in supporting the success of trade agreements.
Increasingly, investor profiles in the region are extending beyond public institutions and towards public-private partnerships. Progress in establishing governance frameworks has mobilised investment into the region, as reputation and credit risks are better mitigated. Commercial banks have begun to explore larger guarantees over longer tenures, which has supported investment. Credit enhanced products also can incentivise, but this must be viewed as a temporary measure, as eventually products must be attractive to the market without enhancement.
Central America should adopt innovative approaches developed elsewhere. For example, remittance securitisation programmes such as those supported by the IFC in El Salvador, where the product targeted micro-, small and medium-sized enterprises and women-led businesses, have the potential to generate multiple positive impacts.
Covid-19 has revealed a competitive advantage for the region – its ability to supply medical devices and protective gear. As highlighted in OMFIF’s October 2020 report, this industry already formed the largest part of Costa Rica’s gross domestic product before the pandemic. In 2020, projects to manufacture these products started to emerge in other Central American countries such as El Salvador, the Dominican Republic and Honduras.
By rapidly adapting the production capabilities of the textile industry, these countries were able to respond to demand for face masks, gowns and other medical gear. Expansion into vaccine production has been explored through financing a biotechnology park, again emphasising the connection between innovation and competitiveness for this large market of 60m people.
Central America remains a region rich in potential with significant challenges ahead. Beyond exchange rate dysfunction and other perceived risks in the region, governance remains at the forefront. The region is well positioned to take advantage of the mandates to invest in impactful environmental, social and governance projects and connect with North American markets.
By showing firm commitment to transparent and responsible practices, and focusing on collaboratively building access and connectivity with a competitive advantage, Central America can look ahead to opportunities with Asia Pacific investors.
Tamara Singh is Head, Asia Pacific at OMFIF. Masamoto Kenichi is Director of Mexico, Central America and Caribbean division of Japan’s Ministry of Foreign Affairs. He was a panellist on OMFIF’s virtual panel on market developments in Central America on 11 March alongside executives from BBVA, CABEI and IFC.