Central America aims to become leader in sustainability

New report demonstrates region’s potential for green development

Central America’s above-average recovery in 2021 and the positive outlook for the coming years demonstrate the region’s resilience to shocks and its potential for development. In February, trade experts and private investors joined the Central American Bank for Economic Integration and OMFIF to discuss Central America’s competitive advantages as a promising destination for foreign investors. They highlighted the opportunities for sustainable projects and environmentally friendly initiatives, and the region’s efforts to improve market frameworks and conditions to enable investor access.

The meeting marked the launch of  the ‘Resilience, recovery and sustainability: Central America 2021’ report, the second edition of an annual publication that tracks the region’s development and sustainable growth.

Louis Taylor, chief executive of UK Export Finance, made it clear that the last two years have massively accelerated investors’ focus on sustainability to the point that environmental, social and governance standards have become an essential part of the viability analysis of projects. ‘Thinking about sustainability is a cultural factor’ in Central America, added Victoria Hernandez, Costa Rica’s minister of economy, industry and commerce.

The array of available initiatives demonstrates the region’s potential for sustainable investment. The United Nation’s Green Climate Fund has helped finance projects that range from combating deforestation in Nicaragua to building an electric railway in Costa Rica.

Dante Mossi, executive president of CABEI, stressed that Central America aspires to become a leader in sustainability and be the first region to have a transport sector run by clean energy. With the support of CABEI, Central America is doubling its efforts to develop and green its transportation infrastructure and railway network. Mossi described these efforts as the beginning of ‘the green industrial revolution of Central America.’ CABEI has raised funds for these and other sustainable projects in the region, having issued five ESG bonds in the past two years for a total of $1.6bn.

To further improve financing options, the report describes how CABEI is supporting efforts to set up a regional public debt market that will provide a centralised trade repository for dollar-denominated sovereign bonds issued by Central American governments. A more integrated public debt market would ensure greater liquidity and depth in the region’s capital markets, increasing its attractiveness to foreign investors, said Mossi.

Hernandez noted that the high public debt levels after the pandemic had shown the importance of public-private partnerships. With the public sector’s budget constraints, private institutions must join the efforts to achieve a sustainable and robust recovery. Biwater, a British company that delivers large-scale projects to improve water provision and implements sewage treatment schemes worldwide, has been investing in Panama for over 40 years. ‘We have constructed the bulk of their water treatment plants [through] public private ventures,’ affirmed Adrian White, Biwater’s president, adding that ‘these [ventures] are longstanding and have all proved successful and a learning curve.’

Taylor described how, nowadays, existing provisions around these partnerships are documented in a way that ‘give[s] investors protections that they perhaps didn’t have in the past.’ Taylor also stressed that political stability, a strong rule of law and a clear regulatory environment for businesses and foreign participants are critical to attracting investment.

To ensure the existence of such robust regulation, the Secretariat for Central American Economic Integration and CABEI are developing and defining regional regulatory frameworks in areas such as PPP. These standardisation efforts will provide one common regulation, which means foreign operators will not have to navigate differences in the Central American jurisdictions they are interested in investing in.

Such endeavours come amid expectations that nearshoring in the region will accelerate as a result of US-China tensions and the supply chain drawbacks of the pandemic. The region’s proximity to the US makes Central America a strategic destination for supply chains to North America. Mossi explained that the region is re-thinking its strategy to supply nearby markets and doubling its efforts to become more competitive.

The region is enhancing its ports and road infrastructure and strengthening its energy sector to guarantee reliable and well-priced electricity. Central American countries have also transitioned from being primarily manufacturing-based economies to becoming important producers of vehicle parts and medical supplies.

Natalia Ospina is Deputy Head of Reports and Surveys, OMFIF.

About the ‘Resilience, recovery and sustainability: Central America 2021’ report:

This report covers the eight countries that make up the Central American Integration System. It presents a detailed view of the region through six pillars: macroeconomic overview; sustainable investment; commerce, external trade and foreign direct investment; financial integration; digital economy; and integration. Each pillar examines where Central American nations stand in the respective areas, highlighting flagship projects and trends that demonstrate potential while identifying where improvement is required.

Download the report here.

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