As LatAm continues to maneuver economic obstacles, experts discuss what opportunities lie in infrastructure
As LatAm continues to maneuver economic obstacles, experts discuss what opportunities lie in infrastructure
Latin America (LatAm) economies have performed well despite current geopolitical turmoil and rising interest rates. Unemployment is recovering steadily, the region’s economy expanded by just under four percent in 2022, and recent monetary policies have helped minimize the negative effects of inflation. Despite noticeable price increases, year-on-year inflation remained below previous spikes. Inflation in two of the region’s largest economies, Brazil and Mexico, hit a near two-year low as of May 2023. These victories are certainly worth noting, but the region is not without its headwinds.
Core inflation (excluding food and energy) remains high. The International Monetary Fund expects strong domestic demand, broad-based price pressures, and wage increases will buoy core inflation at its current high levels and ensure it returns down to target. But these conditions are also expected to decelerate economic growth in the region. In 2022, economies in LatAm and the Caribbean were expected to grow by almost 3.7%, half of the 6.7% achieved in 2021. This rate is estimated to fall even further in 2023 to 1.3%.
Amid such complex fiscal conditions, we asked some industry experts what opportunities they believe infrastructure offers in the region’s current economic climate.
Carlos Saieh, Partner, CEO, Head of Infrastructure, Toesca Asset Management
The renewable energy industry is growing in global importance in the fight against climate change. LatAm is no exception. We have seen record numbers of new projects in renewable energy, particularly in Chile, where renewables already account for almost 50% of the matrix. It’s expected this will soon also be the case in Colombia.
Despite the urgent need for financing for these new projects, we still see major gaps in solutions, posing a significant challenge for the industry, but an attractive opportunity for sophisticated investors. As domestic banks have become more restrictive, particularly in Chile and Colombia, due to higher capital requirements, higher cost of capital, and short-term volatility, global investors have simultaneously become more selective, demanding higher returns for their investments, making traditional sources of funding for the asset class in LatAm extremely scarce. This is why we see a solid opportunity to provide capital solutions to several of these projects.
Toesca hopes to contribute to the development of the industry and transition of the traditional energy matrix, while offering our clients double-digit net returns.
Renato Mazzola, Managing Partner, BTG Pactual
The current high-rate environment in LatAm offers substantial opportunities for infrastructure investment, namely managers seeking to divest in the mid- to long-term with lower interest rates, benefiting from a yield compression. This scenario can often frighten investors and move them away from opportunities such as alternative investments. We are accustomed to high inflation and interest rates, making it more favorable for experienced LatAm GPs to navigate unstable scenarios.
This offers good opportunities, especially in infrastructure assets, as long as the GP knows how to take advantage of it. These investments typically have inflation-linked contracts that will benefit from yield compression upon exit.
Yield compression is not necessarily the main aspect of an infrastructure deal, but aligned with the GP’s experience and know-how, it can boost returns. Given this scenario of increasing investment opportunities, we believe GPs with a strong track record and solid relationships with market participants will be able to fundraise and deliver outstanding results in the current macro scenario in LatAm.
Oscar Ardila, Institutional Business Development, Real Estate Executive, Ashmore Investment Management
LatAm suffers from a significant infrastructure deficit across sectors, from railways and ports to renewable energy assets. In our view, this is partially due to a lack of investment, further exacerbated by fiscal deficits, especially compared with other emerging regions.
We feel the energy transition and climate converge drive attractive infrastructure investment opportunities in the region. This, coupled with robust regulatory frameworks in selected markets, presents opportunities for institutional capital to fill the gap.
The existing infrastructure gap in the region also holds the potential for developing climate-resilient infrastructure across sectors, positioning assets in a way that could favor their life cycles in a Paris-aligned world. According to the IDB, solar and wind power in the region is expected to increase by 10.4% and 9.1% per year between 2020 and 2030, respectively. This comes on the back of an estimated 48% increase in demand for electricity in the region over the same period, which could potentially have a direct impact on future valuations and exit opportunities.
This does not come without risks or headwinds, however, so manager selection, top-down sector approach, and bottom-up analysis via on-the-ground presence are essential to capitalize on the opportunity set. LatAm holds all the essential elements (natural resources, copper, nickel, and hydroelectric potential) to be a powerhouse in the clean energy space.
Andre Sales, CEO/CIO Infrastructure, Patria Investments
The current global geopolitical crisis has highlighted LatAm’s potential as a safe haven. The region’s economy has also been growing faster than developed markets following the pandemic that caused dramatic economic collapse across the globe. LatAm markets have typically offered low correlation to assets from developed markets, being an important destination for investors looking to diversify their infrastructure exposure. Indeed, more than 50% of the energy consumed in the region already comes from renewable sources, and LatAm countries have set a collective target of 70% renewable energy use by 2030, more than double what the European Union (EU) is planning.
In this context, investor appetite for LatAm infrastructure is growing stronger. The region has structural bottlenecks that will take considerable time to address, primarily due to the historically insufficient levels of infrastructure investment.
While public investment has played a significant role in bridging the infrastructure gap, there is a growing recognition of the vital role that private capital plays in this sector. Recent governments have fostered more business-friendly environments, prioritizing infrastructure investments and creating substantial avenues for private investors, particularly through concessions, privatizations, and public-private partnerships.
Andre Figueira, Head of Infrastructure Private Equity, Kinea Investimentos
In our view, with Brazil’s current fiscal conditions, investment opportunities in infrastructure present a promising avenue for economic growth fueled by private capital. Despite the political noise, we believe there is a common understanding among policy-makers that the country may have to count on private capital to close the investment gap in infrastructure.
The water and sanitation industry is an example of this. Currently, approximately 100 million Brazilians have no access to sewage treatment, while 35 million are without clean water. The industry’s new regulatory framework approved by congress in 2020 was welcomed by the private sector, which has since committed approximately BRL 90bn in concession grants and investments in the sector. The current administration has recently attempted to change some aspects of the new regulation, offering more lenient rules for state-sponsored companies, but is facing severe opposition from legislators who clearly recognize the merits of the new framework.
Additionally, Brazil holds immense investment potential in renewable energy, logistics, transportation, and telecommunications, which could benefit the country’s economy with significant productivity gains.
However, it is crucial to correctly navigate Brazil’s complex fiscal landscape and regulatory environment when considering infrastructure investments. Collaborating with local partners, understanding legal frameworks, and assessing political risks are key to successful ventures.