Central America offers a strategic location connecting the Northern and Southern American Continents

03.11.2013 By: Transfer LBC based on Dutch Embassy Costa Rica

Central America together is comparable in size (area & population) with Spain with its 44 million inhabitants and has a combined economy of US$ 200 billion comparable to Finland or Hungary. The region has been one of the most proactive in terms of negotiating trade agreements with other regions around the world. Despite the global economic crisis, trade has grown at a constant rate. The US is still its main export market, the destination of 32% of Central American exports on average, followed by the Central Common Market (26%) and European Union (9%), this is expected to grow now the Association Agreement with Europe is in effect. One of the pillars of the Central American and especially Costa Rican economic development has been trade liberalization, resulting in productivity growth, diversification of the economy and a higher level of investment. Foreign Direct Investment in the Central American region has grown 80% over the past 3 years, reaching US$ 6 billion. Costa Rica is the Netherlands 3rd trading partner in Latin America, behind Brazil & Mexico.

The Central America region is a mixed bag; whilst opportunities are on offer across the region, the risks in some countries are prohibitive. Escalating violence and exposure to international instability makes the region a risky bet, particularly considering the small scale of industries. The region is highly exposed to energy and industrial metals prices, which could raise the cost of construction materials and stoke inflation concerns. However, we do expect some sectors to provide attractive opportunities; recently the Central American region has been dominated by big infrastructure projects, including transportation (roads, airports and rapid transit) and energy (power generation and transmission). Each project is big. Taken together, they involve investments worth billions of dollars.

The Panama Canal in itself is creating a dynamic industry in Panama, with the country set to outperform in terms of industry growth, in addition to investing in ports and airports across the region. The power sector is the other major growth area, with renewable investors likely to find fertile ground in the region.

The services in the construction industry are more developed in Panama, Guatemala and Costa Rica, mainly because of foreign or public investment in tourism and large infrastructure. The construction industry in Central America is demanding "more specialized services like digital design or software architecture that does not clash with the environment and engineering with expertise in infrastructure." Rising energy costs are also demanding more energy efficient buildings.

In each case, the companies and people who can take advantage of these opportunities are engineering companies, engineering and construction contractors, engineers and machinists and other specialists, legal and public relations services, (second-tier) banking.

The construction sector in Central America is an important contribution to national GDP, especially in Panama - 17.4%, Honduras - 6.4%, Nicaragua - 5.3%, Costa Rica - 5.1%, El Salvador- 3.0%, Guatemala - 2.8%. In regards to the amount of construction in meters, Costa Rica tops the list of countries in the region with 6 million square meters, followed by Panama with 2.7 million, Guatemala with 1.2 million, Nicaragua with 1 million, Honduras with 900,000, and El Salvador with 800,000.

In the public sector, all Central American countries start to invest heavily in roads, highways, bridges, airports, ports, and other large projects. Thus, demand for homes, lower interest rates, and investment in public and private infrastructure will pull the sector out of the recent recession due to credit tightening and create a boom in the construction sector in Central America.

The growing presence of foreign investment/foreign construction companies in the region such as FCC (Spain), ICA (Mexico) or Norberto Odebrecht (Brazil) whom are obtaining most of the larger contracts are forcing regional/local companies to team up with foreign players.