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News Article

Latin American Development Bank Aims to Finance 490 Projects

By Alessa Flores | Wed, 09/09/2020 - 10:27

The Latin American Development Bank (CAF) announced on Sept. 1 that it proposed, with the support of 19 member countries, the creation of a fund to finance integration and digital infrastructure projects to help the region's economic and social recovery from the COVID-19 health emergency. CAF intends to issue debt in international capital markets, guaranteed by a group of developed countries, according to an official statement. These resources are invested in member countries through loans that support economic recovery. 

To date, CAF has identified 490 integration and digital infrastructure projects that can boost employment generation and economic growth in the region. In addition, CAF plans to attract more than US$16 billion in credit operations this year to meet the fiscal and financing needs of its member countries that have been affected by the COVID-19 pandemic.

CAF gathers 17 countries in Latin America and the Caribbean and two in Europe. The Latin American and the Caribbean region, in particular, has been profoundly affected by the pandemic. In its Report on the Economic Impact of the COVID-19 Disease in Latin America and the Caribbean, the Economic Commission for Latin America and the Caribbean (ECLAC) revealed that "the pandemic will lead to the greatest contraction of economic activity in the region's history." One of the reasons for this is that the COVID-19 pandemic arrived in the region when it was already dealing with a macroeconomic vulnerable situation. In the decade following the global financial crisis (2010-2019), ECLAC revealed the regional GDP growth rate fell from 6 to 0.2 percent. In addition, 2014-2019 was considered to be the region's lowest growth period since the 1950s (0.4 percent). This undoubtedly makes it vitally important to try to revive countries' economies at the individual and regional levels. 

Increasing investment in infrastructure, according to ECLAC, can generate a virtuous relationship of growth, productivity and sustainability for countries. "The efficient provision of infrastructure services, whether at the national or regional level, is one of the most important aspects of a development strategy, especially because of the lack of adequate infrastructure and efficient service provision is a primary obstacle in the effort to implement a social development policy effectively to achieve sustained economic growth rates and integration objectives," states ECLAC. Therefore, the benefits of infrastructure investment are not limited to the sector but spill over to countries facing enormous challenges on the way to achieving sustainable development. 

However, infrastructure projects are characterized by high costs and requiring large amounts of initial investment, which can exceed government budgets and private investor capabilities. This is why it becomes essential for local governments to have different funding sources and tools. In addition to the government sector, ECLAC's National Development Bank is among the domestic sources of funding for regional infrastructure. Also, external funding sources for regional infrastructure exist such as regional development banks, intra-regional funding for infrastructure, multilateral development banking, subregional and bilateral development banking, extra-regional funding for infrastructure, official development assistance and foreign direct investment. All these add up to a list of financing and securitization mechanisms available for the infrastructure sector.

"Public investment also has an indirect effect on private capital formation and therefore on economic growth, not only because of the increase in aggregate demand for goods and services produced by the private sector but also because of the influence on future profits and sales expectations of private investors. This is why investment in infrastructure can be a major driver of economic growth and thus a viable strategy for economic recovery,” said Hernández Mora, Researcher in Economics at the Universidad Autónoma de México.

For Mexico, investment in infrastructure for economic reactivation is not an alien to the government's plans. Eduardo Suárez, Scotiabank Mexico's Vice President of Economic Analysis in Latin America, shared with Expansión in August that "for the Mexican economy to reactivate itself in the years ahead it is necessary to have a plan based on infrastructure and a good relationship with the US." Next year, President Andrés Manuel López Obrador’s administration announced that it intends to allocate MX$103.2 billion (US$4.8 billion) to its three main works: the Dos Bocas refinery, the Santa Lucia airport and the Mayan Train.

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Alessa Flores Alessa Flores Senior Journalist and Industry Analyst