By Laurie Fitzmaurice Executive Director – Center on Global Energy Policy, Columbia University SIPA
Nearly a year after the first outbreak of Covid-19, the devastating health and economic impacts have led governments to spend US $15 trillion globally to boost economies. While many countries are looking to low carbon investments as part of longer-term economic recovery, it is unclear if Latin America will be able to seize the opportunity of post-Covid economic plans due to economic, political, and structural conditions.
Possibly of your interest: Infrastructure Financing that Strengthens the US-Mexico Relationship – NADB
Latin American Recovery Plans
Latin America has been particularly hard hit. The region contains 8.4% of the world’s population but represents 30% of COVID-19 fatalities.1 Forecasts now predict real GDP for 2020 will be 9% lower than early-2020 expectations, and the loss of output is projected to persist into 2021.2
Economic issues stoked social unrest prior to the pandemic, and governments appear unable or unwilling to address the underlying wealth distribution issues. Those tensions could be further inflamed should the pandemic’s long-term economic effects outpace the short-term impacts of stimulus packages.
Globally, governments responded to the pandemic with stimulus plans based on cash transfers, which provide short-term palliative results – mainly to members of the informal economy.3 Longer-term plans are needed, and for countries looking to cut their carbon footprints, such as China, India, and the EU nations, these plans can include zero or low carbon investments.
However, Latin American region’s capacity to emulate such pro- grams is limited by structural and financial challenges that affect access to capital, made worse by the pandemic. Many countries in the region face high levels of public indebtedness, currency depreciation, credit rating risk, insufficient tax revenue bases, and cumbersome tax regimes.
These factors impede the implementation of robust recovery packages.4 But there is potential to overcome these challenges to long-term investments with creativity and the private sector’s help.
The private sector: an option
Governments could choose to retain cash transfers only if other subsidies such as those on fuels are removed. They could also utilize public-private partnerships or government development bank financing with green goal linkages; access offset markets, or target Sustainable Development Goal (SDG) bond issuances.
Lessons can also be found in the private sector, as seen in two recent transactions. Brazilian pulp producer Suzano closed a financing with a 10-year maturity; that includes a 25 bp step up if the company fails to reduce emissions by 10.9% from a 2015 baseline by 2025.
Similarly, ENEL’s sustainability-linked bond proceeds can be applied to operating expenses or capital expenditures; with a variable coupon rate linked to increases in the share of renewable installed capacity from 46% in 2019 to at least 55% in 2021; and reducing GHG emissions.6
Solutions such as these would be more tailored to Latin American nations’ realities; than the green investment COVID recovery strategies implemented by larger or more developed economies. These are just a few ideas. Creative, private sector solutions could yield even more progress in linking Covid recovery with climate change ambitions.