The declines mark a sharp reversal of the region’s robust investment growth before 2010, when LAC countries were buoyed by robust overall growth prospects, still-elevated commodity prices, and relative political stability in the region. During 2010-15, investment growth averaged 3.9 percent, significantly below the 7.8 percent average during 2003-08. The recent weakening of investment growth has returned investment-to-GDP ratios near their levels in the early 2000s. The slowdown in investment growth has been broad-based across various sectors, and across public and private investment. In light of the weakened economic growth prospects for the region, investment growth is expected to remain low in the short to medium term.

South America, with a large share of commodity exporters, experienced the sharpest downturn in investment growth in the LAC region as these economies’ terms of trade deteriorated sharply (World Bank 2016d). Investment in Mexico and many other countries in Central America has been more robust as reform agendas, especially in Mexico, have bolstered confidence. Investment growth has also picked up in the Caribbean, partly due to strong construction growth supporting the tourism sector.

The post-crisis slump in commodity prices and associated deterioration in the terms of trade triggered sharp investment drops in commodity-producing sectors, in particular mining, across the region (World Bank 2016e; Figure 16). Investment also declined in non-commodity-producing sectors. Public investment was curtailed as fiscal revenues shrank and fiscal deficits widened as a result of lower commodity prices and slowing growth. Private investment declined as investor confidence in growth prospects waned, especially among major commodity exporters (IADB 2016, IMF 2015a). Political and policy uncertainty has also dampened investor confidence and discouraged investment expenditures in several countries in recent years (Argentina, Brazil, Haiti, República Bolivariana de Venezuela) (IMF 2016a).

Tightening financing conditions in the region further weighed on investment. As the U.S. Federal Reserve began to reduce monetary accommodation in 2014-15, currencies of major commodity exporters in the region depreciated against the dollar, some by around 30 percent in 2015 (Brazil, Colombia). Coupled with severe weather conditions that affected domestic food supplies, upward pressures on inflation led some central banks in the region, especially in South America, to raise interest rates in 2015-16 to contain price rises despite weak output growth (Argentina, Brazil, Chile, Colombia), further dampening investment growth.

# **IV.2. What are current and prospective investment needs in the LAC region?**

Investment needs in the region remain significant. The low quality of infrastructure and poor skills of the labor force are bottlenecks to the achievement of faster productivity growth, for example in Brazil (World Bank 2016d), and to poverty reduction. Infrastructure has not kept pace with urbanization in the region (IADB 2010), while the majority of the poor in LAC are in urban areas. Immediate needs for investment in infrastructure and education have also been identified in country studies of Belize, Bolivia, Colombia, Costa Rica, El Salvador, Guatemala, Haiti, Honduras, Panama, and Uruguay (World Bank 2015h-p, and 2016e).

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