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What Will it Take for Latin America's Largest Economies to Achieve an Annual 5% Growth?

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

S&P Global Ratings

Plugging the Climate Adaptation Gap with High Resilience Benefit Investments

Empowering Public Private Collaboration in Infrastructure


What Will it Take for Latin America's Largest Economies to Achieve an Annual 5% Growth?

Latin America's largest economies, excluding Venezuela (Argentina, Brazil, Chile, Colombia, Mexico, and Peru or Latam-6) faced similar fates as a result of the Chinese-led commodity supercycle between 2006 and 2014 (see chart 1). These six countries account for 90% of Latin America's dollar GDP. Last year, commodity prices were 10% below the 2004-2016 average in real terms, adjusted for U.S. inflation. Inversely related to these prices was the price of the dollar relative to a basket of international currencies. In 2016, the dollar was 15% stronger than on average during the 13-year period. The commodity supercycle and its associated dollar depreciation cycle was an unprecedented boon for the region, but its favorable effects have all but dissipated.

Chart+-+Commodity+Prices+and+the+US+Dollar+2004-2016

S&P Global Ratings economists conclude that in order for Latam-6 to grow at 5% per year without facing endogenous (i.e., self-imposed) external constraints:

  • Argentina and Brazil need to save a lot more than they're saving now, and they need to boost investment efficiency.
  • Colombia needs to reduce its structural dependency on foreign saving (current account deficit as share of GDP), for which it can either increase its already high, by regional standards, rate of national saving (investment minus foreign saving as share of GDP) or invest a little less and better.
  • Mexico must improve investment efficiency.
  • Chile and Peru need to raise business confidence in order to keep their declining investment ratios from falling further.

The economists also highlight two declining trends common to most, if not all, the Latam-6 that they must reverse in order to facilitate these adjustments. The first one affects the volume (rather than just the value) of net commodity exports and calls for increased investment in these or other tradable industries. The second affects public saving (overall fiscal balance net of capital expenditures) and calls for fiscal consolidation.



COP24 Special Edition Shining A Light On Climate Finance

Highlights

− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

Read the Full Report
Download


Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

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Download


Plugging the Climate Adaptation Gap with High Resilience Benefit Investments

Highlights

- Adaptation financing needs to substantially increase to address the higher impact of extreme weather to society due to climate change.

- Adaptation projects are typically cost effective and bring wide range of resilience benefits.

- To demonstrate the value of resilience benefits to various stakeholders we consider that it is important to quantify those benefits based on a robust modeling framework.

- We expect that due to the large size of the adaptation gap and constrained public finances,private investment would need to make a considerable contribution to adaptation financing.

Dec. 07 2018 — We believe the recent surge in economic damage from extreme climatic events may focus the attention of public authorities about the need for adaptation investments and accelerate investment in this area.The United Nations Environment Program (UNEP) forecasts adaptation costs in developing countries at between $140 billion and $300 billion by 2030, and $280 billion and $500 billion by 2050. That is approximately 6x-13x above the amount of international public-sector finance available today--just to meet 2030 costs.

Over the last two years,the world has seen a flurry of extreme weather, which has exposed the vulnerability of many countries to these events. Climate change may make matters worse, irrespective of whether we manage to keep global warming to 2 degrees Celsius or not. Attention to climate change adaptation is therefore increasing, especially about how to finance it, given the need to raise enough public and private investment to fortify exposed countries and communities against the potentially devastating effects of physical climate risk.

Read the Full Report
Download

Watch: Empowering Public Private Collaboration in Infrastructure

S&P Global CEO Doug Peterson speaks with Maha Eltobgy from the World Economic Forum, on their joint study that looks at how greater collaboration between the public and private sector can accelerate national infrastructure programmes.