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Rail infrastructure projects in Australia, digitalization of the public administration and renewable energy efforts in Europe, as well as large-scale transport projects and water-supply improvements in China are among the major investment programs LRGs are deploying. However, despite a new wave of LRG investment activity as the pandemic wanes, we expect overall capex by LRGs in most countries will moderate through 2024.

Despite most LRGs experiencing strong economic recovery in 2021-2022, their investment spending has lagged economic growth. In our view, this emanates from pandemic-related delays in investment resulting in pent-up investment needs, which-–if fully addressed in the coming years--would weigh on LRG budgets and result in a higher debt burden. The current synchronized global economic slowdown, characterized by high inflation, monetary policy tightening, and heightened geopolitical risks, in our view, reduces LRGs' fiscal space, absent the additional extraordinary allocation of financial resources from central governments or other institutions (for example, in the EU grants or loans are available to the sector from the Recovery and Resilience Facility; RRF). Despite the sector being faced with similar underlying external constraints across the world, we expect different trends in terms of investment spending. For example, we expect French cities, which started from a good level of infrastructure, will postpone capital investments, due to budgetary pressure on operating spending. Meanwhile, we anticipate other countries that took a countercyclical approach and increased capital spending at the height of the pandemic in 2020-2022, such as Germany, will see moderation of capital spending in GDP terms in 2023-2024. Latin American countries will continue to lag in terms of capital investment, in our view, owing to their difficult access to market funding.

Chart 1


When comparing public investment trends across LRGs globally between 2017-2019 and 2022-2024, we see that the reduction of capex is more acute in emerging market economies, which means infrastructure gaps are accentuated. This is particularly the case in countries with weaker budgetary trends and limited market access, such as Argentina, or where we expect operating deficits will reduce LRGs' ability to increase capex, as is the case for India. We expect that Chinese LRG investment will in GDP terms fall below the 2017-2019 average, after peaking in 2022, due to lower proceeds from land sales and less room for debt expansion.

LRGs in most developed economies will also likely cut back on investment, although for different reasons and at a smaller scale. Nordic countries, with a high quality of capital endowment, have in recent years undergone a cycle of large public investments, motivated by the need to provide housing and public services for successive waves of immigrant inflows. We believe such needs are largely met, and therefore expect a decline in investments in the coming years.

Other developed economies will see moderation in their capital spending, but this comes after expanding their investments over 2020-2022, supported by central government or EU funding. This is the case for German LRGs, which took a countercyclical approach to support economic growth during 2020-2022, but now will most likely moderate their investment with the purpose of rebalancing their budgets and complying with the national debt-brake rule.

In Spain and Italy, LRGs' capex moderated in the past decade to contribute to budgetary consolidation. We expect these LRGs will sustain their public investment activity on the back of the execution of the EU's RRF grants. We anticipate Italian LRGs will see a further upward trend in investment in GDP terms, supported by their already allocated portion of loans in the context of the EU RRF.

Chart 2


Our research focuses on a sample of rated LRGs across 41 countries in different geographies, with the purpose of assessing future trends in the capital spending of LRGs. We acknowledge that LRG capital spending depends on a number of variables, which reduces direct comparability of LRGs across countries and even within in the same country. These variables include the country's degree of government centralization as well as the LRG's ability to generate own savings through budgetary surpluses, its access to external funding to finance investments, and its investment needs and initial capital stock (overall level of infrastructure, for example).

Europe: EU Grants Support Investments, But Capex Growth Will Be Limited

We estimate European LRGs' average capital spending will remain at 1.9% of GDP in 2023, a level similar to that in 2022. In real terms, we expect on average European LRG investments will slightly decline by about 3% in 2024. While EU member states will benefit from large inflows from the RRF, the proportion assigned to LRGs to manage will vary depending on the degree of centralization of their government structures. Moreover, we expect some of the RRF grants will have a substitution effect on LRGs' budgets, alleviating budgetary pressure and therefore not necessarily increasing capex for the same amount of the EU funds received. In our analysis, we focus on 22 European countries (see appendix) with different degrees of centralization.

We also believe that the expected reintroduction of fiscal targets will contain LRGs' expenditure growth in 2024. We note that capital investments are more easily reduced or postponed than other operating expenditures related, for example, to health care or education.

In Germany, Belgium, Spain, and Italy--where LRGs play an important role in capital spending, investments have been below the European average over the past decade (see chart 3). In the case of highly indebted Southern European countries, the decline in LRG investment resulted from fiscal constraints, which required implementation of savings measures and intense cuts or postponement of capital activity to contribute to budgetary consolidation during the recovery from the 2008-2012 economic and financial crisis. German LRGs are required to maintain balanced budgets and low debt under the country's debt-break rule, which has in turn limited their ability to increase capex. In Belgium, the central government has given LRGs a high degree of responsibility for capex, as such LRGs' spending accounts for about 80% of the country's gross fixed capital formation. While subnationals have been investing in large infrastructure projects like the 'Vlaamse Veerkracht' in Flanders and other transport-related investments in Brussels, the country's investment has been below the European average and outpaced its economic growth.

Chart 3


In our view, LRGs in Southern Europe that started to receive funds from the RRF in 2021 will likely lead public investment growth in Europe up to 2026. However, the impact on LRGs' capex growth will depend on the level of government decentralization. Our forecast on capital spending for 2024 also depends on the execution rate of the RRF grants; for example, we forecast capex will intensify in 2023 for Spanish LRGs followed by moderate growth from 2024. On the contrary, Italy, which has also requested a portion of loans from the RRF, will see its LRGs increase their capital spending by 6% in 2024 in real terms.

Meanwhile in Germany, investments increased during the height of the pandemic, supported by the suspension of fiscal rules, which added budgetary flexibility to LRGs. However, we expect capex to moderate already this year and next as fiscal debt-brake rules come into force again in 2023 and in turn limit LRG spending.

We expect French LRGs, which have a robust level of gross fixed capital formation in the European context, will moderate capital spending in 2023 due to constraints on their operating spending in the current context of higher inflation and interest rates, resulting limited debt intake. We believe French LRGs, similar to Austrian LRGs, have greater budgetary leeway to postpone investments.

Eastern European countries, such as Poland, will see the capex of their LRGs reduce starting next year, due to the end of the previous EU budget cycle and the need for EU grant-financed projects to be finalized by 2023. In addition, Polish LRGs underwent a tax reform in 2022 (the Polish Deal), which effectively reduces the amount of personal and corporate income taxes, which are a major revenue source, limiting their budgetary flexibility.

In Nordic countries, we expect a decline in LRG investments in the coming years. They have accumulated high volumes of investment over the past decade to meet the infrastructure needs from inflows of immigrants, which we believe have largely been met now.

Latin America: Investment To Decline In Real Terms, Increasing The Funding Gap For Infrastructure

For most Latin American countries we selected, we expect that LRG investment will remain subdued in 2023-2024, amounting to only about 80% of 2017 levels in real terms. We believe this trend emanates from persistent market volatility and high inflation limiting LRGs' capacity to expand investments. In our opinion, the expected decline in investments will weigh on economic growth prospects in these regions.

Colombian LRGs have had low rates of execution on their capital investment programs. As such, capex has not increased in line with the country's economic growth. This, in our view, could add pressure to future budgets as their infrastructure investment gap becomes more evident. We forecast, however, a slight pickup in investments in 2024 owing to large regional transportation projects (Transmilenio) in Bogota and Cundinamarca.

As of 2022, Argentina's LRGs reduced capital spending on average by 53% compared with 2017 levels. We expect they will continue to cut capex, owing to their limited access to external funding and in the context of high inflation. As such, we estimate LRGs' investment will decline to 1.1% of GDP in 2024 from 3.0% in 2017.

Brazilian LRGs, however, have managed to increase their capital spending up to 2022, from a very low point in 2017. This is thanks to an increase in federal grants, but also an updated regulatory framework related to energy and gas transportation. We expect this trajectory will come to an end in 2023, as federal grants have declined and rising inflationary pressures have increased spending on public wages and pensions.

Mexican states have maintained relatively low capex in recent years, since spending largely depends on federal grants. We expect real growth in transfers to remain subdued, pressuring states' revenue and expenditure balances and limiting increases in infrastructure spending.

Chart 4


Asia-Pacific: Spending To Be Broadly Stable, With Variance Across Countries

For most of the countries in our Asia-Pacific group, we expect LRG capex to be broadly stable in real terms and as percentage of GDP in 2023-2024, when compared to 2022.

Chart 5


We expect Chinese LRGs' capex to fall to 12.4% of GDP in 2024 from 15.4% in 2019, after increasing spending in 2022 to sustain economic activity during the height of the pandemic. In doing so, LRGs expanded their debt issuances to cover particular infrastructure projects. We expect this trend will end as LRGs see their quota for new special-purpose bonds reduce, limiting their ability to expand capex. At the same time, Chinese LRGs have historically relied on asset sales to finance capex, and we expect these resources will decline with the slowdown of the Chinese real estate market (see "The Clock is Ticking for The Debt-Led Growth of China Local Governments," published Feb. 21, 2023, on RatingsDirect).

LRGs in New Zealand have maintained broadly stable investment spending in real terms, supported by water-related infrastructure, which currently represents about 30% of all New Zealand council capex. While the central government is developing a program called "Three Waters" reform, which could shift water infrastructure responsibilities (for drinking water, wastewater, and stormwater) to public entities and alleviate infrastructure demands on New Zealand councils, there is still substantial uncertainty about whether the reforms will pass parliament and so we have not incorporated them into our forecast scenario. In our base case, capex growth should be driven by the need to renew assets reaching end-of-life and pressures from new central government regulations, environmental standards, and earthquake strengthening. However, shortages of material and labor in New Zealand make it hard to execute infrastructure budgets, and could potentially impose limits on capex growth.

Australian states raised their capex substantially since the outbreak of the pandemic, with the purpose of providing economic stimulus and supporting regional growth. Moreover, ambitious capital investment related to transport infrastructure has led to a higher debt burden. We foresee capex growth moderating in 2024 as some states encounter difficulties delivering these projects, because of shortages of raw material, unforeseen environmental conditions, and legal or contractual disputes. However, we expect capex will remain above 2017 levels in real terms.

In Japan, we expect LRGs will maintain relatively stable capex growth, despite a small rise during the height of the pandemic related to increased funding to support small and midsized enterprises. Moreover, Japan's developed infrastructure and sustained spending increases on LRG infrastructure in recent years should allow for contained capex growth in the medium term. However, in the long run, pressures to improve capital spending for disaster prevention will, in our view, persist and likely prevent a decline in capex.

In the Philippines, we expect LRGs' capex growth will stabilize by 2024. LRGs come from a period of high capital investment growth, owing to the need to rebuild infrastructure destroyed by the recent natural disasters in 2022.

Investment Funding Sources Vary Across Regions

During 2020-2022, many LRGs overborrowed, taking advantage of exceptionally favorable financing conditions. This, together with large transfers from central governments, led to comfortable cash buffers in the face of pandemic-related uncertainty. We estimate these cash buffers have been partially used in 2022, and will continue to fund investments in 2023, lowering the need for LRG net issuance for the year. Moreover, since mid-2021, LRGs started to recover their operating margins, reducing their borrowing needs. In the context of capital investment trends, this has translated into a shift in the funding mix across LRGs globally. As such, while in 2021 capital spending globally was financed by about 30% by borrowing, in 2022 we estimate that the recourse to borrowing for this purpose declined to 24%.

We have identified clear differences across LRG globally according to their capex funding mix. We believe these depend mostly on their fiscal space and ease of market access, which determine their relative ability to invest in a countercyclical way. We expect LRGs in Europe will resort less to borrowings due to a combination of EU funds availability and tight fiscal rules.

Chart 6


Latin American LRGs have limited access to external funding, due to the lack of deep and liquid local capital markets as well as the currency and interest rate risks associated with borrowing in foreign currency specifically in Argentina. Due to these constraints, LRGs rely largely on their own operating surpluses and capital revenues to finance their investments. In our view, this prevents them from investing countercyclically, helping to support growth during downturns. This will likely continue to restrict their ability to catch up with more developed countries in terms of capital endowment.

Chart 7


In Asia-Pacific, LRGs typically use a combination of capital revenues, namely asset sales or transfers, own budgetary resources, or debt, in a lower portion--although there are important differences across countries. For example, almost half of the capital spending done by LRGs in New Zealand is covered by their own operating surplus, and we estimate that in 2022 they only relied on debt for about 30% of their total capital spending. This means that most of the ongoing projects on water infrastructure projects done by their municipalities are currently being largely covered by budgetary resources rather than debt issuance.

Chart 8


Chinese LRGs are clear outliers in terms of the weight of their investments in their economy. In the last five years, Chinese LRG capex has represented on average about 14% of GDP and about 50% of total public investment. LRGs in China have been tasked by the central government with stimulating the economy and delivering economic growth targets through their investments. Typically, such investments have been covered to a very large extent by capital revenues, generated from the sale of land to be used for real estate development or large infrastructure projects. However, in recent years, as the pandemic has cooled the economy and the real estate market has undergone a correction, such capital revenues have declined markedly and public investments have been increasingly covered by borrowings. In light of expected lower public investments from 2024, we also expect borrowings to decline.

Chart 9


Japanese LRGs typically fund their capex through own resources and subsidies (together representing about 80% of capex). Japanese LRGs have started to deleverage thanks to improved budgetary balances after consecutive years of deficits. Moreover, owing to the good level of infrastructure, there is no immediate need to increase capital spending in the short term, and therefore any needs on infrastructure would be typically covered with budgetary resources and only a minor part financed through debt.

Australian LRGs have increased their indebtedness since 2019 to pre-fund their large pipeline of capital investments. Although we expect capital investments will moderate by 2024, these will continue to be relatively high in a historical context, supported by ongoing large infrastructure projects. We project Australia's LRG sector's debt will increase by about 20% between 2022 and 2024.

Chart 10


Canadian provinces rely the most on borrowing to finance their investments. This partly reflects the lack of binding budgetary performance targets or debt limits in the context of their fiscal framework. Moreover, they benefit from unfettered access to market funding, which gives them ample flexibility to choose the timing and amount of their investments, even with relatively high levels of outstanding debt.

Chart 11



Table 1

Global LRGs' Capital Expenditure
Average capex (% GDP) Average gapex growth* (%)
2017-2019 2020-2022 2023-24 2018-2019 2020-2022 2023-24


2.6 1.9 1.3 (15.6) (2.9) (21.7)


2.5 2.6 2.7 9.2 4.2 (1.0)


3.7 3.9 3.3 10.3 (4.6) (2.6)


2.9 2.9 2.6 6.5 1.6 (2.7)

Bosnia and Herzegovina

2.3 3.8 3.1 21.4 18.2 (13.3)


1.2 1.8 1.6 3.3 22.9 (12.1)


1.3 1.3 1.0 32.1 (7.9) (3.4)


2.6 2.7 2.7 (2.6) 5.0 (0.8)


14.4 15.5 12.8 14.0 3.0 (2.7)


1.7 0.8 0.8 (15.7) (11.4) 6.0


1.3 1.8 1.2 39.5 (3.1) (43.3)

Czech Republic

2.0 2.0 1.5 21.6 (3.5) (8.8)


1.2 1.2 0.9 (0.6) (0.3) (5.6)


1.6 2.0 1.9 6.5 7.0 (1.5)


2.2 2.3 2.1 7.7 (1.3) (5.1)


2.2 2.9 2.7 12.8 4.2 (3.3)


2.4 2.6 1.8 (0.1) 3.8 (2.5)


1.4 1.0 0.9 (1.1) (6.3) 2.9


1.4 1.4 1.4 6.5 5.7 2.7


1.2 1.5 1.7 6.3 5.5 6.3


3.5 4.1 3.7 1.3 3.7 (2.9)


1.3 1.6 1.5 2.9 6.9 0.9


2.1 1.8 1.4 10.7 (10.1) (2.6)

North Macedonia

1.0 1.0 0.6 5.5 (6.0) (10.6)


0.9 0.9 0.8 (9.0) 4.2 (0.9)


1.4 1.2 1.2 4.0 (3.0) (0.4)

New Zealand

2.0 1.9 1.8 (8.2) 3.7 1.5


1.5 1.2 0.9 (2.9) (12.7) (12.3)


2.6 2.3 2.0 8.7 (3.5) (1.2)


0.4 0.5 0.5 16.0 8.7 5.9


2.7 2.3 1.9 (3.5) (5.3) 12.5


2.2 2.0 1.8 21.2 (1.5) (12.6)


1.9 2.4 1.9 30.0 3.5 (4.8)


0.9 1.0 0.9 25.3 3.5 (2.7)

South Africa

1.1 0.9 0.7 (3.9) (9.0) (4.2)


1.7 2.2 2.2 6.6 6.9 (3.9)


2.0 1.8 1.5 8.1 (5.7) (5.4)


2.2 2.2 2.2 0.3 1.6 1.4


1.0 1.2 1.1 6.9 1.0 3.4


1.6 1.0 1.0 (19.9) 14.4 (0.4)


1.4 1.4 1.4 1.7 (1.9) 0.4
Latin America (median) 1.7 1.8 1.3 (9.0) (2.9) (0.9)
Asia-Pacific (median) 2.2 2.2 1.8 4.1 3.7 0.2
Europe (median) 2.0 2.0 1.8 8.7 (1.3) (3.4)
Global (median) 1.7 1.8 1.5 6.5 1.6 (2.6)
Advanced economies (median) 2.1 2.2 2.0 6.5 1.6 (2.6)
Emerging market economies (median) 1.5 1.3 1.1 3.1 2.0 (2.6)
Source: S&P Global Ratings. *Average capital expenditure growth in real terms (2017 prices). Capex--Capital expenditure.

Table 2

Selected Countries
Europe Latin America Asia-Pacific Canada The Middle East Africa
Austria Argentina Australia Canada Israel Morocco
Belgium Brazil China Kazakhistan Nigeria
Bosnia and Herzegovina Colombia India Turkiye South Africa
Bulgaria Mexico Indonesia
Croatia Peru Japan
Czech Republic New Zealand
Denmark Philippines
Finland Thailand
North Macedonia

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