Tuesday, 13 November 2018

IMF World Bank 2006: Shifting

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Boosted by strong economies and large currency reserves, LatAm sovereigns have turned their backs on multilaterals as memories of financial crises fade. While the IMF is left twiddling its thumbs and looking for a new role in the region, development banks such as the IDB are adapting to the new reality by expanding capabilities in private sector transactions and local currency financing. Anthony Dovkants and Paul Kilby report.

Anarrow segment of sovereigns such as Colombia are still selectively using multilateral funding, but for the most part countries have decided to wipe IMF debt off balance sheets, freeing themselves of the conditionality that comes with such loans. A future crisis may change all that, but for now multilaterals like the IDB (Inter-American Development Bank) are rapidly shifting their focus in the region.

"Today the private sector accounts for close to 90% of economic activity," said Carlos Guimaraes, who joined the IDB as its private sector coordinator in early 2005 after leaving his post as head of LatAm investment banking at Citicorp. "If you want to have a larger role in fighting poverty, you will have to have a larger role in the private sector...[and] if you want to work with the private sector you have to work like the private sector, which means being more flexible, creative, innovative and responsive."

Guimaraes joined the IDB in early 2005 after a long career as an investment banker and was given the mandate to coordinate the bank's private sector department, the Multilateral Investment Fund (MIF), which is an independent fund focused on SMEs, and the Inter-American Investment Corp (IIC), an IDB affiliate that finances private companies.

In order to have a greater impact on private financing, the bank last month raised the ceiling on loans and guarantees from US$75m to US$200m and in some cases to US$400m, allowing it to finance up to 50% of the cost of expansion projects. "For the bank to have a catalytic role [in the private sector, we realised] it really needed to come in with a much larger amount," Guimaraes said.

Mainstream domestic markets

With domestic markets fast becoming mainstream and more clients asking for financing in their own currencies, the IDB is also trying to cater to these needs. For instance, it recently approved the option of lending in local currency on its existing multi-billion dollar credit line with Brazil's BNDES.

The credit line was originally launched in 2004 and allows the BNDES to use resources from three successive operations of up to US$1bn each during a nine-year term. It has already drawn down US$990m and is heard to be asking for more, but in Reais.

The bank is "now putting a lot of emphasis on the ability to lend in local currency," said Guimaraes. "...The moment that capacity is further developed, it will strongly enhance our impact and relevance in the region."

Such moves follow in the steps of the World Bank's private sector development arm, the International Finance Corp (IFC), which has done much of the groundwork with its own local markets platform.

"We have taken the lead in structured products and swaps in local currency," said Nina Shapiro, vice-president finance and treasurer at the IFC. ". . . We welcome other multilaterals and the international banks taking an interest in local currency. We think this is good for the market."

The IFC has often been the first non-resident to borrow in local currencies, including Peruvian soles and Colombian pesos. Other multilaterals have followed. This year Andean development bank CAF issued a S248m (US$75m) 12-year amortiser in Peru, and marked its debut in Venezuelan bolivianos in June with a Bs215bn (US$10m) five-year bond.

The IIC has also recently raised Colombian and Mexican pesos with the idea of bypassing the treasury and sending proceeds directly to the financial institutions supporting SMEs.

Joaquim Levy, IDB vice-president for finance and Brazil's former Treasury Secretary, was heard gauging foreign investor appetite late last month in New York for a larger Real-denominated deal that would help provide local currency financing for the BNDES credit line.

While the bank has tapped local currency bonds throughout the region to sell among locals and foreign investors, future deals are likely to be larger and therefore trickier to structure.

Interest in high-yielding, Real-denominated instruments is not in doubt. But the IDB's challenge is to structure a deal that is cost effective for the bank and the BNDES, while at the same timing appealing to investors, many of whom can already play Brazil through sovereign debt or NDFs. "Our challenge ... is to try to see how a Triple A credit issuing in Brazilian reais can add value to the market," said one official at the bank.

IDB lifts loan restrictions

Meanwhile, the IDB has overhauled its lending framework by lifting of restrictions on direct loans to municipalities, provinces and companies in a variety of sectors. This amplification of sector financing will allow the IDB to assist a broader range of countries, particularly the smaller economies.

Because of the bank's previous mandate which was heavily slanted toward infrastructure projects and trade finance, the IDB was unable properly assist region's like the Caribbean, which rely heavily on tourism, a sector that has been off limits for the multilateral.

The bank's MIF has also been strengthened with the approval of an additional US$500m in resources and recently approved US$5m to support an Argentina venture capital fund. "Equity has a higher catalytic effect than debt," Guimaraes said. "One of the priorities is to develop a capacity to make equity investments in a number of projects in the region."

Federal governments are not entirely off multilateral's funding map. Unlike many LatAm countries that have been retiring multilateral debt, Colombia still sees development bank financing as vital, despite the constraints of conditionality.

It achieves competitive pricing from multilaterals, an important financing source in market downturns, said the Director of Public Credit Julio Torres earlier this year. Recently Colombia negotiated US$400m of 15 and 18-year debt with the World Bank and the IDB, achieving pricing of 104bp–250bp inside the Colombia curve.

Regarding the IMF, however, Colombia has followed the same course as many of its neighbours, announcing in August that it would not renew its IMF programme. "We are still close to the IMF and have a good relationship with them [but] we are in much better shape now," said Colombia's Director of Public Credit Julio Torres.

Mexico also took advantage of elevated reserve levels to pre-pay some US$7bn in relatively expensive IDB and World Bank obligations. The deal continues a shift to pesos from dollar funding and further bolstered the public debt structure.

No poster child

The IMF is clearly having to adapt its role now that two of its largest clients in Latin America have said goodbye to the lender over the last 20 months and there is no obvious poster child left to replace its biggest of all customers – Brazil. The nation and the IMF agreed to the single largest accord in the Washington-based lender's history after inking a US$42bn standby agreement in 2002 that was critical to helping the region's biggest economy from going bankrupt that year on the back of political instability.

Brazil paid down its remaining debt owed early 2005, demonstrating that it was finally able to stand on its own two feet after adhering to an austere fiscal responsibility law and showing that it could keep positing current account surpluses and meeting high primary budget fiscal targets.

Brazil today is very different from the Brazil of 2002 when reserves were ineffective against market speculation. Today, Brazil is using its reserves to pay down external debt and could take them beyond the US$100bn mark by end 2007. It is highly unlikely Brazil will need the IMF again and its graduation in 2005 is in sharp contrast to what happened with Argentina, which partly blamed the IMF for its 2002 financial crisis and did not like the way the lender criticised its debt policy.

That relationship was built on a series of regular conflicts that came to an end in January 2006 when Argentina said last December it would make an early repayment of its entire obligations totalling some US$9.9bn. The IMF at the time said it welcomed the move, but it was quick to remind the country that challenge lay ahead and that it would continue to monitor Argentina and assist where possible.

While inflation continues to be a concern, external accounts have undergone a rapid and yet remarkable transformation and the country has managed to show three years of about 9% GDP growth. That said, Argentina is still vulnerable and that progress was needed with a number of institutions, adding there was an erosion of the fiscal position and that monetary policy, "while being gradually tightened, remained accommodative".

Getting it right

Argentina could yet find itself turning to the IMF again in the future, while Uruguay in sharp contrast has taken a leaf out of Brazil's book and done much to get it right. So much so that it looks likely to graduate from the lender's auspices before its current standby ends in the middle of 2008. Aside from consistently paying down obligations, the nation has done much to meet the IMF's policy demands including improving its external position.

Uruguay has already paid down US$514m worth of IDB and World Bank debt carrying rates of above 8%, and earlier this year it issued US$500m of 30-year bonds, yielding 7.625%.

Despite such payments, the World Bank still has a role to play in middle income countries, such as Mexico and Brazil, say supporters of multilateral lending. While per capital incomes have increased among certain segments of the population, poverty at the lower levels has remain consistent.

"Our role is helping the poor and if you look at the average poverty level [in the region], or people living on less than US$2 day, it is still . . . pretty much unchanged," said Ulrich Zachau, director of strategy and operations for the Latin American region at the World Bank.

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