The World Bank and Inter-American Development Bank (IDB) have announced dramatic increases in lending to Latin America in the wake of the global credit squeeze triggered by the U.S. financial collapse. Crowded to the margin in recent years by demands for financial independence backed by high commodity prices and steadily growing reserves, the World Bank, IDB, and International Monetary Fund (IMF) are happily back in business. The majority of South American economies had lowered their exposure to IMF influence, with new Stand-By Arrangements (SBAs) falling to only two in 2007 (Peru and Honduras, both of which expire in early 2009). In 2005, 80% of IMF’s $81 billion loan portfolio was to Latin America. By early 2008, Latin America represented only 1% of the IMF portfolio with nearly all its $17 billion in outstanding loans to Turkey and Pakistan. Prior to the crisis, the total outstanding debt to the IMF in Latin America had fallen dramatically to about $700 million.1 Their fortunes tethered, the lending portfolios of the International Financial Institutions (IFIs) had also declined prior to 2007.
Given the outspoken criticism of the IMF, World Bank, and IDB in recent years, it is impressive to witness the IFI ability to redeem their credibility in Latin America as they "decouple" their own shoddy institutional reputations for poor regulation and oversight from the toxic Wall Street meltdown. The U.S. financial crisis has exposed the profound negligence in accountability of many of the same financial actors (Northern intermediary banks, insurance companies, credit ratings agencies) on whom the international project finance system depends. As taxpayers begin to question the credibility of the gatekeepers of the U.S. financial system that blatantly accumulated private fortunes but now require public funds to socialize the costs, can the IFIs remain immune from their role in enabling the crisis by failing to act earlier?
The IFIs proudly proclaim sharp lending increases in 2008 and 2009, including a return to Emergency Lending and Contingent Credit, with the same lack of transparency or accountability that depicted the last meltdown that began in 1998. Current parallels to what we have learned about the U.S. Troubled Asset Relief Program (TARP) since October include a recognizable eagerness for mega-loans that appear overnight and are issued with virtually no documentation or external accountability mechanisms, only to fail dramatically in their intended purposes.
Sixteen of the banks that have received the largest handouts from the U.S. Treasury Department’s $700 billion TARP were asked how they have used that money, and how much was spent on bonuses this year. Most refused to answer.2
The U.S. Congress can’t get the answers either. Its oversight panel declared in a first report this month that the Treasury is doling out billions "without seeking to monitor the use of funds provided to specific financial institutions."3 The Bush administration Treasury has refused to press the banks for greater disclosure, instead trying to peddle the positive effects of the TARP on the U.S. economy. The Government Accountability Office (GAO) learned that "the standard agreement between Treasury and the participating institutions does not require that these institutions track or report how they plan to use, or do use, their capital investments."4
Executives at all but two of the bailed-out banks told the GAO that the "money is fungible," so they "did not intend to track or report" specifically what happens to the taxpayers’ cash.5
With the prospect of a new replenishment from donor governments in the coming years to bail out the IFIs for their own latest rash of questionable credit, the similarities between 1998 and 2008 raise the question—what have the IFIs learned?
IFIs Offer $60 Billion External Stimulus Package to Latin America
In September, President Lula da Silva expressed the irrational aspirations of many when he referred to the unfolding financial crisis in the United States as "Bush’s problem" and claimed the crisis would have only a ripple effect in Brazil. Motivated in part by the nearly 7% third-quarter growth, the Brazilian president echoed the views of other Latin American leaders and market analysts that continued to use the term "decoupled" to describe how the region’s perceived risk diversification had inoculated them from the U.S. financial morass. Indeed, many espoused the theory that the rest of the world would "decouple" from the United States. Europe, Asia, and Latin America would somehow continue to expand and their consumption would soften the U.S. recession. A new economic equilibrium would emerge, with smaller U.S. trade deficits and lower surpluses elsewhere.
In Brazil, this hubris was rocked by the near collapse of one of the country’s largest private Banks (Unibanco), which was subsequently forced to merge with the country’s second largest Bank (ITAU) to survive. As China’s growth rate veers downward to near 5% for 2009 and freight vessels return empty to Latin American ports, investors flee Brazil and credit is suddenly scarce. Mapping trends throughout the region, Brazilian stocks are down over 60%, hedge funds are hemorrhaging in key emerging markets, trade is likely to decline by 10-20% (for the first time since 1982), and investment has dried up. Global economic growth in 2009 will be the lowest since at least 1980. "Decoupling" was an illusion, as the crisis is global.
Until recently, the relevance of the IFIs in Latin America was hotly debated. An observed decline in IMF, World Bank, and IDB lending to the region, relative to newer competitors such as the CAF (Andean Development Corporation), BNDES (National Bank of Economic and Social Development), a Brazilian sovereign wealth fund, and a much heralded Bank of the South further crowding the field, created the perception that a decisive break with the IFIs was imminent. The IMF announced layoffs of as much as 20% of their staff due to lack of business, and the World Bank was reportedly facing similar restructuring decisions. Motivated in large part by a crisis of relevance, the IDB recently "realigned" itself to more effectively serve the needs of its clients.
In a sobering turnaround, the IFIs have announced aggressive new lending projections, anchored by massive emergency lending windows intended to mitigate the spiraling credit freeze and safeguard the region from the unfolding crisis. The lack of transparency with the details of the new liquidity funds raises more questions than answers about the conditionality associated with them. In the past, IMF SBAs and IFI adjustment loans during periods of economic crisis have included conditions to cut back the subsidies and take other belt-tightening moves such as devaluing the currency, so as to reduce imports and boost exports.
Some highlights of the revival of IFI programs in Latin America include:
International Monetary Fund : At the end of October, the IMF announced that it would offer as much as $100 billion in loans to troubled countries, but wouldn’t require them to make the severe policy changes that the IMF has demanded for decades. Yet not a single country has taken the IMF up on the offer.
According to the Financial Times: "The new facility is similar in intent to the so-called "contingent credit line" (CCL), a pre-approved insurance-style policy developed by the IMF and the U.S. Treasury in the aftermath of the Asian financial crisis. But despite strong encouragement, no country ever applied for the CCL, fearing it would signal to investors that the government was worried about financial contagion. The new program aims to avoid the stigma problem by having countries apply confidentially as they need it rather than in advance."6
Some middle income countries such as Mexico, Brazil, and South Korea are not interested yet because the 3-month term is too short a time, and because of the requirement for renewals. The IMF is willing to provide such countries 3-month loans that could be renewed twice, for a total of nine months in all. Other countries may be worried that by taking out such loans, they are signaling to the market big problems ahead.
For Latin America, the IMF has announced the creation of a new rapid disbursing, Short-term Liquidity Facility (SLF) for countries with access to international capital markets. The purpose of this new facility is to provide large upfront disbursements of short-term balance of payments financing. Disbursements may be up to five times the country’s quota in the Fund, and will have a 3-month maturity. Eligible countries may draw on these lines of credit up to three times during a 12-month period. Countries with a good track record of sound policies (based on the periodic assessments conducted by the Fund) and sustainable debt burdens may qualify. The credits will not be subject to the procedures and conditionalities that normally apply to the Fund’s other programs.
Inter-American Development Bank: The IDB announced new quick-disbursing credits to the tune of US$6 billion to help countries to maintain economic growth and employment in the midst of the credit crunch. The Liquidity Program for Growth Sustainability is designed to provide financing through intermediary banks to firms in the region that are facing transitory difficulties in accessing credit. The countries that receive financing out of the Bank’s ordinary financial capital can tap into the Liquidity Program. The loan amounts are determined by IDB on a case-by-case basis, but so far Costa Rica and El Salvador have taken $500 million and $400 million respectively since the window became active in late October.
IDB also intends to speed up approval of its loans to finance projects and strengthen social programs. The objective is to approve a record US$18 billion in new loans in 2009, up from about US$12 billion in 2008. This would represent an 80% increase on the Bank’s current financing in the region and nearly triples the average lending to the region between 2003 and 2006. The IDB also announced a US$20 million Emergency Liquidity Facility (ELF) to help microfinance institutions weather economic crises and natural disasters.
The IDB reaffirmed its role as the leading source of long-term funding for Latin America and the Caribbean. The IDB increased backing for social programs designed to prevent millions from falling back into poverty and boosted financing for infrastructure investments and key reforms to boost competitiveness.
The World Bank Group: The World Bank announced a possible increase in support to countries with new commitments of up to US$100 billion between 2009 and 2011, or about $33 billion per year. The International Development Association (IDA) can provide US$42 billion to support low income countries seeking to enter the capital market and to assist countries experiencing difficulties due to falling commodity prices and weaker remittances. Between 2009 and 2011, the group will provide increased support to the private sector, through the International Financial Corporation (IFC), for a total of US$30 billion. Expansion of IFC lending includes a doubling of the Global Trade Finance Program (from $1.5 billion to $3 billion); boosting the global share fund for bank recapitalization by US$1 billion; and implementing a US$300 million emergency credit line for privately funded, financially viable infrastructure projects to support them in the renewal of commitments and recapitalization in case of financial constraints.
Andean Development Corporation: The CAF recently announced the establishment of a contingency line of credit for US$1.5 billion and has also pledged to increase the lines of credit set up for the region’s financial system from US$1.5 billion to US$2 billion. These mechanisms, in conjunction with its traditional loan operations and other financing modalities, will bring total CAF loan commitments to US$16 billion for the period 2008-2009. This represents a 40% increase over average lending levels between 2005 and 2007.
Latin American Reserve Fund: The LARF has also offered to make available, with immediate effect, liquidity credit lines totaling US$1.8 billion. The Fund could add another US$2.7 billion in the coming months through its contingency lines for balance-of-payments support, depending on how market conditions evolve.
United States Federal Reserve: The U.S. Federal Reserve has established temporary liquidity swap facilities with the central banks of Brazil, Mexico, Republic of Korea, and Singapore to provide external liquidity in amounts of up to US$30 billion in each case. The funds are to be repaid by April 2009.
The increase in World Bank and IDB lending to Latin America is expected to continue in 2009. The trends in IFI lending to the region show a dramatic increase since 2006 for the three major multilateral institutions. The spike in lending for the World Bank and IDB is associated with the greater availability to policy (adjustment) lending tools (not available to the CAF) and the closer association between access to international credit and the endorsement that comes with IFI policy loans. Throughout 2008, several $1 billion loans have been made to shore up the finances of state and federal treasuries.
IFIs in a Party Mood as Clients Come Knocking
The renewed demand for IFI loans has clearly improved the morale of Bank staff under fire and facing job insecurity over the past several years. At the most recent IDB holiday party, the division chiefs of the Department of Infrastructure and Environment (INE) performed their own song and dance tributes to client demand for infrastructure stimulus packages throughout the region.7
INE General Manager Roberto Vellutini stated that the inspiration for the performance came during a 2008 mission to Guyana to analyze the needs of the country—which according to the optimistic logic of INE were entirely associated with infrastructure. The refrain in the song was adapted to the apparent competition between divisions in the Bank, with INE demanding that other IDB managers "leave their clients alone."
Within Brazil, the IFIs also increased their overall share of the debt market. However, the $4 billion in World Bank loans and the $2,600 billion by the IDB—while the highest levels ever in the history of both banks to Brazil, paled in comparison to an estimated $40 billion in BNDES loans in 2008. So quickly has the volume and scope of BNDES lending increased (see Figure 2 below, quadrupling over the past decade) that the IFIs now lend directly to BNDES in order to remain relevant in the Brazilian market.
In 2008, the IDB issued the third $1 billion tranche of the $3 billion loan to BNDES to support lending to small and medium enterprise.8 The lDB project is a CCLIP Loan, which refers to a Conditional Credit Line for an Investment Project—a relatively new instrument that programs a series of loans over a period of time for a defined sector. Like many of the recent megaloans that the IDB is processing, there is no documentation to explain the objectives of the current operation or the outcomes of the prior tranches.
According to the IDB website, the loan objective is "to support the progressive strengthening of the competitiveness and the generation of employment in the segment of the private sector MiPymes (Micro, pequeña y mediana empresa, or Micro, small, and medium enterprises, MSMEs), through medium and long term financing for entrepreneurs for the execution of investment projects. The program, in accordance with past operations, will answer to the strategy of supporting the government to make more competitive the productive sectors, through the provision of medium- and long-term financing that would be canalized by the BNDES to the MiPymes through regulated IFIs. The program will finance investment projects directed to the enlargement, modernization, and diversification of productive activities of those enterprises that meet the technical, financial, economic, legal, and environmental viability requirements."
Since 1964, the IDB has provided $5.4 billion in loans to BNDES. The World Bank is also preparing a massive $1.3 billion Development Policy Loan (DPL) for BNDES (First Programmatic Development Policy Loan for Sustainable Environmental Management) in direct response to the emergency credit squeeze faced by Brazil. The World Bank Country Partnership Strategy (CPS) that was approved on May 1, 2008 outlined a fundamental break with past Bank strategies in Brazil by planning no loans to the federal government in the first two years of the strategy. In part, this was due to the very low completion rate of loans prepared under the former Country Strategy (2003-2007). Only 53% of the projects defined by the World Bank (18 of 34) in the first two years ever materialized, which dropped to 15% (4 of 26) in the second two years. In the current CPS, the World Bank declares that it will cease being a "shadow government" in Brazil.
In a change of course, this BNDES loan emerged only in the past few months and represents direct influence of the World Bank not only in assuaging the current credit squeeze in Brazil, but also in the redesign of investment guidelines in economic sectors prioritized by the government and in the possible adoption of stronger safeguard policies by BNDES to evaluate future high risk projects. According to the World Bank Project Information Document for the Brazil BNDES DPL: "Opinions diverge on whether Brazil will be able to finance the (expected) current account deficit of around 2% of GDP in the current tight international financial markets. This, to a great extent, depends on how FDI (Foreign Direct Investment) performs. If FDI falls by just half (from the current level of 50 billion reais to about 25 billion reais) the need for adjustment will be minor. If FDI decreases further and/or if the corporate sector were to find it difficult to roll-over its foreign currency debt, some additional policy adjustments may instead be needed."9
The DPL outlines a two-tranche program that intends to support BNDES actions to rewrite investment guidelines in key sub-sectors, such as biofuels, hydroelectricity, and pulp and paper, among others. The DPL will include in its conditions compliance with Brazil’s climate action plan and will provide technical assistance to defining regulations for the new Amazon Fund.
The World Bank and IDB loans will help Brazil maintain liquidity in addition to other emergency measures recently taken by Lula da Silva, that include giving $2 billion to BNDES for emergency credit lines to exporters.10 BNDES received about $12 billion from the National Treasury in 2008. Brazil’s flagship investment program, the Programa de Aceleração do Crescimento (PAC) is struggling to meet its 2008 targets for investment and will be more dependent on external project finance in 2009.11
Summaries of Recent IFI Borrowing Across Latin America
Other Latin American countries have ramped up borrowing from the IFIs in recent months. Costa Rica will use a $500 million Inter-American Development Bank loan to boost credit to the manufacturing and exporting sectors in order to bolster economic momentum and mitigate the consequences of the global financial emergency.12 The rapidly prepared loan is part of the IDB’s Liquidity Program for Growth Sustainability (LPGS) set up to help Latin American and Caribbean governments alleviate the effects of the international turmoil on their countries’ macroeconomic stability, growth, and employment. The funds approved Dec. 17 by the Bank’s Board of Directors will help the Central Bank of Costa Rica extend an immediate $50 million in lending dollars to national banks so that they can channel additional credit for working capital and trade financing to exporters and other enterprises within the export chain. The funds will also support the Central Bank’s efforts to assist domestic companies whose traditional access to direct financing from foreign suppliers has been cut off due to the current global difficulties and are now being forced to tap the local market for credit.
The $500 million is not the only funds that the government can count on this year. Pending approval are a $19 million loan for national parks, also being provided by the IDB, and yet another $850 million loan by the IDB for infrastructure. In addition, the World Bank loans for $72 million and $65 million will be used exclusively to help repair the damages in Limón by this year’s rain and floods. The Arias government is reportedly in talks with the IMF for a possible Stand-By Arrangement.
No documentation is available to explain the goals or performance indicators of the emergency IDB Liquidity loan to Costa Rica.
El Salvador is also one of the first Latin American countries to invite the IMF back into the region as the preferred macro-economic gatekeeper for international finance. While most Latin American leaders were in Brazil committing themselves to a more regionally autonomous trade and finance pact, the U.S. loyalist government of El Salvador was instead signing a 15-month emergency Stand-By Arrangement with the IMF to provide a $800 million line of credit, and requesting emergency support from the IDB for an additional $400 million (approved also at a Dec. 17 IDB Board meeting). The IMF Stand-By Arrangement is subject to a Fund Board approval in January. The IDB immediately disbursed $37 million in December.
The Salvadoran Central Reserve Bank will use the funds to purchase short-term portfolio receivables for working capital and trade financing, and thereby provide local financial institutions with funding for new short-term loans for working capital and trade credits.
Despite a wave of recent reforms and the entry into force of the Dominican Republic-Central America Free Trade Agreement with the United States (CAFTA-DR), which have helped the Salvadoran economy grow 4.7% in 2007, this economic expansion is likely to slow to 1% in 2009. Fitch downgraded Salvadoran risk to unstable in October. In the medium term, reduced capital flows to the region may make it more difficult to achieve sustained growth if the crisis lingers on and the recession in the United States and Europe continues. Recent household survey data indicate that poverty increased in El Salvador from 30.7% in 2006 to 34.6% in 2007 (the largest 1-year increase since the end of the war in 1992), and will continue climbing in 2008. This reversal suggests an additional 15,000 families now live in poverty.13 Moreover, with presidential elections slated for March 2009 that favor the opposition FMLN (Farabundo Martí National Liberation Front) and debt obligations of nearly $700 million coming due in 2010, the actual ARENA (National Republican Alliance) government has scrambled to find liquidity.14
Jamaica should receive inflows of around US$950 million by April 2009 from the IFIs, Prime Minister Bruce Golding has confirmed (a 184% increase over the loans in FY 2007-08). Jamaica will borrow $600 million from the IDB over the next 3 years, including three new policy loans for $360 million. The other major loans in the pipeline are the possibility of another US$300 million from the IDB in liquidity support for the upcoming budget, and a Development Policy Loan from the World Bank to support the public sector reform process—similar to the IDB’s policy-based loans—for around US$150 million. These negotiations are currently ongoing, and the amounts to be approved have not yet been finalized.15
Colombia has also taken on nearly $2.4 billion in new multilateral debt in anticipation of a sharp downturn in 2009. Colombia will borrow $1 billion from both the World Bank and the IDB, and another $400 million from the CAF. Among the loans taken is a Disaster Risk Management Development Policy Loan with Catastrophe Deferred Draw Down Option (CAT DDO) Project from the World Bank, which aims to strengthen the Government of Colombia’s program for reducing risks resulting from adverse natural events. The operation supports an institutional effort widely perceived as necessary and which the government is already actively implementing, in part with support from the Bank through two previous lending operations. This CAT DDO will replace an existing contingent line of credit included as a component in the disaster vulnerability reduction adaptable program loan (APL).
Mexico is also turning heavily to the IFIs. The World Bank and the Inter-American Development Bank say they will offer about $5.5 billion in loans to Mexico in 2009 to help finance infrastructure, development, and anti-poverty programs. Mexico will receive a $2 billion credit line from the Inter-American Development Bank for Oportunidades, one of the pioneer conditional cash transfer programs. The IDB also approved in November a $2.8 billion, 10-year Conditional Credit Line loan to boost the low-income housing market in Mexico. The emergency operation includes three mortgage and housing-related financial packages for a total of over $2.8 billion (the largest single financing package ever approved by the IDB for Mexico) to foster greater liquidity, in a move to protect and build on recent gains in home ownership by the poor.
Bank representatives said Thursday that the World Bank will offer as much as $3 billion for a variety of projects. The IDB will kick in as much as $2.5 billion, with another $1 billion possible. In 2008, the IDB supported Mexico with $6 billion in diverse programs. Much of the money will go to low-income housing, public works, transport, and anti-poverty programs.
Ecuador is seeking $2.6 billion in credits from regional multilateral lenders to finance an economy reeling from a spreading global crisis, President Rafael Correa said on Tuesday. Correa said his government is working on securing $1.5 billion in credits from the Inter-American Development Bank, $600 million from the Andean Development Corporation, and $480 million from the Latin American Reserve Fund. Correa’s announcement to seek loans comes only weeks after the country defaulted on $3.8 billion in global bonds, in a move analysts say would hurt the country’s multilateral financing. To cope with financing needs, Ecuador recently issued $1.5 billion in domestic bonds and announced it will collect hundreds of millions of dollars in unpaid taxes from foreign oil companies.
The massive wave of new lending is occurring at such a breakneck pace that even some at the Bank cannot keep up with the volume of new IFI debt. With a lack of transparency about the expected impact of these new emergency loans, not unlike the questions being raised about the U.S. bailout of Wall Street bankers and speculators, there is good reason to be concerned that greater oversight is needed at this critical moment. Sadly, this accountability has long been deficient at the IFIs and is not likely to be voluntarily implemented now.
Some IFI insiders argue that the current levels of lending are not sustainable without a new infusion of capital. The last IDB replenishment of its Ordinary Capital Fund (the 8th replenishment) was in 1994 and carried with it some of the most far-reaching conditions ever. Should the IFI spending spree elicit the need for replenishment from donor governments to sustain lending when the global recession really becomes visible in 2009, U.S. citizens might find U.S. Congress calling for this accountability in hearings and conditions on future support.
- Mark Weisbrot, "Ten Years After: The Lasting Impact of the Asian Financial Crisis," August 2007, CEPR, http://www.cepr.net.
- ABC News, http://abcnews.go.com/GMA/Business/story?id=6479322&page=1.
- For a unique rendition of Pink Floyd’s "Another Brick in the Wall" see the video link to INE’s performance, http://services.iadb.org/exrspe/videos/Thewall.wmv.
- IDB BR-L1178: BNDES: Third Program under the CCLIP Line to Support MSMEs, http://www.iadb.org/projects/project.cfm?id=BR-L1178&lang=en.
- See World Bank draft Project Information Document, dated Nov. 20, 2008, http://web.worldbank.org/external/projects/main?pagePK=64283627&piPK=73230&theSitePK=322341&menuPK=322375&Projectid=P095205.
- Gazeta Mercantil, Oct. 13, 2008.
- TCU contesta balanço da evolução das obras, Folha de S. Paulo, 17/11/2008.
- CR-L1033: Liquidity Program for Growth Sustainability in Costa Rica, http://www.iadb.org/projects/project.cfm?id=CR-L1033&lang=en. The loan if for a 5-year term, with a 3-year grace period, at an interest rate based on 6-month LIBOR plus 400 basis points annualized.
- El Faro, Dec. 29, 2008, http://www.elfaro.net/secciones/Noticias/20081229/noticias2_20081229.asp.
- ES-L1029: Liquidity Program for Growth Sustainability, http://www.iadb.org/projects/project.cfm?id=ES-L1029&lang=en. The loan is for a 5-year period, including three years of grace, at an interest rate based on 6-month LIBOR plus 400 basis points.
- R. Anne Shirley, "Borrowing from the Multilaterals—Looking Beyond the Numbers," Jamaica Gleaner, http://www.jamaica-gleaner.com/gleaner/20090104/business/business4.html.