Development Banks and the Latin America and Caribbean region

international_offshore_bankingModern literature shows that development banks have supported the development of Latin America and the Caribbean (LAC) region, a part of the world with insufficient infrastructure and non-efficient capital markets. However, multilateral development banks could do better as market developers. Musacchio and Lazzarini (Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond) present evidences from a very large development bank (Brazil´s BNDES) that this kind of financial institution causes mixed effects in the development of the recipients of loans and grants. Multilateral banks help governments and private sector when offer knowledge to governments, when spread best practices among debtors and when provide low-cost credit to the countries of the LAC region. However, the criticism about multilateral development banks includes: i) self-established risk-management policies that severely limit potential support to national governments, and ii) their preferred selection of companies with good political connections.   

How about the differences between the many multilateral institutions in the LAC region? Brief explanations are listed bellow together with some of their characteristics and contexts.

World Bank: The World Bank is a source of financial and technical assistance to developing countries around the world, not only the ones in the Latin America and Caribbean. An institution which is part of the United Nations, the World Bank provides low interest loans and credits as well as grants to developing countries. In additional to its financial services, the organization provides policy advice, research, analysis, and technical assistance. The World Bank has been criticized by the conditions imposed on borrowing countries and its bias towards a neoliberal model of growth. Despite the criticism, the World Bank is one of the most highly-regarded financial institutions in the world. In addition, its environmental standards for project evaluation became benchmark for project evaluation worldwide.

BNDES (Brazilian Development Bank) is the second largest development bank operating in Latin America, with US$ 303,3 Billion in assets and net income of US$ 3,2 Billions (as of Dec 14). Although the bank supports social initiatives in education, mass transportation, basic sanitization and small agriculture, this heavily subsidised development bank usually finance large-scale industrial groups. For example, 62% of the 2014 disbursements of US$ 79 Billion targeted large enterprises (defined by revenues above US$ 100 million).  Historically an important player in the industrial development of Brazil, a late-industrialized country, BNDES has been criticized for supporting the international expansion of “National Champions”, i.e. large, private companies that were cherry-picked but the Federal Government to receive large amounts of subsidized credit lines in order to increase the international relevance of Brazilian multinationals.

IDB (Inter-American Development Bank), a financial institution  focused on Latin American and Caribbean countries. IDB is an organization affiliated to the Organization of American States. The IDB makes loans to the governments of its member countries and has preferred creditor status, meaning that borrowers will repay loans to the IDB before repaying other obligations to other lenders such as commercial banks. According to its own website, IDB is not only the oldest and largest regional multilateral development bank but also the main source of multilateral financing for economic, social, and institutional development in Latin America and the Caribbean. The bank supports governments, private sector and small to medium-sized business.

CAF (Corporación Andina de Fomento, Development Bank of Latin America) was established to promote Andean development and integration serving public and private sectors. According to Financial Times (link) CAF funds more infrastructure projects In Latin America than World Bank and IDB together but is accused of opacity and low lending standards.   

CABEI (Central American Bank for Economic Integration) is Honduras-based development bank with total assets of US$ 8 billion, focused on lending to its founding member countries: Guatemala, Honduras, El Salvador, Nicaragua and Costa Rica. Due to its high portfolio concentration in only five countries and their low borrower quality of its members, CABEI holds the lowest credit rating among the multilateral development banks in the region.

FLAR (Fondo Latinoamericano de Reservas) and CDB (Caribbean Development Bank) are the smallest development banks of in Latin America and Caribbean region.  Both organizations maintain very strong capital position and ample liquidity to balance their negative aspects: the high concentration and credit risk embedded in their loan portfolio.  

In order to understand multilateral institutions, Figure 1 shows the differences between them. The x-axis presents the return-on-assets of the development banks, the y-axis their equity-to-loans ratio and the area of the circles shows their total assets.

Dev Banks 1Figure 1: comparison of multilateral banks in LAC. (Source: author)

As we can see from the graphic above, BNDES is more profitable (compared to total assets) than IDB and World Bank. This is explained by the fact that both multilateral banks are more risk averse (i.e. have better rating) than their Brazilian counterpart, as shown by Table 1.

Development banks

S&P
IDB
AAA
World Bank
AA+
CDB
AA
FLAR
AA
CAF
AA-
CABEI
A
BNDES
BBB-

Table 1:  S&P ratings for development banks in Latin America.

bank-of-international-settlements-warns-against-further-loose-monetary-policy

Regarding lending policies, BNDES disbursed almost eighteen times the total amount disbursed by the Word Bank and eight times the amount IDB did in 2014. This is explained by the aggressive lending policy pursued by BNDES to support Brazilian multinationals and the creation of Brazilian “national champions”. Picture 2 illustrates total lending compared to its counterparts.

Development Bank 2

Figure 2: Total disbursements 2014. (Source: author)

In conclusion, the current debate about multilateral development banks includes, but are not restricted to:

  1. Real vs. potential impact on regional growth due to the conditions imposed by such organizations to countries;
  2. Pro-market bias mostly by World Bank and IDB, and
  3. Focus on large and well-connected corporations in the case of BNDES, which is called “Lender of the first resort” for supporting national champions and the internalization process of Brazilian multinationals

Final question for the curious minds: How could multilateral companies mitigate currency and operational risk?

References:
  1. Center for Global Development:  Why Multilateral Development Bank Practices Are So Far from Their Potential
  2. Investors Relation websites: World Bank, IDB, BNDES, CAF, CABEI, CDB, FLAR
  3. Musacchio, A. Lazzarini S.G. Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond (Harvard University Press, 2014)

Link to picture of globe and bills here; link to picture of bank here

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