Cabei to shift focus to the private sector
The damage caused by hurricanes Eta and Iota, which slammed into the Central American states at the end of November, caused widespread damage and further misery to millions in countries that were already suffering from the Covid-19 pandemic.
The Central American Bank for Economic Integration (Cabei) has been partnering with governments throughout the pandemic. Its total expenditures for this emergency have now topped $2.7bn. Most recently it has been helping to finance the anticipated vaccine programmes that will get economic activity back to normal. In November it sold a $50m private placement to Japanese investors to fund El Salvador’s vaccination efforts – and a similar deal will soon be placed for Honduras. Dante Mossi, executive president of Cabei, says that he expects the low cost of these funds [Libor plus 60bp, which is AAA-level funding cost] to lead to all eight countries in the region requesting this money.
These vaccination bonds show that Cabei is proactively looking forward to 2021 and the recovery. Mossi says the hurricanes will delay the recovery in the affected countries but still expects positive GDP growth around the region.
“I have met with the presidents of the Central American countries, as well as those of Dominican Republic, Belize and Panama, and they all say they don’t want to take on more debt,” says Mossi. “That is why we are proposing to channel more of our disbursements through the private sector in the coming years.”
Mossi says that the private sector is better placed to provide financing for projects in the region. However, he notes many companies are also wary of adding debt with such an uncertain outlook. In order to mitigate this issue, the development bank is about to launch a $1bn equity fund – in partnership with Korean institutional investors – to encourage risk capital and, where relevant, help companies invest without adding leverage. This fund was made possible by the January 2020 addition of Korea to Cabei’s membership as a shareholder. Korean investors now see security from Cabei’s participation and guarantee, which is further strengthened in their eyes by having its government as equity participant in the development bank.
Greater private sector involvement will also add resilience. Mossi hopes the private sector will rebuild to higher technical standards and will also incorporate market-driven risk management solutions. The use of catastrophe insurance and business interruption policies mean the costs of these projects can be borne by the private sector and not add to the overburdened public sector.
“If there is a silver lining to the recent hurricanes, it will be that it encourages governments in the region to tackle the political issues that have frustrated more ambitious water resource management programmes,” he says, adding that climate change will also make such extreme weather events more frequent, more severe and even create other issues such as more frequent droughts.
Cabei is turning its recently expanded annual budget (an average of $3.038bn a year between 2020 and 2024) to large-scale infrastructure projects that will add greater resilience, such as the $600m, Cabei-sponsored Ulua dam project in Honduras, as well as airports, railroads, gas-powered and renewable energy projects.
As Cabei turns 60 it has evolved into the region’s strongest credit and continues to act as a conduit for international investment. For example, Germany has suspended all its bilateral programmes with Central American countries, preferring instead to deal with just one regional counterparty: Cabei.
Central America is the fourth largest Latin American region, with a population of 60 million, and today Cabei has the financial strength to tackle projects that will drive intra-regional growth. For example, Cabei is working with a Korean company to build three cargo ports throughout the Caribbean to boost trade.
“Many of these larger-scale projects were previously seen by other development banks as too big and too risky for the region but now Cabei is showing that not only are they vital, they are possible,” says Mossi.
By embracing the private sector and ambitious infrastructure projects, Cabei intends to help the region grow in size and solidity in the coming 20 years in much the same way as the development bank has done in the previous two decades.