By Lucy Conger
Central America has long been considered a bit of a financial backwater, but its fortunes have started to pick up. A free trade agreement with the US, almost $10 billion a year in remittance flows and increasingly sophisticated exports have all played their part in changing perceptions.
None of this is lost on the Central American Bank for Economic Integration (Cabei), the regional development bank, which has rewritten its strategy to take advantage of the change. “We changed our business model; we see our role as an institution that has to mobilize resources throughout the region,” says Harry Brautigam in an interview with Emerging Markets.
And mobilize it has: the bank has more than tripled funding to promote economic development in the region over the last three years. In 2006, it raised $2.4 billion in resources for projects in the five-country region, up from about $700 million in lending in 2004.
With the launch of an aggressive five-year plan in 2004, the bank has moved beyond vanilla lending to diversify its financial offerings, with a view to galvanizing the region’s nascent capital
markets. They’ve been mooted on and off for at least 15 years, but there’s reason to believe concrete development is at hand – especially if Brautigam has his way.
The bank’s president has a bold plan for beefing up Cabei’s role in Central American capital markets. “We envision Cabei’s role as the driving force for clearing and custodial services of securities traded in the region,” he says. By creating one regional custodian, cross-border trades would be more efficient, and corporate issues could appeal to the broader market.
Brautigam comes armed with formidable experience: he was a director at Barclays Capital’s Latin America regional office and, before that, handled debt and equity transactions in South America for Bank of America’s investment banking group. He has a doctorate in economics from the University of Illinois at Urbana-Champaign.
For now, cross-border financial investment occurs mostly between Costa Rica, Panama and El Salvador, where custody is more advanced, says Ivan Diaz, general manager of Latin Clear, Panama’s clearinghouse. “It’s beneficial because the pension funds of El Salvador can come to Panama through a correspondent and buy bonds and corporate bonds,” says Diaz.
Panamanian and Salvadoran mutual funds list on each other’s markets, enhancing liquidity and corporate bonds for Panama-based Global Bank and Banistmo, sold in El Salvador.
But much more is needed to expand cross-border investing and expand the region’s capital markets. Settlement and clearing is lacking on a regional level to get around the current cumbersome process whereby each national custodian makes coupon and capital payments through a single regional account in a bank, says Diaz.
Compelling
The case for a more sophisticated regional capital market is more compelling than ever. “It makes sense now with regionalization and consolidation of Central American markets – mergers and acquisitions, cross-ownerships of various industries and sectors – that there be a Central American consolidated capital market,” says Raul Ardito-Barletta, executive vice-president for Central America and the Caribbean for BNP Paribas in Panama City.
Brautigam says that Cabei will step up its local market bond issuance. Up to now, only 3% of Cabei financing is issued in Central America, although Central American investors do purchase its bonds on international markets.
International banks have begun swooping in to set up region-wide operations, most notably HSBC, which bought Panama’s Banistmo for $1.8 billion last year.
Citigroup and GE Capital are among others acquiring local banks to position themselves throughout the region in moves that could spur capital market development.
“Foreign banks are more likely to introduce these products – debt and equity securities – to the region because they have the technology and expertise to do it,” says Carl Ross, head of emerging markets research at Bear Sterns in New York.
Aside from its capital markets focus, Cabei is stepping up its activities in several other domains: providing cofinancing, cosigning, guarantees and structuring of syndicated and A/B loans. With these instruments, the bank expects to mobilize $3.7 billion to back integration and development projects in the region, with the goal of meeting its stated priorities – integration, globalization and poverty alleviation in Costa Rica, Guatemala Honduras, Nicaragua and El Salvador.
Its principal activities, after all, are to support the development of infrastructure, including electricity, highways and customs facilities and developing an investor-friendly business climate and services, such as streamlined customs procedures, that boost trade flows under the new Central American Free Trade Agreement (Cafta) and within the region.
“Cafta created the incentives to open markets to take advantage of larger markets, like the US, but as Central American industries were not ready, intra-regional trade grew and will continue to increase as we improve our customs systems,” says Brautigam.
With Cabei assistance, customs procedures are being streamlined, and today goods move freely between Guatemala and El Salvador, and at other borders pass through a one-stop checkpoint. In each of the past three years, intra-regional trade has increased by 10%.
Private-sector positioning
Cabei is also working to promote the role of the private sector in the Central American market, which now tops $72 billion and includes 38 million people, especially for infrastructure projects. In recent years, the bank has backed the construction of the regional electricity grid and highways, the privatized telecoms systems and upgrading of ports and airports.