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Emerging Markets

Support grows for CAF capital boost

Key shareholders are throwing their weight behind plans by the Andean Development Corporation (CAF) to increase its capital base.

Key shareholders are throwing their weight behind plans by the Andean Development Corporation (CAF) to increase its capital base.

CAF’s board approved the request for an extra $2 billion from its 18 shareholder nations last week.

And in Medellin yesterday, Oscar Zuluaga, Colombia’s finance minister, told Emerging Markets: “Colombia supports the CAF’s plan to increase its capital base. We believe that multilateral banks need to strengthen their assets to increase their leverage.”

In an interview, CAF president Enrique Garcia denied that competition from the IDB for extra funding from cash-strapped governments in the region would undermine his lobbying efforts.

“Whenever we have asked for fresh capital, member states have committed,” he told Emerging Markets. “We are asking [for] a capital increase so we can become a bigger player in the region.”

CAF’s lending is dominated by its Andean member states – Bolivia, Colombia, Ecuador, Peru and Venezuela. 11 other countries in the region are also represented.

Garcia says CAF aims to act as a counter-cyclical lender this year, providing short-term liquidity facilities for the balance of payments needs of its member states. He aims to grow the loan portfolio by 12% annually for the next few years.

In February, CAF provided Peru with a $400 million contingency loan, as part of $1.5 billion of credit lines pledged in October 2008. Last year, the Caracas-based lender’s loan portfolio was a record $9.78 billion. It has $13.5 billion of assets in total.

CAF has around $9 billion of loan commitments this year, Garcia said. It is registering record demand for its long-term infrastructure loans and its cheap lines of short-term credit for commercial and development banks at interest rates of around 250 basis points over Libor.

In 2007, CAF’s members agreed to double its authorized capital to $10 billion in the coming years – $6.5 billion paid in, and the rest callable capital.

In December, Standard & Poor’s revised its outlook for CAF’s A1 rating from stable to negative, citing the declining creditworthiness of the heterodox economies of Venezuela and Ecuador. Lending to Ecuador’s public and private sectors accounts for 20.8% of CAF’s loan portfolio and constitutes CAF’s single largest country exposure.

Earlier this month, CAF approved a $100 million credit loan to Ecuador while the sovereign continues to defy foreign investors by defaulting on bonds issued in international markets.

Larry Hays, Latin American sovereign credit analyst at Standard & Poor’s, said: “Despite CAF’s strong capital base, the credit risk on its loan portfolio has risen, while its Andean shareholders are set for an economic slowdown.”

But Garcia argued that CAF has the status as credit of choice for its five Andean members, representing 62% of all multilateral lending last year versus 35% from the IDB. “CAF is the only multilateral that is really owned by developing countries and our member states are very loyal and that’s why we have had no history of a country defaulting on its loan obligations to CAF.”

While the IDB suffered $1 billion losses on its portfolio last year, CAF accrued a net return on investments of around $320 million last year.

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