By Aaron Weinman
NEW YORK, June 18 (LPC) - Global development banks are mobilizing billions of US dollars in capital to fund initiatives in Latin America as commercial bank lending slumps throughout the region, which is grappling with a spike in coronavirus cases and a severe dip in projected economic performance.
In recent months, the Inter-American Development Bank Group’s IDB Invest, which supports private sector companies in Latin America and the Caribbean, has increased its funding program by US$2bn to US$7bn. And according to senior officials with the US International Development Finance Corporation (DFC), the Washington-based firm has approved funding for projects worth more than US$800m in Latin America this year.
Meanwhile, Latin American syndicated loans led by commercial banks tallied just US$3.5bn for the first half of 2020, down 90% from the first half of last year, according to Refinitiv LPC data. International banks active in Latin America have prioritized bilateral loans with clients as they remain wary of conducting broadly syndicated deals while the region’s governments work to slow the spread of Covid-19.
Latin America’s economies, which rely heavily on manufacturing, tourism and mining for growth, have ground to a halt. On June 8, the World Bank forecast the region’s economies to contract by 7.2% in 2020, with Peru and Brazil to decline by 12% and 8%, respectively.
“The economic prospects paint an extreme scenario in the region,” said Orlando Ferreira, chief strategy officer at IDB Invest. “If you think of (Covid-19) in waves, that wave is now hitting Latin America.”
ALL ON DECK
Regional development banks have also ramped up their activity to complement lending initiatives from their international peers and commercial lenders.
On Monday, Brazilian aerospace company Embraer said it finalized a US$600m, four-year loan to service its working capital. Brazil’s National Bank of Economic and Social Development will provide US$300m, while the rest will come from “private and public banks,” Embraer said in a press release.
Elsewhere, development banks, including the Honduras-based Central American Development Bank for Economic Integration, Venezuela-headquartered Corporacion Andina de Fomento and Colombia’s Financiera de Desarollo Territorial, have provided millions of new US dollar and local currency loans in the last two months.
“Collaboration is critical with both commercial lenders and multilaterals,” said one senior official with the DFC, adding that the firm has a joint pipeline of projects totaling roughly US$9bn with the IDB this year. “Multilaterals can provide that liquidity for projects that banks have a hard time supporting right now.”
Syndicated loan issuance topped more than US$50bn last year, according to Refinitiv LPC data. This was the largest volume since 2007 as international lenders flocked to deals for the region’s biggest corporates, including Mexican oil company Petróleos Mexicanos, its Brazilian peer Petróleo Brasileiro and Brazilian pulp and paper company Suzano, among others.
“There was an opportunity for borrowers to get cheap, five-year money from a lot of banks,” according to a senior banker in New York. “Now, that pipeline has completely shifted. It’s about shorter tenors and smaller bank groups.”
International banks have pivoted to potential three-year syndicated loans. In contrast, development banks and export credit agencies are keen to either co-lend or provide guarantees for bank-led loans to mitigate risk for private lenders.
For example, in April, IDB Invest doubled its Trade Finance Facilitation Program to US$3bn to provide liquidity through lenders for companies from the import-export sectors.
The ripple effect of the coronavirus pandemic has not only left Latin America with a healthcare crisis but also a year of sub-par economic growth. As commercial banks scale back their efforts, counter-cyclical lenders such as development banks will have to step up their funding commitments.
“We are the ones that run to the burning building. Our role is only going to increase. We are going to fill the gap from the capital flight,” said a second senior official at the DFC. (Reporting by Aaron Weinman. Editing by Michelle Sierra and Kristen Haunss.)