How to Build Up a Region: Development Banks and Multilateral Financing
This is an Insight article, written by a selected partner as part of Latin Lawyer's co-published content. Read more on Insight
After a period of economic slowdown throughout the countries of Latin America and the Caribbean, 2017 has seen the beginning of a much-awaited economic recovery in the region, with the first fiscal quarter showing a 0.8 per cent GDP growth and 1.1 per cent in the second quarter. However, there is a consensus by policymakers that significantly improving the region’s infrastructure must remain a priority. Statistics demonstrate that infrastructure is at the core of economic development by increasing productivity, facilitating transportation, fostering mobility and generally enabling competitiveness. Moreover, infrastructure investment can also play an important role in countercyclical fiscal policy. Standard and Poor’s has estimated that an increase in infrastructure spending equivalent to 1 per cent of GDP in the region would generate 900,000 jobs in Brazil over a three-year period and increase its economy by 2.5 per cent. In Mexico, this scenario would result in the gain of 250,000 jobs and GDP expansion of 1.3 per cent. The quantity and quality of infrastructure in Latin America has vast room for improvement, with a yearly investment gap estimated to be between US$120 billion and US$150 billion a year.
Historically, multilateral development banks (MDBs) have been a primary source of financing for infrastructure development efforts in Latin America. Undoubtedly, these institutions will continue to play a key role as finance engines for the region’s development agenda. They are especially well suited to this task given their ability to manage risk, provide know-how, and fund up-front and long-term costs of large-scale projects. However, the financial resources available to the traditional MDBs may not be sufficient to achieve the much-needed improvements to the region’s infrastructure.
The new landscape of financing institutions and activity by established actors
A notable trend is the emergence of institutions that are carving out a new space within the field of global development finance. These players are part of a broader movement of decentralisation in development finance and an increase in South-South cooperation. In particular, the new multilateral development banks NDB and AIIB promise to be relevant players in Latin America in the future. Both institutions, together with CBC, have a strong Chinese influence. However, the traditional multilateral financial institutions continue to represent the bulk of investment in the region, a fact that is likely to remain true for the near future.
BRICS New Development Bank
In July 2015, the BRICS countries formed the New Development Bank (NDB) with the purpose of ‘mobilising resources for infrastructure and sustainable development projects in BRICS and other emerging and developing economies’, and to supplement the financing efforts of existing multilateral and regional institutions. With an annual estimated global infrastructure gap of about US$1 trillion, creating new financing opportunities for infrastructure projects is crucial for emerging and developing countries and the emergence of NDB is a welcome addition to the development finance arena.
BRICS collectively account for 53 per cent of the world’s population and 23.1 per cent of its GDP. However, despite recent advances to give more weight to BRICS, their pace of economic growth has consistently outperformed BRICS’ influence in long-established institutions. NDB is meant to reflect a new geopolitical balance that is vastly different from the post-World War II setting during which many project finance institutions were created.
The subscribed capital of NDB is US$50 billion, with each of the BRICS signatories contributing US$10 billion. This capital base will be used to finance projects within the BRICS countries initially, but other developing countries will also be able to seek NDB funding. During 2016, NDB lent US$1.5 billion to 11 projects (only one in the region), and is expected to make US$2.5 billion in loans in 2017. At present, all NDB’s funding is on a sovereign basis, but it is expected to start lending to private borrowers in the near future.
NDB is a reflection of the ambition of its founders to assert their place in a new global financial structure. Its founding documents, however, specifically provide for cooperation with Bretton Woods institutions. The expansion of South-South cooperation constitutes a new layer of economic engagement that supplements the existing framework of project funding, rather than standing opposed to it. Although many BRICS are coping with moderate to severe economic recessions, NDB seems to be moving forward, creating a space for itself in Latin America.
Asian Infrastructure Investment Bank
The second major initiative led by emerging economies is the Asian Infrastructure Investment Bank (AIIB). The Chinese government’s proposal to create a new lending institution gained momentum in 2014, and AIIB’s articles of agreement entered into force in December 2015. There are 57 founding members, including many non-Asian countries such as Brazil, France, Germany and the United Kingdom.
AIIB’s stated goal is to ‘complement and cooperate with the existing MDBs to jointly address the daunting infrastructure needs in Asia.’ Nonetheless, there have been recent indications of investment interest in the Latin America region, signalling a shift from its original regional focus. In March 2017, Peru and Venezuela were approved as members of AIIB, Chile was approved as member in May 2017 and Colombia has already applied for admission.
Brazil-China Cooperation Committee for the Expansion of Productive Capacity
On 10 May 2015, the Ministry of Planning, Development and Management of the Federative Republic of Brazil and the National Development and Reform Commission of the People’s Republic of China entered into an agreement that aims to further the promotion of projects in Brazil and that emphasises China’s interest in being an active player in the development of the region. Funded with an initial commitment of US$20 billion, CBC will be focused on identifying projects considered as a priority by the Brazilian government and that improve industrial cooperation between the two countries. Priority sectors for investment include logistics and infrastructure, energy and mineral resources, advance technology, agriculture, agribusiness and agricultural warehousing, manufacturing, and digital services, among others.
The common thread among NDB, AIIB and CBC is, undoubtedly, China’s interest in establishing its presence in the multilateral banking space. Despite its present stagnant economic growth, China has considerable national savings including approximately US$3.2 trillion in currency reserves, a significant portion of which is held in US government bonds. As the second-largest economy in the world, China appears intent on putting its economic prowess to use by collaborating with emerging and developing economies, and has taken a special interest in Latin America. This is further evidenced by China’s commitment to financing projects in the region through its national policy banks (China Development Bank and China Ex-Im Bank), which surpassed the World Bank and Inter-American Development Bank lending to Latin America in 2016. Infrastructure is a suitable asset for long-term investment, and improvements to the region’s development will positively impact the deepening Sino-Latin America economic relationship.
Activity by established actors: instruments and reforms that afford new opportunity
Certainly, NDB and AIIB will not displace the traditional financial institutions that promote development of Latin American countries and have acknowledged that the best way to promote development is by partnering with these organisations and benefiting from their expertise, knowledge of the region and network to provide better financing options to the region.
These organisations have long focused on development in the region and have proven to be dependable sources of medium- and long-term funding for infrastructure, social development projects and climate change mitigation.
Local practitioners consistently identify the following institutions to be the most active in the region: International Finance Corporation (IFC), with total commitments of US$5.1 billion in the region in 2016, Inter-American Development Bank (IDB) and Inter-American Investment Corporation (IIC), with a combined US$2.2 billion commitment in 2016, Latin American Export Bank to Foreign Trade Bank of Latin America (more commonly known as Bladex) and Development Bank of Latin America (CAF), with a total of US$12.4 billion in commitments in 2016.