IDB governors gather after approving a doubling in size of the bank’s private sector arm Credit: IDB Group

The annual meetings of the Inter-American Development Bank (IDB) drew to a close this weekend on a triumphant note with the approval of a $3.5 billion capital increase for IDB Invest, its private sector arm, and the adoption of a new business model for the bank that will allow it to take on more risk while boosting its financing capacity to $112 billion over the next decade.

IDB president Ilan Goldfajn called it an “historic moment,” adding that this meeting of the bank’s governors in the Dominican Republic was at least as significant as its 2015 gathering in Busan, South Korea, when the private sector division of the bank was officially carved out as a separate entity that ultimately came to be known as IDB Invest. Since then, it has put some $53 billion to work.

The development coincides with rebounding confidence across the region, as evidenced in comments to LatinFinance by numerous officials and financiers at the meetings in Punta Cana this past week.

The newfound assuredness of policy-makers and bankers comes against the backdrop of a global bond rally this year, spurred by expectations of interest rate cuts in the US and elsewhere, that has buoyed riskier debt as investors flock to higher returns. The appeal of emerging markets bonds has been heightened by a growing belief that US dollar strength may have peaked, a reversal that could portend huge gains for non-dollar assets.

Latin America and Caribbean sovereigns – including many LatinFinance spoke to in Punta Cana – are leveraging the region’s structural advantages at a time of renewed optimism in global financial markets, not only to issue debt but to innovate the ways they do so.

Collectively, the region’s governments have issued some 40 thematic bonds, or 21% of the global total, helping turn the region into a hot spot for sustainable and thematic investors, beyond traditional sovereign debt buyers. Many countries are luring them to sell debt – some more actively than others. While Mexico and Chile dominate the region’s sovereign debt markets – with the former having just priced its largest-ever cross-border deal, at $7.5 billion, in January – they also lead the way for sustainable credit.

But Brazil, too, has recently said it will return to the sovereign sustainability linked bond market at least once or twice this year, following its first such issuance at the end of 2023.

While markets remain closed to Argentina, investors are eyeing smaller opportunities, no matter the backdrop. Ecuador, for instance, is trying to capitalize on the success of last year’s debut debt swap for ocean conservation by implementing a second such transaction, according to finance minister José Luis Vega. Guatemala said it has been working on a framework for sustainable bonds to be issued in the second half of the year. Paraguay is also considering issuing a sustainability bond next year. Even Peru, despite its persistent political dysfunction, is keeping close tabs on the market to time its next issuance.  

Changing Lanes

Will investors heed the calls? Likely so, as long as Latin American countries deliver two ingredients: favorable prospects for output growth and economic stability. In the short term, though, much will depend on the trajectory of the US economy, the timing of interest rate cuts by the Federal Reserve – which analysts increasingly believe will be delayed until the second half of the year – and the direction of the US dollar. For now, the dynamics speak strongly in favor of Latin American assets.

Average interest rates in the region have been trending down from a high of 9.8% in July 2022, but the rate of easing may be tempered by the risk of capital outflows – especially if US interest rates remain high, the IDB notes. At the same time, overall budget deficits are still relatively large due to higher interest payments, requiring further fiscal adjustments across the region.

Longer term, though, the region has a lot going for it. Latin America’s traditional wealth in natural resources means that it holds as much as two thirds of the world’s lithium reserves – a critical resource in the global transition to clean energy. Countries, including Brazil and Chile, have made headway towards the expansion of renewable energy. Innovation is also underway across the region in green and climate financing.

Central and North America, meanwhile, are benefitting from the reordering of global supply chains and the shift in manufacturing to the region, while others are betting on ‘powershoring’, the relocation of production to countries with abundant renewable energy resources. On the geopolitical map, Latin America appears insulated from wars in Ukraine and Gaza.

Structural constraints

More fundamentally, Latin America has yet to address structural weaknesses in terms of productivity, which hamper its overall economic performance. Felipe Jaramillo, vice president of the World Bank for Latin America and the Caribbean, said static productivity is contributing to the region’s inability to maintain the economic growth needed to reduce poverty. The region’s economy expanded at 2% in 2023, the bank said, and Jaramillo added “we do not see factors that will accelerate growth.”

“This is concerning, because mediocre growth means we cannot seriously reduce poverty and exclusion, or improve quality of life,” he said.

The IDB delivered a similar diagnosis in a report, published Monday. It said regional growth is forecast to slow to 1.6% in 2024 from 2.1% last year before rebounding to 2% in 2025. The Dominican Republic, which hosted the meeting, is among the outliers with a forecast of at least 4% this year, according to Economy Minister Pavel Contreras.

Eric Parrado, IDB chief economist and one of the authors of Monday’s report, said: “The region is suffering a triple challenge, which means that we have social issues that we need to tackle, such as poverty, informality, distribution, and so on, and we have to tackle that because in recent years we have had social problems because of that.”

“The second challenge is related to the fiscal stance. We spent a lot of ammunition during the Covid 19 crisis and we reacted swiftly with our reaction to subsidies and transfers, but now we do not have much ammunition, which is why the private sector role is very important.

“The third challenge is economic growth, which is low. We have to generate resources to finance the government and also to offset the problems with the social sector,” he said.

Need for persistence

In addition, the infrastructure gap is still immense, with an estimated $150 billion needed annually to meet the region’s needs, according to the World Bank. There has been a rebound in private investment in concessions and PPP contracts in Brazil and elsewhere, and Chinese companies continue to invest in several countries. But this may not be enough. Education and human capital is a looming and serious concern.

A dramatic deterioration in public security is also weighing heavily on growth and undermining investment flows to the entire region. “Insecurity is a new frontier and it is affecting the capacity to attract investment,” Goldfajn said.

Recent episodes of extreme violence in Ecuador and Haiti as well as repeated clashes between drug-related armed gangs and security forces in Brazil are a reminder of the risks associated with the region.  

“The meager progress in productivity poses a barrier, impeding the ability of Latin American and Caribbean countries to achieve robust and sustainable economic growth,” the IDB report said.

“Tackling this fundamental challenge becomes crucial for policy-makers aiming to confront the complex dynamics influencing the region’s economic landscape.”

The talk about reforms is not new — What’s needed now is persistence. “The story of Latin America is that we know what to do, but sometimes we procrastinate and postpone,” Parrado said.

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