Financial crisis leads to a resurgence of the IFIs in Latin America

13 February 2009

After years of playing an ever diminishing role in Latin America, the IMF and the World Bank are in pursuit of a resurgence in the region.

In recent years the role of the international financial institutions was hotly debated in the region. This was due to the diminishing lending of the IMF, the World Bank and the Inter American Development Bank alongside the increasing prominence of other lenders such as the Brazilian development bank(BNDES) and recently established Bank of the South (see Update 62).

According to a briefing by the Bank Information Center (BIC), Latin America’s share of the total IMF portfolio fell from 80 per cent in 2005 to 1 per cent in 2008. However, in a dramatic turn around, the IFIs have announced agressive new lending projects, spurred by the window of opportunity opened by the financial crisis, with billions of dollars in new loans set to flow into the region.

In a recent article, Juan Jose Daboub, Managing Director of the World Bank, highlights that after years of growth in Latin America and the Carribbean, 2009 will be a time of readjustment and dealing with the shocks of the financial crisis. Among the challenges ahead, he points out the falling demand for Latin American goods by Europe and Asia, coupled with a credit crunch, falling tax revenues and decreasing remittances from abroad. Furthermore there is concern about the decline in trade financing as well as short-term corporate debt roll-over.

Among the most visible of trends in the region is increased loans to Brazil, with the country taking on $4 billion in World Bank loans, the highest ever level. However, this pales in comparison to the role that BNDES plays in the country with $40 billion in loans in 2008. As a result, the World Bank is preparing a $1.3 billion loan directly to BNDES in direct response to the credit crunch. According to BIC, beyond playing a role in alleviating the credit crunch in Brazil, this loan presents the World Bank with an opportunity to redesign investment guidelines in economic sectors prioritised by the government and possible future safeguards for BNDES for evaluating high risk loans.

In December, the Bank’s board of directors also approved $50 million to help the central bank of Costa Rica extend loans to national banks for channelling additional credit for working capital and trade finance for exporters. These are just a few examples of increasing loans being taken on from the IFIs in anticipation of financial downturns by Latin American countries, including El Salvador, Mexico and Colombia.

Regional initiatives continue

A handful of Latin American countries met in Caracas in late November to discuss the formation of a regional monetary zone. Among those gathered were Bolivia, Honduras, Nicaragua, the Dominican Republic, Venezuela, Cuba and Ecuador, which have undertaken technical studies on immediately creating a new accounting unit called the Sucre.

“We’re not going to wait here with our arms crossed for the World Bank or the International Monetary Fund to come solve what this great threat unleashed on the world”, said Venezuelan president Hugo Chávez. He proposed strengthening the role of the Bank of the South and pledged $500 million of Venezuelan funds to establish a regional “common monetary fund” and asked other countries to commit portions of their reserves to back up economies in crisis.