The Latin American Development Bank, IDB, plans to help Latin American countries “de-dollarize” their economies by providing more financing in local currencies, said bank President Luis Alberto Moreno.
“Part of our role should be to help the countries in the region de-dollarize and to have more of their stock of debt in local currency” Moreno said in an interview during the bank’s annual meeting in Calgary, Canada.
Surging foreign investment and faster economic growth are leading to stronger currencies in countries such as Chile, Brazil, Colombia, Uruguay, and Mexico. The region accounted for twice as much of global capital inflows in 2009 as it did in 2006, Moreno said.
“That is having a huge impact on our exchange rates, on the tradable sector,” Moreno said adding that “all countries are worrying about the impact of overheating.”
To offset the currency gains and to develop capital markets across the region, the Washington-based IDB plans to increase borrowing in local currencies, while allowing more borrowers in the region to convert their IDB loans from US dollars.
“This is a choice for countries, depending on their total pool of debt” said Moreno. “The important thing is the bank has the flexibility to accommodate them.”
The IDB, which received a capital increase of 70 billion US dollars last year, may borrow in the Chilean market, selling so-called “huaso” or “cowboy” bonds in pesos, said Chilean Finance Minister Felipe Larrain.
“We are creating a local market and we are deepening our financial market,” Larrain said in an interview at the IDB meeting in Calgary. “We are moving in the direction of internationalization of the Chilean peso.”
The IDB and private companies are among entities showing interest in huaso bonds, peso-denominated notes issued by foreigners, Larrain said.
“Over the next couple of months we will probably see some” issuance, he said. “We are seeing a lot of interest. The IDB is one example, but there are a lot of examples of private companies”.
Total bond sales by the IDB may reach 10 billion USD this year, down from 11.8 billion in 2010, according to a bank presentation in Calgary. The bank has bonds outstanding in currencies including Mexican pesos, Brazilian Real and Costa Rican Colones. About 73% of borrowing was in US dollars last year, down from 84% in 2009, according to bank data. Five percent of the bonds were sold in Latin American currencies last year, up from 2% in 2009.
The bank has also been working with borrowers in the region to convert their US dollar loans from the IDB to their local currency using the swap market. Local currency loans accounted for 2.1 billion, or 3.3%, of the 63 billion total at the end of 2010, up from 2.5% the previous year, bank documents show.
“We are building capacity to support the increased demand we are seeing for local currency financing,” said IDB Treasurer Soren Elbech, in an interview in Calgary.
“We are actively engaging capital markets to do whatever we can to support this demand. If it makes best sense to issue a bond in local currency, we will of course look at that,” he said. “We are continually working with financial counter- parties in the swap markets to provide as cost-efficient funding as possible in the currencies in demand within prevailing bank policies and guidelines.”
Moreno said funding for infrastructure such as roads, airports and ports, is a priority for the bank. Education and productivity are also important.
“Infrastructure is the most important in terms of volumes of resources,” he said. “The gains of trade to be made are hugely dependent on the investment in infrastructure”.
With strengthening currencies and economic growth of more than 6% last year, the region’s priorities are changing, he said.
“The set of challenges the region has today are very different from the past in that we begin with a positive outlook, derived from the good macroeconomic stability that we have enjoyed over almost the last decade,” he said.