To meet the mammoth financing needs for climate and economic development in Latin America and the Caribbean, cooperation will be needed, the president of the Inter-American Development Bank says in an interview. The private sector must play a part, so too the entire banking sector. Now is the time to act on climate change, infrastructure and social investment, he says.
Latin Finance
Ilan Goldfajn took over the reins of the Inter-American Development Bank (IDB) in January, bringing a wealth of experience to the Washington, DC-based lender. He previously ran the Western Hemisphere Department at the International Monetary Fund, and before that he was governor of Brazil’s central bank and an economist at financial institutions in that country.
LatinFinance interviewed Goldfajn about the trends in development financing in Latin America and the Caribbean, including the need to step up efforts to achieve the United Nations Sustainable Development Goals. He believes that improving efficiency can help boost the amount of money available for lending, and that more focus needs to be put on boosting the effectiveness of the projects. He also shared his expectations for the global economy as the interest rate cycle appears close to peaking.
The interview was edited for length and clarity.
LatinFinance: We are seeing signs of increased appetite for cooperation between multilateral and other public banks. What is your sense of why this is happening now? What is the urgency for this increased fervor for cooperation?
Ilan Goldfajn: Why now? Because we need to elevate, we need to move from billions to trillions of financing for climate and social projects. The demand is there as we move closer to the point of no return in terms of climate change.
We are committed to the 2030 Agenda and Sustainable Development Goals. We are halfway to that point, and we need to change the way we do things in order to reach our commitments. So, we realized that we had to do something to enhance what we do.
In practice, this means that we need to find the resources and the cooperation in the places we have. The private sector is very important. We need to be able to entice the private sector to come to the right places. There are several ways to do this. One way is that you anchor projects and you bring in the private sector with your reputation. You can try to redefine risks, so you provide guarantees. You put up concessional money that is blended so it helps to get the resources. You can have innovative instruments where innovation entices the private sector to buy the bonds or buy the instruments so that we get more money into the countries.
It is also true that we cannot continue to do what we have been doing, with each of us having our own standards and our own way of doing things. We have scattered efforts, where I do “X” and you do “Y.” But they are very similar, and then we let the countries deal with it.
We need to leave talk behind and start implementing the goals. What does it mean to implement? It means to have very precise action plans on which we are all working together.
What are these places and where we are working together and where can have a major impact? With the World Bank, basically we have three areas. One is the Amazon, a specific region and a specific moment where we have political will in the eight countries in the Amazon, and we have the IDB that has an Amazon unit. It is now only a focus on deforestation and emissions, but it’s also an alternative for people so they do not deforest, you deal with the job, you give them economy and finally you realize that the region is not just forests but that there are cities, so you do infrastructure. It is a holistic approach. There are very specific deliverables, and so we talk to the World Bank so that we can do it together. Can we have a financial instrument? Can we offer an Amazon bond? It is very specific. We narrow down the region, we have a project and then we see if we can work together on one instrument.
The second is the Caribbean. We can talk about the infinite needs of the Caribbean, but we focus on one: climate. But it’s not climate in general, it’s resilience. You can talk about mitigation, but that is not what we want to focus on in the Caribbean. The Caribbean is adapting to climate change because the Caribbean is already facing the consequence of hurricanes. The Bahamas, for example, lost the equivalent to 26% of GDP. Again, we can have an instrument with disaster clauses. Can we give them insurance if something happens? Can we give them liquidity if something happens? We are going to work together on this.
And the last item we decided to work on is digitalization. It is a big issue, but we narrowed it also. We are going to focus on digitalization in education to start with.
So, you see it is very concrete, and the three teams are already working on this. This is the kind of cooperation we need. We need to work together because we need to scale things up.
LF: Would you say that enthusiasm extends to all development finance institutions, including a newly expanded BRICS bank, with China effectively at the helm, and to the AIIB with its growing global footprint?
Goldfajn: I think that there is a perception that this is a moment to act, that there is political will to act. Globally, one of the few consensus is that we need to act on climate change, we need to act on infrastructure, on social investment.
The new generation is very focused on impact. It is less about diplomacy and more about actually reaching results. It is about impacts in a very precise way: how many people are getting water and sewage that were not getting it, how many people can transport to work in less time, how much more connectivity are we getting.
We need a culture change. The way we were built since the 1940s and 1950s was about how much we are going to lend, how much we are going to pour into the countries. And that was our measure. It was supposed to be a good proxy in the past. Now it is not. One dollar in one project will be very different from one dollar in another project. That proxy does not serve us well anymore. We need to look at the impact [of projects].
LF: On the question of lending, there is the idea that more can be done with less. Where is the IDB on this? What is the thinking now?
Goldfajn: The thinking now is that you need to be more efficient with the resources that you have, but we need both. We need more resources and we need to use them better. You need to do better with more, not better with less. You need to do better with more, not better with less.We need to show that we are doing better, that we are effective in terms of development, that we have an impact, that our projects really make a difference.
We have realized that just being able to increase the scale, be it with the private sector or with the World Bank, that is not enough. The projects are led by the countries and sometimes they do not have the capacity – institutional capacity, people, project capacity. We need to be able to focus on the projects, not only on the financing. We can have the capital, but if the capacity is not there it is not going to work.
LF: The G20 put forward some bold proposals for boosting MDB investment capacity. Where do the IDB and its shareholders stand on the question of rethinking risk appetite frameworks to boost lending capacity, for example, by using callable capital?
Goldfajn: Today, most of the capital we have is already callable.
The question is if we are going to get more capitalization. I think that the answer we are going to get from stakeholders is that it looks like there is a sense that there is a need to increase our capacity.
From the point of view of the IDB, this year we are engaging in two capitalizations, one with the IDB Invest and the other with IDB Lab. That is going very well. By the next annual meeting we will probably have a resolution. We already have a mandate to start talking about it and it is very important that this phase is concentrated in the private sector, in being able to get the private sector on board.
LF: Has the quantum come into focus?
Goldfajn: That is exactly what we are discussing. Talking about numbers. We don’t have a conclusion yet, but that is where we are today.
The sticking points are linking the resources to projects. It is called IDB Invest 2.0. How much more vision? How much more risk? Can we attract more private capital? What is needed to attract more private capital?
With this capitalization, IDB Invest would be getting closer to the IDB public sector [bank] if the IDB does not get its own capitalization in the future. It means that we are very serious about involving the private sector because we realize that only with the public sector is not enough.
LF: There is fresh support for the global green bond initiative. What does this involve?
Goldfajn: Two types of green bond initiatives. One is the one that the IDB is pushing, which is the Green Bond Transparency Platform. Already more than 90 percent of issuance of green bonds is on this platform and it helps everybody in the region to look at the green bonds to take uncertainty out of the process.
The other is that we are going global. We are getting our European partners to put the platform on a global scale. We are giving support to the Green Global Bond Initiative. We are partnering, we are willing to participate. It is not a transparency platform, but an initiative to help with issues. It is more like technical assistance. It is a way to help develop and design the green.
What is our role? We are in the countries, we are talking to Colombia about issuing, we are talking about Brazil issuing. We are involved in all these countries that want to issue. So how do we issue, how do we do it, what is the best way to do it? So, there is now a global initiative and we are bringing the countries of Latin America and the Caribbean to the table.
LF: Where does the blue bond debt swap you worked on with Ecuador fit into this?
Goldfajn: There are two generations of instruments. The first generation of instruments is green bonds. Green bonds are more mature, still growing but more mature. We are now talking about transparency and scale.
The new generation instrument is what I will call the smart way of using our knowledge and our resources. We need to use our scarce resources and our knowledge to provide our intervention at the right moment at the right place. There are three of them. One is debt swaps. Why is this the right moment and right time? It is the right time because we have countries in the region that have debt. That is a reality. We just came out of the pandemic and the region has relatively higher debt than other places.
This is a moment when interest rates are higher, the cost of debt is higher, which means that our interventions with our scarce resources can generate a huge difference between the old debt and less risky new debt.
When we did it with Ecuador, they gained $1 billion. Half of that for the Galapagos and the other half to lower debt service.
We are getting quite a huge amount of demand for debt swaps. Central America wants debt for health, the Caribbean wants debt for education, in other countries they want debt for nature. What you have is debt on one side and a priority on the other, and in the middle, there is a huge spread between new and old debt.
We have others like sustainability linked bonds. It is a smarter way to use resources.
LF: Looking at the rest of 2023 and 2024, the expectation is that the rate cycle has peaked and the United States could have a soft landing. Does this bode well for capital flows to Latin America and the Caribbean?
Goldfajn: I believe that there is an opportunity here, both short and long term. Latin America and the Caribbean have had a lot of opportunities in the past and we need to seize them.
What are the opportunities now in the long run? It is clear that the region has a complementarity for global public goods that the world needs. I can mention three of them. One, clean energy. In Central America, 80 percent of the energy is clean. If you continue to invest in renewable energy, at the end of the day you can export clean energy. Second, nature. We have the Amazon, and we can build on this by providing nature conservation. Third, minerals. Two-thirds of the lithium and a good chunk of copper that come from the region are needed for mobility. Are we going to seize these opportunities? In the short term, central banks in the region raised interest rates before the rest and did it because the memory of inflation is fresh. It looks like they are going to leave the tightening period before the rest. Chile, Brazil and others are already in the process. But if the region leaves earlier than the rest, it usually means capital flows will come to take advantage of the momentum.
Link da publicação: https://latinfinance.com/magazine/2023/10/05/interview-idb-president-ilan-goldfajn/
As opiniões aqui expressas são do autor e não refletem necessariamente as do CDPP, tampouco as dos demais associados.
