Coronavirus: IDB aims to be LatAm’s first financial responder

Luis Alberto Moreno, president of the IDB

Being forewarned isn’t always to be forearmed, according to Luis Alberto Moreno, the president of the Inter-American Development Bank (IDB).

As Latin American governments have watched the advancing pandemic spread across the world to a region far from its epicentre, there has been little they could do to address their underlying weaknesses in the time to prepare for the crisis.

“Latin America always tends to get things late – and this is the one time where it is good that we got this late,” says Moreno. “But does that mean we are prepared? No, our healthcare systems are not of the scale or quality of those in Europe or North America.”

To date, the IDB has committed $12 billion to fight the impacts of the virus. It issued $2 billion on March 30 to top up its 2020 funding.

Moreno says the investment grade-rated countries in the region should be able to follow the IDB into the markets.

Indeed, Panama jumped in ahead of the development bank with its $2.5 billion of fundraising as the international markets bounced and saw an appetite for strong emerging market paper.

However, the IDB’s focus will be on those countries that cannot.

Moreno says $3 billion is being directed to the help with the region’s healthcare crisis. He says the money is being used to help countries source essential medical supplies (the bank has created an approved list of 700 existing suppliers) and to help create more supply.

“This kind of ‘Wild-West’ situation in terms of medical supplies – be it for respirators, face masks or uniforms – has affected all our countries,” he says. “That has brought about a lot of innovation from companies trying to produce supplies, and we are working with tech companies in Brazil, Colombia and Peru that are switching production.

“There are tech stock companies that are now manufacturing hospital uniforms. Crisis creates innovation and humanity responds with solidarity and that is what we are seeing.”

The IDB has focused its initial response on providing disbursements that help the healthcare challenge – specifically to purchase equipment.

Moreno says the bank its disbursement rate is running 50% above normal levels; he expects there will be about another $15 billion this year to help weaker sovereigns fund a broader financial response to the economic fallout from the virus.

“$15 billion to the sovereigns is going to generate a lot of positive flows,” he says, “but when you look at the amounts of money needed, it is going to be a drop in the bucket compared to the immense needs the hemisphere has.”

Most of the weight of the economic fallout will come through fiscal deficits. A recent presentation from the IDB pointed out that the region is in a weaker position to respond to this crisis than it was in the 2008 recession.

Victoria Nuguer, economist at the IDB, said: “The fiscal package available to [the region’s governments] is about half what was available in 2009. This gives us a much smaller fiscal space from the one we had in the last crisis.”

Nuguer estimated that the region’s countries have an average fiscal deficit of 3% of GDP going into the crisis, while a quarter have deficits above 4%.

Moreno says: “Aside from countries like Peru that is spending 12 points of GDP, which is about what the US is doing, [the biggest fiscal response is coming from] countries like Chile and Brazil that are doing close to 6%, and the rest are under 5% and most are closer to 2.5% at best.

“That means the response capacity is not a strong one ­– and that is happening across the southern hemisphere, not just Latin America but also Africa,” he says. “The response that the IMF, the World Bank and we at the IDB have to have is all hands on deck and do as much as we can with our balance sheet; and that’s exactly what we are doing.

“This is a time to put the [fiscal] rulebook aside and preserve lives, and that means increasing the indebtedness of all countries – that is definitely going to happen.”

The IDB has also been actively coordinating its response with that of other development banks operating in the region: notably CAF, Fonplata and the Central American Bank for Economic integration (Cabei).

“For example, we don’t have a footprint in the eastern Caribbean, so we work through Cabei,” says Moreno.

That sub-region is being hit very hard, according to Dante Mossi, executive president of Cabei, which is implementing a $1.9 billion package in these countries.

“The impact was harder for some economies that depend more on tourism, such as Costa Rica, the Dominican Republic, Panama and Belize, which had cancellations for hotels, cruises, conferences and many more tourism-related services,” says Mossi.

“We have an early estimate of a contraction of the economy of the region from 1% to 2.5% of GDP. Probably Belize and Nicaragua will take more severe shocks than the rest.”

Moreno says the bank is also working to maximize the financial support to the region from bilateral agencies such as German development bank KfW and the French development agency AFD.

The IDB is also targeting vulnerable groups within countries. This will be a particularly large challenge for the region because so many Latin American countries have informal sectors in which large sections of their populations work.

The IDB is seeking to support individuals directly, as well as working to maintain the solvency of small and medium-sized enterprises in these countries.

“This issue is particularly acute when you look at a region that has 50% of its labour as informal; you really have to boost the social safety nets,” says Moreno. “That’s the work we have been doing. On top of that we are providing money to keep trade finance going at the banks to enable them to provide lending to small businesses.”

Moreno is worried that the private sector is retrenching.

“In terms of the commercial banks, we are seeing the same things that we saw in the previous [2008] crisis – retrenchment from the big [global] banks in terms of how much they deploy in the region,” he says. “That’s where trade finance becomes so critical, and that’s why we are boosting our capital going to trade finance – it’s particularly important for the regional and smaller banks.”

Moreno adds that IDB Invest is working to bypass banks entirely to help meet the rapid spike in demand for credit from SMEs.

“We are looking for creative ways to meet the explosion in demand from small businesses, and there just isn’t enough financing coming from ordinary channels,” he says. “For example, we are looking at the factoring of a value chain of receivables as one potential source of money for these businesses.”

Moreno is also thinking about what the long-term impact of the Covid-19 crisis will be – and he’s cautiously optimistic.

He says there could be benefits to the financial help for informal workers.

“Now governments are putting out a lot of money, and that allows the capture of information about informal markets in ways we have never been able to do before,” he says. “So that’s a change to begin to think about more flexible – but more connected – types of labour.”

And he sees structural and political benefits.

“Perhaps this is the beauty [of the crisis]: this is a challenge for humanity to have more solidarity, to work more together and look more at what unites us rather than divides us. This is a moment that forces us to do that, and that will require far more and better multilateralism and very strong global cooperation.”

He believes that there is an opportunity for a green growth-led recovery, as the lower demand for energy may accelerate the shift to decarbonization – through, for example, sustainable mass transit schemes, as well as the more obvious promotion of renewable power.

“This is a moment when we are going to have to face up to a lot of the structural issues that we weren’t able to solve,” he says. “In that regard, countries will [respond] differently, but it’s a real opportunity fundamentally to change a lot of our challenges. To me, that’s the more exciting outcome of this horrible situation that humanity has to face.”

Moreno points out that one third of the IDB’s lending already goes to climate change-related initiatives, and in the longer term that may increase further.