The Inter-American Development Bank has begun to dip its toe into local-currency borrowing and lending over the past few months. Previously, the IDB could only borrow in Latin American currencies if it immediately swapped the proceeds into dollars; now it can also borrow in them if it immediately lends the proceeds to a specific project.
But IDB observers hold out hope for a much more aggressive use of the bank’s liabilities. A report from the Center for Global Development, whose authors include former IDB chief economist Ricardo Hausman and former Mexican finance minister Angel Gurria, says that the bank should issue benchmark bonds in the international capital markets, denominated both in nominal and inflation-linked Latin American currencies.
“IDB bonds with AAA rating issued under New York law would make it possible to separate currency risk from sovereign and convertibility risks,” notes the report. “The bonds in domestic currency could be used to provide insurance against exchange rate risk.”
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The report even notes that developing such markets would not necessarily entail the IDB taking on exchange-rate risk itself: it could lend the proceeds out in the same currency. Alternatively, it could help to build a more liquid market in medium-term and long-term cross-currency swaps, which would also benefit domestic markets. A liquid offshore market in risk-free Latin-currency bonds could be of enormous benefit for the development of Latin American capital markets; there would be even more benefit if some of those bonds were indexed to inflation. But John Hauge, manager of the IDB’s finance department, is cautious about such ideas. He notes that the bank’s local-currency lending is only now getting off the ground, and that the board will probably want to see a lot more of that before taking any next step into benchmark local-currency bond issuance.
Hauge is also keen to keep the IDB’s cost of capital to a minimum. “We have to borrow on a cost-effective basis,” he says, “and we cannot take foreign-currency exposure”, even for a few days. That means that any money raised in local currency has to be earmarked for a specific project even before the deal comes to market. “We are not just going to borrow $500 million in Brazilian reais and sit with that on our balance sheet looking for projects,” he says.
At the moment, Hauge is most interested in the asset side of the local-currency balance sheet. “Our goal is to be a leader in the local-currency lending area,” he says. The deals that are presently wending their way through the IDB bureaucracy are extremely time-consuming, being the first of their type. The hope is that they will lay the groundwork for much quicker and smoother deals in future.
But the vast majority of the IDB’s borrowing is likely to remain based mainly in Japan, alongside the occasional dollar-denominated benchmark. Local-currency borrowing will not make up a significant portion of the bank’s liabilities for the foreseeable future.
