CABEI a stronger regional player making a bigger impact
Achieving the best credit ratings in Latin America, issuing its first green bond, approving its most important project and welcoming a high-quality new member, 2019 was some year for the Central American Bank for Economic Integration (CABEI). The Honduras-headquartered bank will celebrate its 60th anniversary this year in stronger shape than ever.
Guatemala and Honduras share a land border of some 256 kilometres, but until recently cargo vehicles passing between the two countries could meet delays of up to 11 hours as they crossed. Today, after a programme designed to streamline the customs process helped with a $1.5 million technical assistance from CABEI, the waiting time is – in some cases – down to just six minutes, according to the bank’s president Dante Mossi.
CABEI’s role in facilitating the smoother transit of people and goods is just one example of how the bank is putting into practice the concept that provides its name and purpose: integration.
Central America’s average annual GDP growth between 2014 and 2018 was, at 3.5%, far above the average for Latin America. Moreover, Belize, Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, Panama and the Dominican Republic have a combined population of 60 million, and – as a block – the region forms the fourth-largest economy in Latin America.
This is one reason why CABEI’s vision of a more integrated Central America is so important. As the lender’s 2020-2024 strategy states, presenting a collective vision of Central America will “make it easier for the international community to understand, size and decide on its interaction” with the region.
“I see a region that is growing, that has a very young market, and that is attractive to investors,” says Mossi. “Central America’s major advantage is that the private sector is dynamic and we are totally open to trade.”
It is also why more countries are recognizing the opportunities. And they are choosing CABEI – which provides 46% of development financing in Central America – to channel their resources.
Korean multiplier effect
In 2019, CABEI welcomed the Republic of Korea as its seventh non-regional member, with the Asian country investing $450 million of capital into the bank for a 7.2% stake.
Korea’s arrival in tandem with other capitalization initiatives are set to have a transformative effect in the bank’s lending capacity, boosting yearly loan approvals by approximately $1.0 billion, allowing CABEI to maintain its position as the region’s dominant multilateral.
Furthermore, the deal should improve the bank’s institutional governance, strengthen its financial profile (see box), and increase the benefits of cooperation agreements signed with Korean institutions that should favour member countries.
Also from Asia, since 1992 the Republic of China (Taiwan) has been the largest non-regional member, ahead of Mexico, Spain, Argentina, Colombia and Cuba.
These countries see an ideal partner in CABEI for their diversification into an economic block with immense potential.
A Reference for sustainable development and integration
Such a commitment from Korea is a demonstration of faith in CABEI’s vision to become the benchmark for sustainable development and economic integration in the region.
Moreover, it plays into the bank’s strategic framework for 2020-2024, which includes strengthening institutional governance, bolstering its financial capacity and passing on more benefits to member countries, effectively promoting regional integration, and ensuring that the bank’s projects achieve a greater economic and social impact.
Ultimately, CABEI becoming a more reliable, more broadly supported financial institution will enable it to finance high-impact regional projects at the lowest possible costs.
Already, the bank has been able to improve the borrowing conditions for its members: in 2019 CABEI reduced the margin on its sovereign public sector operations twice – by a total of 25bps.
Being able to raise funds from local institutions in Honduras and Costa Rica has also allowed CABEI to offer local currency financing, thus supporting initiatives such as small and medium-sized enterprises support programmes and municipal infrastructure while mitigating borrowers’ exchange rate risk.
| CABEI FACTS AND FIGURES
• 60 years as the financial arm of Central American integration
• AA/AA/Aa3 – CABEI’s credit ratings, after three upgrades in 2019 (one of them by 2 notches)
• $450 million capital subscribed by the Republic of Korea
• $11 billion – the expected size of CABEI’s loan portfolio by year end 2024
• 24 – the number of currencies in which CABEI has issued
• More than $30 billion in financing disbursed by CABEI since its foundation in 1960
Proven commitment to sustainability
Central America’s carbon emissions are high on a global scale, but the region is a part of the world susceptible to climate change, so CABEI’s growth goes hand-in-hand with a firm focus on environmental sustainability.
This is in the bank’s DNA. As Mossi points out: “CABEI has been financing green infrastructure since long before it was fashionable.”
Between 2015 and 2019, some 36% of CABEI’s loan approvals – or $3.9 billion – were for climate change initiatives.
Crucially, in 2019 the bank issued a Zero Carbon Declaration, saying it would refrain from financing projects related to the extraction and generation of energy based on mineral coal.
Rather than representing a new direction, this takes CABEI’s already firmly established commitment to sustainability one step further; some 84% of its energy financing approvals were already directed to projects involving renewable energy, electrical infrastructure, or electric sustainability programmes.
Yet as CABEI sees its role as more than simply financing infrastructure, the green agenda opens up room for innovation. The bank is committed to actively participating in the structuring and development of financial instruments oriented towards the mitigation and prevention of climate change.
CABEI has held the status of an Accredited Direct Access Entity with the Green Climate Fund since 2016, and it has now signed a framework agreement with the fund to channel financing for climate change adaption towards SMEs.
A flagship railway
Perhaps the most emblematic project for CABEI’s ambitions is a $1.3 billion electric passenger train to be constructed in the metropolitan area of San José, the capital of Costa Rica, for which the bank has approved $550 million of financing.
CABEI describes this as the “most important operation in its history”.
The train will support the bank’s green objectives by substantially reducing carbon emissions in the area; it will have a direct social and economic impact through reduced traffic and better air quality and it coincides with the bank’s vision of giving Central America a more sustainable physical profile.
In addition, the project could chime with CABEI’s regional outlook, as it has sparked interest in neighbouring countries for similar initiatives.
Costa Rica’s is the first major rail investment in Central America for 150 years – a sign of potentially exciting times on the way.
Whether it’s a customs union, a regional gas pipeline, or the master plan for the Gulf of Fonseca, a more united Central America is a reason to cheer for the region’s people as well as international partners. CABEI is certain to be at the forefront as integration increases.
|A robust financial partner
One major impact of Korea’s incorporation to CABEI was the strengthening of the bank’s financial profile, and it was the main driver behind rating upgrades from Moody’s, Standard & Poor’s and Japan Credit Rating Agency in 2019. Korea’s arrival increased the percentage of CABEI’s capital from members with an investment-grade rating from 32% to 37%. At AA/AA/Aa3, CABEI is the best-rated bond issuer in Latin America.
The bank’s financial solidity was further reinforced as the Board of Governors increased its authorized capital from $5 billion to $7 billion on October 2019. The eighth general capital increase and its second in the last decade. It was a telling demonstration of the importance of the bank for member countries.
The capitalization also frees up the necessary capital to promote the incorporation of new members. CABEI views this as a chance to improve its credit rating even further, pursuing in this way a triple-A rating that would be unprecedented in Latin America.
These improvements will only enhance CABEI’s long-established prowess in international capital markets; the bank has issued bonds in 24 different currencies across 23 different markets.
In any case, a trio of double-A credit ratings already means the bank will gain greater access to those high-quality bond investors – particularly central banks and official institutions – that buy the sovereigns, supranationals and agencies (SSA) asset class. This has the potential to further lower funding costs.
Beginning the green bond journey
Moreover, as CABEI enters the world of “true” SSA borrowers, according to the bond market, so its issuance of green bonds becomes more relevant. Many of the biggest funds focussed on green bonds participate in the SSA market.
In October 2019, the bank sold its first public green bond: a $375 million Reg S-only floating rate note at a spread of 85bp over Libor after attracting $974 million of orders from Asian (75%) and European (25%) investors.
Following the bank’s focus on climate change initiatives, the bond – which had the approval of second party opinion provider Sustainalytics – will be used to finance projects including sustainable land use, renewable energy, sustainable water management and clean transportation.
The next step in CABEI’s continuing development as an issuer is likely to be a 144a/Reg S green bond that would allow it to further diversify its investor base and firmly establish itself alongside the world’s top-ranked borrowers.