At a time when Caribbean countries are grappling with high debt, CAF–the former Andean Development Corporation that now brands itself as the Development Bank of Latin America–is now providing advisory support to T&T, Jamaica, and Barbados.
T&T carries a gross public debt load of 46 per cent of gross domestic product (GDP), Barbados 109.2 per cent of GDP, and Jamaica 146.2 per cent of GDP, according to the October 2014 edition of the RBC Caribbean Economic Report.
"Currently, CAF is providing advisory support to various countries in the Caribbean (T&T, Jamaica and, recently, Barbados). In the specific case of T&T, CAF is now assisting the government with the conclusion of the process to facilitate T&T's entrance as a full member of CAF," said CAF director representative in T&T Iwan Sewberath in an e-mail reply to questions.
CAF quietly opened its office for the Caribbean in Port-of-Spain last year (2013).
Asked what was meant by advisory support, Sewberath said:
"Advisory services are specialised services to assist stakeholders–public and private sectors–with analytical work that is needed to undertake necessary due diligence, or to assist with the management of the execution of projects. This is so often needed, because so many of our countries lack a proper institutional capacity to pull off these fairly complicated and specialised activities."
In a May 13 (2014) US Securities and Exchange Commission (SEC) filing, CAF said T&T still has to pay US$107.8 million to become a full CAF member. T&T already paid US$215.6 million, according to the filing.
T&T will become the 11th full member of CAF holding Series A shares, which have a par value of US$1,200 each. Argentina, Bolivia, Brazil, Colombia, Ecuador, Panama, Paraguay, Peru, Uruguay and Venezuela are the existing full CAF members. CAF's other shareholders are Chile, Costa Rica, the Dominican Republic, Jamaica, Mexico, Portugal, Spain and 14 private banks in the region.
According to CAF's 2013 annual report, T&T increased its 2012 shareholding from 8,134 Series C shares (which like Series B shares, have a par value of US$5) to 15,867 Series C shares in 2013.
"Simultaneously, CAF is in dialogue with the Government of T&T about the development of an operative (work) programme for the period 2014-2016, which includes projects in the infrastructure area (such as roads and bridges rehabilitation), improvement of education, infrastructure, mass urban transit," Sewberath said.
"In addition, CAF stands ready to facilitate a stronger connection between the private sectors of T&T and Latin America. Lastly, CAF is assisting the Minister of Finance (Larry Howai) with the design of a new model for catalysing investments in relevant sectors of the economy using an enhanced synergy between the private and public sectors."
Asked if Caribbean countries can and should take on more debt through loans from multilaterals like CAF, he said: "The relationship between Caribbean countries and CAF goes well beyond developing a lending portfolio. In fact, CAF would like to present itself as a key development partner with accumulated experience in Latin America, and is willing to share this experience with the Caribbean in the form of policy advice, technical assistance, and if the situation so requires, with loan programmes.
"The loan programmes could be developed with both the public and private sectors. Every country must exercise prudent debt management, and CAF operations are always placed in a proper macro-economic framework and environment. In an environment with proper revenue and expenditure management, and within the country's own planning context."
CAF signs MoU with CDB
CAF also has signed memorandum of understanding (MoU) with the Caribbean Development Bank (CDB).
"The relationship, in regard to a lending portfolio, CAF-CDB is obviously only related to eligible member countries meaning that for the time being only T&T, Jamaica, and Barbados would be eligible for possible co-financing from CAF and the CDB. However, the relationship CAF-CDB goes beyond developing a joint lending portfolio through co-financing. It deals with exchanging experience in the areas of risk management, project management and execution, energy financing (particularly renewables), private sector development just to name a few areas, for the benefit of the entire region," said Sewberath.
On October 16, Standard & Poor's Ratings Services (S&P) revised its outlook on Corporaci�n Andina de Fomento (CAF) to negative from stable. At the same time, S&P's affirmed its AA- long-term rating on CAF, which ranks CAF investments as "high grade," and only four notches shy of the highest AAA rating.
"Weakening credit conditions of two of CAF's largest sovereign borrowers–Argentina and Venezuela–pose mounting downside risk for the CAF's risk-adjusted capital adequacy under our downside scenario. Collectively, the Argentina and Venezuela sovereign exposures accounted for 28 per cent of CAF's loans as of August 31, 2014. The economic conditions in and external liquidity of Venezuela, CAF's largest sovereign borrower, continue to deteriorate," S&P said.
"Moreover, the likelihood of Argentina remaining in default on its discount bonds for a protracted period of time has risen, in our view. We believe there is a greater than one-in-three probability that Venezuela could default on its foreign-currency commercial obligations while Argentina remains in non-payment status. If this occurs, we expect CAF's risk-adjusted capital ratio will fall below the current 15 per cent level (the lower threshold of CAF's current capital adequacy range)," S&P said.
S&P's base-case expectation remains that CAF's borrowers will continue to treat CAF as a preferred creditor. "We base this expectation, first, on these borrowers' strong history of maintaining timely debt service to CAF, even when defaulting on commercial creditors," S&P said.
CAF has never suffered arrears on payments of interest or principal exceeding 90 days on a public-sector loan, S&P said. Second, S&P said, CAF's shareholders, all of which are eligible to borrow, have supported the institution with several large injections of new paid-in capital. The most recent approved capital increases totaled US$2.02 billion (approved in 2011), US$2.2 billion (2009), and US$1.5 billion (2007-2008).
CAF's current 15 per cent risk-weighted capital adequacy supports the affirmation of the AA- long-term foreign-currency issuer credit rating, S&P said.
"This risk-adjusted capital ratio reflects the bank's balance sheet as of August 31, 2014, and our sovereign foreign-currency ratings as of October 15, 2014. CAF's very strong financial profile and strong business profile (as our criteria define these terms) serve as the basis for its AA- stand-alone credit profile. CAF does not have callable capital from higher-rated shareholders," S&P said.
Barbados pays US$50 million
The rating agency said CAF's strong business profile is bolstered by its expanding membership, which has increased from the original base in the Andean region to comprise 17 Latin American and Caribbean countries, Spain, and Portugal.
"Barbados, the newest member, joined this year," S&P said.
"Barbados today enters CAF, the development bank of Latin America, as a Series C shareholder with a contribution of US$50 million," a September 9 CAF press release said.
The share agreement signed by CAF Executive President Enrique Garc�a and Barbados Finance Minister Christopher Sinckler, "will allow the country (Barbados) to access financing" from CAF and technical support of its priority development projects," said the release. Up to press time, Sinckler had not responded to an e-mail asking if Barbados would soon be borrowing from CAF for an infrastructure (road works) programme.
Garcia said: "The entry of Barbados to the share capital of CAF seeks to strengthen the links of economic and trade cooperation with this country, with the aim of promoting sustainable development and investment in the public and private sectors, as well as contributing to the promotion of business and cultural relations with the other shareholder countries."
In addition, S&P said CAF shareholders have reaffirmed CAF's public policy mandate through their several capital increases.
"The regular injections of new capital have reinforced CAF's ability to lend through the credit cycle and weaker economic conditions, including during the economic downturn of 2009-2010."
S&P said its appraisal of CAF's governance partially reflects "the absence of a significant number of non-borrowing member countries, a weakness relative to higher-rated multilateral lending institutions with greater shareholder diversity. On the other hand, the growing diversity of CAF's sovereign loan portfolio, the institution's bylaws and risk practices that moderate loan growth, and its dividend policy that retains most earnings favorably contribute to our view of CAF's governance."
S&P described CAF, established in 1968, as "a regional development bank serving Latin America. It provides financing–in the form of loans, guarantees, letters of credit and lines of credit, and equity investments–predominantly for infrastructure and energy-related projects."
As at December 31, 2013, CAF had US$27 billion adjusted total assets in Latin America, of which 52 per cent were loans to sovereigns and public-sector companies.