Is there a role for Development
Banks in Long Term Financing?
Ad Hoc Expert Group Meeting on the theme:
"Rethinking the Role of National Development Banks”
New York, 1 st December 2005
Daniel Titelman
Coordinator
Special Studies Unit, ECLAC

OUTLINE
1. The context
2. Domestic Financial Markets
3. Role of National Development
Banks
4. Conclusions

1. The Context

5%
4%
3%
2%
1%
0%
8%
7%
6%
GDP GROWTH, 1959-2003
(Annual rates, moving averages for 10-year periods)
Average: 2.9%
LATIN AMERICA INDUSTRIALIZED COUNTRIES ASIAN DEVELOPING COUNTRIES

1.0
0.5
0.0
GROWTH VOLATILITY, 1959-2003
(Rates of variation, moving averages for 10-year periods)
2.0
1.5
LATIN AMERICA INDUSTRIALIZED COUNTRIES ASIAN DEVELOPING COUNTRIES

1. The Context

NATIONAL SAVING RATES COMPARED TO
OTHER DEVELOPING REGIONS ARE LOW
20
15
10
5
0
40
35
30
25
Latin America East Asia

1. The Context

• Economic (real or nominal) volatility and financial development are highly correlated
– Macro instability and financial fragility go hand by hand.
– Volatility affects the development of risk management instruments, particularly long term instruments.
– Volatility affects savings decisions.

OUTLINE
1. The context
2. Domestic Financial Markets
3. Role of National Development
Banks
4. Conclusions

• Shallow and underdeveloped
• Mainly banking, capital markets are highly underdeveloped
• Short term oriented
• Scarcity of risk management instruments, particularly long term oriented
• Credit Rationing particularly for SME, and innovative enterprises.
• High and segmented financial costs

80
60
40
20
0
140
120
100
FINANCIAL DEEPENING
(M2 AS A % OF GDP)
Latin America Japan United States

FINANCIAL MARKETS ARE BANK BASED
(Bank credit as a percentage of total financing)
Argentina
Brazil
Chile
Colombia
Ecuador
El Salvador
Mexico
Paraguay
Peru
Uruguay
Venezuela
Germany
France
UK
US
Latin America
Germany & France
US & UK
44
30
22
79
47
26
1990-1994
63
77
37
58
85
100
46
99
57
98
53
50
59
44
26
70
66
35
1995-2000
50
51
38
57
77
84
36
89
50
97
54
73
48
40
21
69
56
31
61
91
71
31
1999
45
42
39
81
52
98
60
65
56
52
32
71
67
42
63
76
68
39
2002
13
52
47
100
49
98
71
77
48
42
24
72
57
33
54
84
79
32
2001
22
44
44
100
54
98
70
65
47
45
25
70
57
35
62
86
74
35
2000
28
43
42
100
56
98
60
66
Note: Total includes commercial bank credit and market capitalization of listed stocks, it excludes corporate bonds which are not relevant for the region. However, including them will have the effect of lowering them will lower even more the weight of bank loans as a source of finance for other countries

FINANCING COSTS ARE SIGNIFICANTLY
HIGHER FOR SME THAN PRIME CORPORATION
(Difference= prime lending rate (in % terms) - ordinary lending rates (in % terms))
1995
1996
1997
1998
1999
2000
2001
2002
2003
ARGENTINA
28.54
27.77
26.24
18.80
17.50
17.43
BRASIL
35.08
27.91
16.13
19.96
17.06
15.35
16.55
18.46
19.58
COLOMBIA
1.37
4.00
3.53
5.79
6.01
7.27
PERU
42.01
41.71
URUGUAY CHILE
37.09
37.85
33.59
36.27
36.62
26.46
13.05
12.07
Source:ECLAC

COST OF BANK CREDIT IS EXPENSIVE
COMPARED TO CAPITAL MARKET COST
( rates in % annual)
Argentina
Bolivia
Brazil
Chile
Colombia
Costa Rica
Dominican Republic
Guatemala
Haiti
Honduras
Mexico
Nicaragua
Panama
Paraguay
Peru
Uruguay
Venezuela
Prime real lending rate2003
Ordinary real lending rate
Sovereign yield
12.0
19.5
13.9
3.0
11.3
9.5
25.5
17.8
58.0
11.6
33.2
4.2
3.5
15.8
19.8
8.2
14.4
50.3
16.0
10.3
58.6
88.1
10.5
6.4
8.7
6.3
4.8
9.1
6.8
Source: ECLAC.

ACCES TO CORPORATE MARKETS IS
RESTRICTED TO HIGH RATED COMPANIES
( Corporate issues in Chile, millions of Ch$ at year end)
Year Number of
Issues
Amount
Issued
1995
1996
1997
1998
1999
2000
2001
2002
5
5
7
7
13
21
40
40
Outstanding debt Issuers
28,082
73,655
45,887
382,189
398,159
729,224 2,086,184
1,901,536 4,034,709
1,255,390
Amount $ Rate (UF) Maturity
( years)
981,239
983,855
836,302
1,068,617
1,358,137
5,313,449
5.96
6.48
6.13
7.24
7.03
7.02
6.09
5.27
13.35
27.61
21.17
14.85
20.41
13.73
14.91
14.51
Rating Leverage Number of private issuers at year end
A
A
A
A
AA
AA
A
AA
20,465
20,192
17,672
22,799
29,244
45,747
87,093
110,248
44
45
41
40
43
43
62
66
Average assets
310,512
1,475,258
342,590
717,319
965,428
452,943
Source:Source: ECLAC. Notes: Maturity and rate are weighted average by total issued in year; Public companies bonds and securitized bonds are excluded; Average lending results from dividing total lending at year end by number of companies with debt; Number of private issuers at year end; Total assets by issuers divided by number of issuers in each year.

OUTLINE
1. The context
2. Domestic Financial Markets
3. Role of National Development
Banks
4. Conclusions

3. Development banks have an important role to play in long term markets due to shallow financial systems and productive sector heterogeneity.
• Additionality and complementary with the private financial system (provider of additional resources).
• Provide incentives to financial Development
– Financial intermediation and risk management instruments ( affects access, costs, maturity of loans)
– Capital market and long term financing (a.i.
Infrastructure financing)

The instruments to be used will depend on the deepness and development of domestic financial markets
• Provision of funds (either 1 st or 2 nd floor)
• Helping to develop the financial and capital markets (creation of new, more sophisticated instruments).

Latina America and Caribbean 41 Development Banks
Instruments available, 2002
Medium and long term lending
Short term lending
Investment in entreprise equity
Investment in bonds and/or securities
Administration of trusts
Participation in venture capital societies
Provision of guartantee funds
Financial leasing
Cofinancing and coinvestment
Underwriting
# of authorized entities
40
36
24
31
21
12
23
16
15
11
%
97.6%
87.8%
58.5%
75.6%
51.2%
29.3%
56.1%
39.0%
36.6%
26.8%
# of entities that exercise
39
34
20
29
19
9
20
13
12
8
%
95.1%
82.9%
48.8%
70.7%
46.3%
22.0%
48.8%
31.7%
29.3%
19.5%
Source: ALIDE

• Banca Multisectorial de
Inversiones (El Salvador)
• COFIDE (Peru)

COFIDE: Percentage structure of approved loans
2004
23%
17%
7%
17%
36%
Trusts and confidential commissions
Investment
Medium term working capital
Short term working capital
Foreign trade
Source: COFIDE, memoria 2004

• Banca Multisectorial de Inversiones
(El Salvador)
• COFIDE (Peru)
• CORFO (Chile)
• CAF (at the sub regional level)

Infrastructure Financing CAF: Loans by sectors
Productive Sectors
80
Infrastructure Social sectors
1.872
Fianancial intermediation and others
1.667
70
60
5.383
50
985
1.290
40
4.209
30
536
20
10
922
528
353
195
122
362
311
0
1991-2000 2001 2002 2003
Amounts approved for execution were 50% of total in1991-2000 and 80% in 2001-2003
172

• Pending development of long term domestic financial markets, development banks will still be important for funding medium and long term projects.
• Development Banks should also play a role in helping to develop the financial system and capital markets

Is there a role for Development
Banks in Long Term Financing?
Ad Hoc Expert Group Meeting on the theme:
"Rethinking the Role of National Development Banks”
New York, 1 st December 2005
Daniel Titelman
Coordinator
Special Studies Unit, ECLAC