In November 2020, the Asian Infrastructure Investment Bank (AIIB) approved $50 million in financing for the first Latin American country to join as a non-regional member: Ecuador. What is the scope of the project? What can we expect from the AIIB for Latin America?
Project 000435 is a $50 million sovereign guaranteed loan to Ecuador’s largest public bank, Corporación Financiera Nacional B.P. (CFN). The objective is to counteract the liquidity constraints faced by micro, small, and medium-size enterprises (MSMEs) as a result of the COVID-19 induced economic crisis. The World Bank is also participating in the financing.
“CFN is a development bank that as an instrument of public policy allows channeling resources to companies for investment and working capital,” Pablo Patiño told ReporteAsia.
Patiño was general manager of CFN until August 2020 and advisor to the Board of Directors until November 2020. He was in charge of leading the process and approval of the transaction with the AIIB.
“Prior to the talks with AIIB, the CFN had finalized a $260 million financing with the World Bank, so the strategy of both parties was to allocate AIIB resources to the financing program previously set up with the World Bank, which facilitated approval by the AIIB,” Patiño noted.
The loan was provided through the AIIB’s COVID-19 Crisis Recovery Facility (CRF), which involves some $13 billion in financing for public and private sector entities of any AIIB member facing severe adverse shocks as a result of COVID-19.
“Our first investment in Ecuador comes at a time when liquidity support is critical in response to the pandemic. This project provides crucial access to funding for private sector companies to help them sustain their businesses in these difficult times,” Konstantin Limitovskiy, AIIB vice president of investment operations, said during the official announcement.
The project comprises four components: strengthening CFN’s institutional capacity, developing and improving financial products to promote MSME access to financing, a credit line brokered by CFN for on-lending to MSMEs, and project management.
The AIIB is co-financing the “Capitalization of the National Guarantee Fund (NGF) for the COVID-19 special program” and the extension of a loan to CFN for on-lending (through loans or guarantees) to Participating Financial Intermediaries (PFIs) for further on-lending to eligible beneficiary MSMEs.
Under the project, the AIIB provides, through the borrower, short-term liquidity financing for MSMEs in the form of partial credit guarantees and/or lines of credit to mitigate the impacts of the COVID-19 pandemic-induced economic crisis.
“CFN is the project executor. The funds from the loan are used by the CFN to grant lines of credit to the small and medium-size enterprise sector under a second-tier scheme, facilitating access to credit and ultimately economic reactivation and job creation,” said Patiño, who today works in the private sector as managing partner of Apolo Finance, a Guayaquil-based firm that provides comprehensive legal and financial advice.
Patiño enthusiastically highlighted the coordination between the AIIB and CNF: “The AIIB team has been very proactive in promoting this operation. When interests are aligned, results are more agile. In general, the AIIB joined the program that was being worked on months ago with the World Bank, so the objectives, components, goals, etc. were adapted to the amounts foreseen by the AIIB.”
As the first project approved by the AIIB in Latin America, this loan has the eyes of not only the other non-regional Latin American members, such as Argentina, Brazil, Chile, and Uruguay, but also the countries that have not yet become members: Bolivia, Peru, and Venezuela.
“It has been very important for AIIB to have operations in South America. The pandemic crisis, like any crisis, also represents opportunities. In this case, it was the opportunity to quickly complete the first operation with AIIB. This is a very important milestone for CFN because multilateral banks are its main source of financing due to their business model,” Patiño said.
For the time being, the AIIB’s plans indicate that it will only work on sovereign debt projects in the Latin American region in the case of direct financing to state-owned entities. There is another line of credit that includes Latin American countries and does not involve sovereign guarantees: the Global Infrastructure Partners Emerging Markets Fund I (GIP EM).
GIP EM is a closed-end fund with a target size of $5 billion. It aims to take advantage of the wealth of investment opportunities in the infrastructure sector in growing middle-income emerging markets globally, with a focus on China, India, Indonesia, Malaysia, the Philippines, and Vietnam in Asia, and Brazil, Chile, Colombia, Mexico, and Peru in Latin America.
The role of the AIIB, as in the Ecuador project, is that of financier but not executor. In this case, the financing structure involves the provision of funds through a financial intermediary.
Based in Beijing and closely related to the Belt and Road Initiative, the AIIB promises low-cost financing options for the development mainly of energy, transport, and water infrastructure.
So far, the AIIB has reported the approval of 151 projects in 31 countries for almost $30 billion. Ecuador’s project is a first sign of a future that Latin American countries hope to be able to take advantage of to pay off their infrastructure backlog, although there is still no information on other projects submitted to the financial organization.
This article was originally published in Spanish by ReporteAsia.com.