Gabriel Felpeto
Vice President of Finance at CAF. Over 30 years of experience in capital markets and other financial activities. Previously, he served as Vice President of Finance at Banco Unión in Caracas, Venezuela. He holds an MBA from the Institute of Advanced Studies in Administration (IESA) and is a Mechanical Engineer from Simón Bolívar University.
Interview
Q/ From a financial point of view, what differentiates CAF from other multilateral development banks? What challenges and opportunities result from these differences that you are going to tell us about?
It is important to understand that CAF is one of the very few multilateral institutions at an international level that has very specific characteristics, which have to do with its shareholder countries. In our case, almost all of the countries are developing countries, that is to say, more than 95 % of the capital is in countries in the Latin American and Caribbean region. This presents an important difference in comparison with slightly better known international multilateral financial institutions such as the World Bank and others that have among their shareholders, both in the region where they provide finance, which are developing countries and which are the ones borrowing from these institutions. And also a significant portion of their capital, approximately 50 %, comes from developed countries with high risk ratings that provide capital, not only paid-in capital but also as guarantees. It is important to understand this difference because it presents significant challenges, challenges for CAF that have to do, of course, with its access to capital markets, which in some way imply a slightly higher price or interest rate than these other multilateral institutions due to the guarantee they have from developed countries. However, it presents a significant number of opportunities that have to do a little with the proximity to the countries.
As I mentioned before, 95 % of them are countries in the region, so there is a much greater sense of ownership. It has to do with governance, there is less bureaucracy, let’s say, the institution, which offers it significant flexibility and it is highly recognized by the countries. This, in addition, is recognized by the market because our countries present a, you could call it solidarity or a reaction, let’s say, to the CAF that is a little stronger than to other multilateral institutions due to this sense of governance and the governance they present towards the CAF. It is important to always remember these differences and to be aware that this represents these challenges and opportunities and all that it implies.
Q/ What is the role of multilaterals in promoting financial innovations, favoring the creation and strengthening of markets to attract financing to the region, such as green and blue bonds, contingent bonds? What can you tell us about this?
CAF’s main role is to intermediate resources between markets that have capital markets, that have excess savings, that is to say, of course, developed markets, to the countries of Latin America and the Caribbean that, on average, let’s say, have a deficit or a deficit of internal savings in relation to the investment needs that they need in order to grow their economies. Given the high rating that CAF has due to its solid financial structure, it allows us to play this role of intermediary, but it also allows us to fill certain market failures and take additional risks that the private sector in our countries is probably not willing to take or does not have the capacity to take. This role of filling this market gap can be seen across our balance sheet, as it can be on the asset side through our loans, but also through our funding in the capital markets.
On this last point, CAF has been playing an important role, both in terms of issuing green bonds, blue bonds, which have to do with oceans and other important bodies of water in the region. We have intervened or continue to intervene, let’s say, we have an important presence in local capital markets, where we play a role not only in raising funds to be able to lend, but also in offering quality instruments to the market that in some way contribute to the development and strengthening of local capital markets. On the asset side it is very important, we provide solutions that mitigate exchange rate risks, we offer solutions to our clients that have to do with exchange rate hedging, not only to their local currencies, which is very important, but also perhaps to other currencies that for some particular reason these clients may have, let’s say some need for hedging depending on their trade flow with other regions of the world.
Another role that multilateral organizations play is to develop innovative products. Here I would like to highlight one that was recently approved and has in fact just been disbursed, a loan that is in some way correlated with the fulfillment of the countries’ climate or social objectives, and to the extent that the client fulfills these objectives, they can have an economic incentive basically reflected in a decrease in the interest margin they would pay. So in that sense we align the economic interests of the clients, but also the environmental and social interests of the countries where we operate. And finally, I would just like to mention that it is important for institutions like CAF and, in general, for multilaterals, that the solutions are not standard for all clients. Each country, and even within each country, there are clients of many different kinds, so it is important that these solutions are tailored to the needs of each client.
Q/ Is subnational financing the new frontier for development banks? What are the challenges and opportunities in this quasi-sovereign sector?
This subnational sector is a somewhat unknown risk for multilateral development banks; traditionally it is not in their normal customer base. However, I think, and I’m not the only one who thinks, that it is part of CAF’s strategy to deepen its knowledge of this sector and to be able to increase the loan portfolio in it. However, this presents a number of significant challenges. As I said before, as we are not used to this type of client, we have to develop capacities that have to do with financial capacities, with the types of products we offer, which are definitely different from those that the central government may have. It also has to do with internal capacities, how to develop expertise in human capital in order to understand credits, which are also different and with which we have to strengthen it, because obviously at the end of the day we are a bank and we have to give credits that are solid.
Another important issue in this sector, which is somehow being addressed by local commercial banks, is that CAF cannot enter to play a competitive role, displacing local banks. We would be misusing our resources by doing that. Rather, we have to leverage ourselves with local banks, collaborate with them, complement their activity and that can be done in different ways. Obviously, there may be restrictions on credit quotas for these sectors, in which case CAF can play a role by providing not only financing, but also guarantees, for example, so that they can free up credit quotas.
On the other hand, there is the issue of deadlines. In many markets we are seeing that commercial banks are probably willing to finance these subnational governments, however, they have deadline restrictions and we, let’s say, having a fairly solid balance sheet, can go for normally longer terms than commercial banks. So, again, in summary, we should be complementary. Another very important thing is not only financing as such, a development bank in general, in all its financing, but I believe that in this subnational sector in particular it can play a role not only in providing resources, but also in helping to develop capacities in these local governments or other subnational entities to be able to develop projects that are viable, solid and that, of course, have an impact on the populations of these entities.