US$5.65 billion approved

(Caracas, December 12, 2006).- CAF President & CEO Enrique García gave a report on activity in 2006, announcing that the amount of operations approved for the 17 shareholder countries totaled US$5.65 billion, which is 19% more than the figure for last year and a record for the last 36 years.

Reviewing the region, García said that "for the third consecutive year, economic activity in Latin America maintains its dynamism in a favorable international environment. The region will growth at an estimated 4.7% in 2006 with 5% inflation, in response - among other aspects - to orderly fiscal management." He added that "the vigorous growth of the global economy, very favorable terms of trade - especially for South American countries - and ample international liquidity have resulted in an export boom in the region, a surplus on balance of payments, and a comfortable accumulation of international reserves." However he drew attention to the fact that "even though the macroeconomic situation in Latin America is positive, important deficiencies persist in competitiveness and the social area."

The year also saw membership changes in the Andean Community and Mercosur. The recent Presidential Summit in Cochabamba gave renewed stimulus to South American integration through identification of focal points, including energy cooperation, sustainable physical infrastructure, social cohesion and more attention to asymmetries between countries and within them. This progress has been made in an environment in which ratification of bilateral trade agreements between some Andean countries and the United States faces difficulties, and postponement of the WTO Doha Round portends less progress in the trade opening at global level.

Another important development is the satisfactory and democratic termination of electoral processes in 11 countries of the region. In this context, unlike in the past, García said that "economic stability has not been adversely affected by the election cycles." He considered that the future challenge was to strengthen governance and reduce the level of political polarization existing in some countries.

Taking advantage of the existing window of opportunity, the CAF chief said that "Latin America should promote an integrated development agenda to achieve, with a long term view, high, sustained and inclusive growth which improves the conditions of life of its inhabitants. The policies adopted should reconcile the objectives of stability, efficiency and equity." With respect to increased international participation, the region has to solve important deficiencies in the microeconomic area. According to the most recent World Economic Forum survey on competitiveness, Latin America ranks 73 in a sample of 125 countries.

García also said that "progress in the social area has been insufficient. Although rates of poverty and unemployment have improved in almost all countries in the region along with indicators of access to basic services, inequality is one of the main problems that afflicts Latin America, which has the worst income distribution in the world."

Support for macroeconomic stability

Looking to the future the CEO said that Latin America should not waste this positive moment, especially considering its good macroeconomic situation and the fact that the international environment will become less benign for developing economies over the next few years. Although the region is now better prepared to face external deterioration than in the past, vulnerabilities persist which need to be resolved.

For this reason macroeconomic stability has been a priority field of interest for CAF. Operations were approved to strengthen public debt management, with a view to limiting potential pressure on fiscal accounts. The Corporation destined US$1.33 billion for this segment, channeled through approval of contingent funds to guarantee successful management of liabilities and reduce monetary mismatches in the public sector, as well as institutional reforms, especially with respect to optimal utilization of budgetary resources.

Support for competitive participation

García considered that the region should deepen its participation in the global economy, using the diverse means of international participation available, and exploit their complementarities. He emphasized that for the benefits of trade to materialize "complementary activities should be adopted to promote a process of productive transformation which increases productivity and diversification of exports.

In the area of sustainable infrastructure, the CAF president said that in 2006 the Corporation had continued supporting various initiatives that influence the logistics platform for competitiveness, allocating 33% of approved funds for member countries which total around US$1.86 billion. These operations have been executed with respect for environmental conservation and linking the projects to other social initiatives. This amount includes financing of approximately US$1.20 billion for regional integration, destined to projects for roads, transport systems, railways and electrical interconnection works, especially in South America. He emphasized the Corporation’s growing participation in public-private partnerships (PPP) for construction of infrastructure for public use, such as concessions for roads and multipurpose pipelines, among others.

The Corporation also created the Fund for Promotion of Sustainable Infrastructure Projects (Proinfa) with US$50 million, which assists countries with the formulation of investment projects, and advises them on preparation of bidding conditions, the financial structuring of operations and during the later negotiations.

In the productive sector, favorable conditions in the international environment for Latin American countries resulted in growing participation by CAF in financing investment projects for expansion of productive capacity. The new operations for the sector totaled US$1.58 billion. These operations give priority to financing the segments of the micro-, small-, and medium-sized enterprises directly or through the financial systems, in projects to improve business competitiveness through initiatives for productive expansion, development of infrastructure to support production, regional expansion, among others. The Competitiveness Support Program (PAC) contributed to strengthening clusters in sectors with export potential, improving the capacities of business undertakings and adoption of good corporate governance practices.

Stimulus for social development

Giving priority to increased social inclusion is the most urgent challenge facing the region. This requires equipping marginal sectors with the tools and assets necessary for self-development, increasing the execution capacity of social agencies to improve the quality of social expenditure, including new social actors in the public policy agenda, and promoting an effective social protection network. In this area, the CAF destined US$840 million for execution of projects in the areas of water and sanitation, rural development, education and health to improve the quality of life of the population.

To improve the financing conditions for projects in the social area, the Compensatory Financing Fund was strengthened, backed mainly by the Corporation’s profits. This is a mechanism for reducing the cost of financing projects subject to sovereign risk with a high impact on the development of countries.

CAF helped the micro-enterprise sector by means of equity interest, loans and lines of credit, subordinated loans, partial guarantees for bond issues, as well as assistance and advice on institutional strengthening. This year lines of credit were reviewed and renewed with 32 microfinance institutions and six new ones were serviced, including three in Argentina, Mexico and Uruguay.

Financial strength

These activities took place in a context of financial strength fostered by prudent management of assets and liabilities, which has been confirmed by recognition of credit quality from Fitch Ratings, which upgraded the long-term risk rating from A to A+, while Standard & Poor's gave a Positive Outlook and confirmed the short- and long-term ratings. The Corporation also issued bonds for a total of US$809 million on European and U.S. markets, as well as in local currency in Peru and Venezuela. Another development was the capital increase of US$209 million contributed by member countries, in recognition of their confidence in the financial management of the Corporation.

Lastly, US$35 million from non-reimbursable cooperation funds were used to support the CAF strategic programs, including South American Regional Integration Infrastructure Initiative (IIRSA), Competitiveness Support Program (PAC), as well as programs on governance, environment, and cultural and community development. Other activities that significantly benefited from CAF funds included the institutional strengthening of microfinance institutions, the SME Integrated Support Program, the Latin American Carbon Program (PLAC), and the Business Investment and Development Fund (FIDE).

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• US$1.34 billion approved for Argentina, Brazil, Costa Rica, Mexico, Panama and Paraguay.
• US$400 million for Bolivia
• US$1.04 billion for Colombia
• US$946 million for Peru
• US$892 million for Venezuela