Panama City — The president of the Inter-American Development Bank (IDB), Mauricio Claver-Carone told Bloomberg Línea in an interview on Thursday, on the sidelines of Bloomberg’s New Economy Forum Gateway event in Panama City, that when he assumed the role in September 2020 he took on an “inefficient bank” that was “a graveyard” of unfinished projects.
Claver-Carone, who succeeded Colombian banker Luis Alberto Moreno in the role, spoke about how the region’s governments can fight inflation and the important role that central banks have in that task, how the region’s countries can take advantage of nearshoring, the projected and long awaited economic recovery in Venezuela, in which projects the IBD will be investing in, and how the bank needs to measure the impact of that investment on projects.
This interview has been edited for length and clarity.
Bloomberg Línea: Latin America is experiencing not only currency depreciation, but also high inflation. In addition to central bank actions, what tools can governments use to curb this?
Mauricio Claver-Carone: Let us not underestimate how important the region’s central banks have been. They have been key. This could be much worse if central banks had not acted. Today one could argue, and this is a debate that is taking place in the United States, about whether the Fed has been too gradual with its interest rate hikes. That argument cannot be made in Latin America. In Brazil, the central bank has played an exceptional role. Those most impacted are the most vulnerable due to high food prices. What we are working on with governments is that, despite the fiscal pressure, how can we find space to serve the population.
In addition to taxes, which are very important to curb inflation, what other tools are there? For example, some governments are working on controlling prices or reducing tariffs on fertilizers...
It is a global problem and what we have to do is to produce. We have to increase production. And, for that, incentives are needed. If you are Argentina and you control exports, it is a disincentive. But Brazil, for example, is creating incentives for production. Yes, there are fertilizer problems, but we are looking at partnerships to see how to finance the import of fertilizers from other countries because 80% of Brazil’s production depended on Russia.
Against this complex backdrop, where are the opportunities for Latin America?
We are seeing the biggest realignment of value chains that we have seen in our lifetimes. It started with the Covid lockdowns in Asia, and now we have added resource scarcity due to the Russian invasion of Ukraine. For the first time in history, we are seeing that there is a recalibration of how investors take risk. Before, I think there was a misjudgment of what investors thought was political risk in Latin America. Today, compared to the closures in China, compared to the Russian invasion, Latin America and the Caribbean are seen as a lake of peace and stability. And that is where governments should focus on this opportunity and these incentives. That is where we have to take advantage of nearshoring.
You have talked a lot about nearshoring, but what does the region need to move forward in that area?
Governments must invest in logistics, in infrastructure and in how to minimize transportation costs, which in Latin America is 60% more expensive than in Asia. At the IDB we are not only talking about nearshoring, but also financing it. Last year we invested $4 billion, half for governments and half for companies that are in China or elsewhere and want to move to Latin America and the Caribbean. A McKinsey study last November revealed that 90% of American businesses are looking at and prioritizing regionalization over globalization. This phenomenon is very important. This view of regionalization will make it easier for integration to be practical. Because integration is talked about in the region from a political point of view and this hinders rather than facilitates.
How can we break this inertia and bring about real integration?
By blows, region by region, country by country. We must join forces. There must be political will, analyze issues such as tariffs, see what hinders and solve those issues one by one.
There is a lot of talk about Venezuela and its signs of economic reactivation. Do you think that country is heading towards recovery?
The countries in the region that are going to have the greatest investment are the countries that have political and macroeconomic stability. Venezuela has a long way to go to reach that stability. After all, the largest investor in Venezuela continues to be China. The oil industry has been the good and the bad in Venezuela for decades. There is still a lot to be done in the political and economic arena for the country to truly turn the page. But yes, when there is that political and economic transition in Venezuela, we have already appointed the first representative for Venezuela, he is working from Washington, and we already have a whole strategy to support the transition in that country.
What is your reading of the shift to the left in the governments of Latin America?
I see it as more ideological than anti-establishment. In that sense, I am apolitical. With Peru and Chile last year we created the largest portfolios in the bank’s history. Under the political transitions in those countries we have been able to work with the governments and we continue to be their principal partner.
How much does the IDB have for investment this year and next year?
Last year we broke records. In 2021 we closed at $23.5 billion. We did it by optimizing resources. We introduced a new model for originating projects and changed the bank’s model a bit. Previously, loans went to large countries, almost pushing financing to Mexico or Brazil. We have been able to spread the risk so we don’t have to force loans. This year we are going to break financing records in Central America and the Caribbean and to small countries that were undervalued by the IDB.
In which sectors will the investments be made?
We are moving from concrete bridges to digital bridges. Digitization is fundamental. Renewable energy is also a great opportunity. We have to mobilize money in the private sector, which is the key. There is an estimated $25 trillion ready in ESG investments. So, if we could mobilize $1 trillion for Latin America and the Caribbean it will be transformational. We currently have a $300 billion renewables pipeline. We need to increase it.
In several Latin American countries there are works financed by the IDB that have encountered problems, and that have not been completed. How can you explain this?
I joined an IDB that, structurally, believe it or not, was inefficient. Very bureaucratic and without measurements. We realized that our institution did not measure the impact of what it financed. We did not follow the projects through the whole cycle: it was approved, it was funded and the project remained in a kind of black box. What we have done now is to create measurement systems for the entire life of the project. I walked into a bank with a graveyard of half-baked projects. Last year, there were more than 1,000 inquiries for projects that were underway.
One of them was the Hidroituango dam in Colombia. Why did the IDB pull out of that project?
We are no longer part of the project. Hydroelectric dams are complex. It is a project that had and may have good prospects, but the current uncertainty is not the type of investment that this new IDB wants to be exposed to. But let me tell you one thing: I have been the first president of the IDB who has had the courage to say that if this project does not work well, that there are practices that are not consistent with our standards, I must tell the shareholders that the IDB must exit. The IDB of political favors, of getting us into projects for political favors, is over.