US urges bank reform

02/04/2006 | Lucy Conger

Focus on IDB private sector strategy

Amid concerns over “a growing and genuine angst” in Latin America, the US Treasury is throwing its weight behind the new IDB president Luis Alberto Moreno’s bid to reform the development bank, according to a senior Treasury official.

In comments that will come as a relief to Moreno, US assistant secretary for international affairs Clay Lowery urged the bank to step up its private sector operations, especially among small and medium sized enterprises and to take a lead role in helping close the region’s infrastructure gap, estimated at around $80 billion.

Addressing an audience at a Deutsche Bank conference yesterday, Lowery said that worries about social and institutional issues in the region have boosted the multilateral’s prominence in the Treasury’s strategy for the region.

The US-backed favourite for the top job at the bank, Moreno is eager to put his own stamp on an institution whose relevance is being called increasingly into question. With that goal in mind, the IDB will launch in June “Building Opportunity for the Majority,” one of Moreno’s initiatives that aims to focus bank work on the poor who make up most of the region’s inhabitants.

The proposal aims to channel bank efforts so that Latin American and Caribbean societies produce benefits for the people who make up the broad base at the bottom of the pyramid, Donald Terry, head of the bank’s working group on opportunity for the majority, told Emerging Markets. One of Moreno’s new appointments to the bank, Alfredo Barnechea, a Peruvian political analyst and author, is also working on this program as part of his assignment to develop the vision of the bank under president Moreno.

Even as the region’s economies are on an upswing, income inequality remains high, unemployment and under-employment are acute and the poverty rate is 40% plus, says Terry. “Now we have democracy and open markets (in the region), it’s turning out that if you empower people politically but don’t empower them economically, you have a bunch of alienated voters and you get economic and social instability,” he added.

From the time Moreno, a former media executive and Colombian ambassador to the United States, entered the bank, he began looking to develop a campaign that would reach the average person in Latin America and become a signature piece for his IDB presidency.

Building opportunity for the majority will be an “organizing principle” of IDB work, Terry said. The goal of promoting broad-based economic growth will make the bank’s work more relevant at a time when traditional lending is diminishing. One Canadian development official reports that his country is very satisfied with what they have seen so far. “That the largest and most powerful Latin countries need the bank less at this moment will help [Moreno]; it’s an interregnum in which to figure out what the IDB’s strengths are under changed circumstances.”

In his first six months at the helm, Moreno has told bank staff that he is working on issues of process at the bank. Employees continue to await word about the direction in which Moreno intends to take the bank and the priorities he will pursue. Anxiety is building as employees continue waiting to see the Moreno brand for the bank.

Market fears fade

Brazil posts sharp rebound following uproar

By Thierry Ogier

Financial markets rebounded quickly after political turmoil in Brazil earlier in the week. Even though the country’s risk premium increased slightly to 234 basis points at Friday’s closing, tension in the market has abated significantly in recent days – country risk shot up more than 5% after finance minister Antonio Palocci announced his resignation on Monday night. The local stock exchange gained 1% during the week and the dollar, which had regained some ground against a strong real, fell again by 1% on Friday alone.

The strength of Brazil’s economic indicators means that political uncertainties have translated into little more than a hiccup and volatility, if any, is bound to be short-term affair, analysts say. “If we had had a better international environment, it’s likely that nothing would have happened,” said Guillermo Mondino, head of emerging market research at Lehman Brothers. “Palocci resigned the same day that the US were hiking rates again and felt more sensitive than usual.”

Paulo Leme, managing director of emerging markets at Goldman Sachs, said: “the recovery was quite remarkable given the nature of the shock. It shows that it would be very costly to go short when Brazil has such a balance of payment surplus. The central bank has managed the volatility impeccably”. There were some critics in the market when the institution zeroed its dollar-indexed debt position, but it has proved to be an effective shield, he said. “Insurance is very costly, but storms always come.”

Meanwhile, investors will be watching government policy makers very closely ahead of elections. “As long as sound monetary and fiscal policies are maintained, we are happy to stay,” says David Rolley, vice president of Loomis Sayles & Co. At the worst, the road towards investment grade may have become a slightly rockier one, but it should still get there in a year or so

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