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April 1, 2022updated 04 Apr 2022 9:42am

Balancing economic and climate goals in Central America

Poor and particularly climate-vulnerable Central America is in more need of impact-focused financing than most regions. The Central American Bank for Economic Integration is working hard to provide it by raising more capital internationally, such as through blue bonds.

By Virginia Furness

Dante Mossi took over as executive president of Cabei in December 2018. (Photo courtesy of Cabei)
  • The Central American Bank for Economic Integration (Cabei) is seeking to tackle the pressing regional challenges of food insecurity, mass migration and extreme weather by attracting more international investment. 
  • Central America clearly illustrates the challenge of meeting both the economic and sustainability goals of development financing, with climate action high on Cabei’s agenda.  
  • The development bank has mobilised almost $5bn over the past five years for climate investment and plans to issue blue bonds to finance sustainable development of the ocean economy.  

From Costa Rica’s rainforests to colourful reefs teeming with fish in Belize and Honduras, Central America is both hugely ecologically diverse and especially vulnerable to climate change

Many of the future environmental shifts modelled by developed nations and climate scientists are playing out in the region right now. Food insecurity, mass migration and extreme weather events – from earthquakes to droughts to floods – are occurring with increasing frequency. Central American countries regularly appear among the ten nations most affected by climate change, according to the Global Climate Risk Index, compiled by non-government organisation Germanwatch. 

Around 30% of Central America’s territory lies within the ‘dry corridor’, which stretches from Mexico to Panama and is one of the areas most vulnerable to climate change globally.   

“The first [category 5] hurricane I remember was Hurricane Mitch [in 1998] and I saw how it decimated Honduras,” says Dante Mossi, the executive president of the Central American Bank for Economic Integration (Cabei). “That was a hurricane that happened every 20 years. But now it isn’t just a major hurricane every 20 years – you start to have more very dangerous storms occurring more often and creating the same havoc.” 

Cabei, a multilateral financing institution that aims to promote sustainable development and increase regional productivity, has mobilised almost $5bn over the past five years for climate investment and has disbursed $31.9bn since its creation in 1960 (see pie chart above and bar chart below).  

A tricky balance to strike

This investment is focused on developing a fair and inclusive economy that is low-carbon and resilient to the effects of climate change. That is a particularly difficult balance to strike in a deprived region desperate to improve its commercial fortunes.  

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In 2019, the bank issued a ‘zero-carbon declaration’, stating it would refrain from financing projects related to the exploration and extraction of coal and to energy generation based on coal. The bank also said it would develop financial instruments to help support climate change mitigation, prevention, resilience, sustainable food production and clean energy generation.  

Not before time. The increasing frequency and intensity of storms is wreaking havoc on some of the region’s infrastructure, underlining the need for more spending on climate-resilient roads and bridges. By 2030, the United Nations Environment Programme estimates that the cost of climate adaptation will reach $140bn to $300bn per year. In 2017/2018, global adaptation investment from public and private sources was just $30bn annually, of which two-thirds went to developing countries, the World Bank says.  

“During my tenure [since December 2018] I’ve had three presidents coming to the board of Cabei and saying 'we are sick and tired of financing roads and bridges that the storms took out’,” says Mossi. They are coming back for loans to rebuild bridges that have been financed three or four times in some cases, he adds. 

“So this is the kind of issue that bothers Central America. That is the biggest challenge, and the key to that is to prepare well.”  

Accordingly, Cabei in May last year set up a Climate Change Investment Project Preparation Fund. The scheme provides technical assistance for initiatives focused on natural disaster management and adaptation to climate change. The initial fund made $5bn available to Cabei’s member countries, and in December the European Union agreed to provide an additional €4.9bn

Regional governments apply to the fund for support to design, for example, a bridge. Cabei then puts the project out to public tender and hires a company to design the bridge. If the government goes ahead with the project and takes out a loan from Cabei to finance it, the preparation amount is charged back to the project. If the project is not deemed feasible, Cabei’s preparation fund absorbs the loss.  

Looking after the ocean

Central America accounts for 12% of the Latin American and Caribbean coasts, including mangroves and coral reefs. But views vary as to how to manage these natural assets, creating conflict in the region and underlining the sustainability versus commercialism trade-off. 

“Taking care of the oceans is within Cabei’s ESG framework,” says Mossi. “One of the targets is the Gulf of Fonseca.” 

El Salvador, Honduras and Nicaragua share coastlines with the Gulf of Fonseca – a bay where the large Pacific waves form a gentle swell. But the three countries are at loggerheads over competing development objectives around the 3,200km2 expanse of water.  

El Salvadorian president Nayib Bukele is pushing an initiative, called Surf City El Salvador, to turn the city into a hotspot for surfers and to attract more tourists generally. Nicaragua is similarly keen to grow its tourism sector but also wants to modernise Corinto, the country’s biggest port located down the coast from Fonseca.

Honduras is also seeking to develop the region’s trade facilities, with the construction of a new deepwater port on Isla del Tigre. In November 2021, Cabei approved a $207m loan to finance a 2km bridge connecting the island to the mainland. From this port, heavy cargo could reach the Port of Cortés, an important access point for trade with the US, in around four hours.  

The project is seen as key to stimulating regional trade and bringing much-needed revenue to Nicaragua; last year, the country exported $4.65bn worth of goods to the US. But it would displace many people who live and work locally as fishermen. In addition, substantial dredging will be needed to ensure the water is deep enough for large cargo ships. 

Ensuring the project meets both economic and sustainable development objectives for the region is a core focus for Cabei, which is working to progress an initiative for the sustainable development of Fonseca with the three countries. 

Cabei says it has established a fund to support the preparation of beneficial projects, a scheme to help finance projects under the 2019 investment and economic development master plan for the gulf. Initiatives include fishing and aquaculture, tourism development, logistics and agro-industrial development centres.  

Blue bonds planned

The scheme will involve funding from regional and multilateral development banks, commercial bank financing and ‘blue bonds’ that Cabei plans to issue in international capital markets, Mossi says. Such instruments – which have already been employed in Central America, such as in Belize, as Capital Monitor has reported – will form part of a new blue and sustainable growth initiative that Cabei will launch later this year.  

The bank is also planning to issue a $500m social bond but is waiting for market conditions to stabilise, Mossi says.  

It will also look to tackle waste management. Mountains of plastic bags from the Guatemalan capital Guatemala City are being washed up on the coast of Honduras, Mossi says. “One of our missions is [to stop this]. “So we are issuing a blue bond to help finance all these solutions.” 

Cabei also needs to do a better job of labelling and promoting such initiatives – where it has already made some progress – if it is to attract more investment, Mossi adds. 

The bank, rated AA/AA/Aa3, is a regular debt issuer. As of September 2021 it has raised $1.3bn across a SFr220m seven-year green bond and three social bonds: a $500m social bond, a $245m recovery and reconstruction Covid-19 bond in the Mexican market and a $218m-equivalent Swiss franc social bond. Cabei has made debt placements in 24 currencies and 23 markets.  

Going electric

Electrification of the region’s transport systems is another key focus for the bank. It has entered into a public-private partnership with the Green Climate Fund – established within the framework of the United Nations Framework Convention on Climate Change (UNFCCC) to help developing countries address climate change – to finance a $1.5bn electric train project in San José, Costa Rica. The project is set to create 1,200 direct jobs during its construction phase and will reduce CO2 production by 7.6 million tonnes throughout its useful life, Cabei says.  

Other projects of note include replacing the brightly coloured US school buses that zip across Guatemala with updated electric models.   

As ever with emerging markets, Central America may continue to struggle to attract the financing it needs in the face of an intensifying climate crisis. At least Cabei has plans to address the challenge.  

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