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Latin America & Caribbean

Disaster Risk: Using Capital Markets to Protect Against the Cost of Catastrophes

Michael Bennett's picture
Hurricane Sandy / NOAA
Hurricane Sandy / NOAA


In addition to their often devastating human toll, natural disasters can have an extremely adverse economic impact on countries. Disasters can be particularly calamitous for developing countries because of the low level of insurance penetration in those countries. Only about 1% of natural disaster-related losses between 1980 and 2004 in developing countries were insured, compared to approximately 30% in developed countries. This means the financial burden of natural disasters in developing countries falls primarily on governments, which are often forced to reallocate budget resources to finance disaster response and recovery. At the same time, their revenues are typically falling because of decreased economic activity following a disaster. The result is less money for government priorities like education or health, thereby magnifying the negative developmental impact of a disaster.

To address this problem, the World Bank Treasury has been helping our clients protect their public finances in the event of a natural disaster. The most recent innovation is our new Capital-at-Risk Notes program, which allows our clients to access the capital markets through the World Bank to hedge their natural disaster risk. Under the program, the World Bank issues a bond supported by the strength of our own balance sheet, and hedges it through a swap or similar contract with our client. The program allows us to transfer risks from our clients to the capital markets, where interest in catastrophe bonds is growing.

Will more debt hinder the development of the Dominican Republic?

Co-Authors: Aleksandra Iwulska, Javier Eduardo Báez and Alan Fuchs

In April this year the Dominican Republic borrowed 1.25 billion US dollars on international markets in 30-year bonds. The DR is the only country in the B investment rating group that  successfully issued 30-year bonds in the last 6 years. The country has a total of 2.75 billion US dollars for three issuances in the past 15 months.

At the same time, debt levels have been growing in the country: non-financial sector public (NFPS) debt doubled from 18.3 percent of GDP in 2007 to 36.6 in the first quarter of 2014.When considering the DR Central Bank debt stock, levels would be already close to 47 percent of GDP. It is worth noticing that Jiménez and Ovalle (2011) estimated in 56.7% the debt to GDP the maximum debt to GDP threshold that investors would consider sustainable for the DR in 2013.  Meanwhile, interest payments reached a peak of 2.4 percent of GDP in 2012-13 and external debt stood at 25 percent of GDP in 2013, levels not seen since the economic crisis of 2003. But the economic realities in the DR now are much different than they were in 2003. GDP grew by 4.1 percent last year and 5.5 percent in the first quarter of 2014. The Central Bank forecasts the annual economic growth at 4.5 percent this year. Meanwhile, central government fiscal deficit dwindled from 6.6 percent of GDP in 2012 to 2.9 percent in 2013.

Why we were happy when our bosses raised employee parking rates... Or how parking requirements drive modal choice

Shomik Mehndiratta's picture
Follow the authors on Twitter: @shomik_raj and @canaless
 
Recently, as part of a broader cost cutting initiative, World Bank management decided to do away with a long standing policy of subsidizing parking for its employees. Those of us who work on the Bank’s transport projects and help cities develop more sustainable mobility systems saw this is as a welcome development… losing some friends in the process. 
 
This personal example, along with a recently completed pilot we conducted on corporate mobility programs, inspired us to share some insights on the dramatic role parking-related regulations and incentives can play in influencing the decisions made by all stakeholders with regard to modal choice –whether it be private developers, property managers, employers or employees:

For rural communities, good roads mean the world

Maria Margarita Nunez's picture

Coffee beans in the hands of a Peruvian farmer.

On a Friday evening last November, twelve mayors from nearby districts gathered at the municipal office building in Tarapoto, Peru. Even though the rainy season was just ramping-up in this lush tropical area of the country, local roads were already being washed away. These mayors were eagerly planning for the local Provincial Road Institute to use their tractors to protect their roads to counter the negative effects of the rain.
One of them cried out, “How will my people bring grapes and coffee to local markets without good roads? Our products are going to rot and my people are going to suffer.”

How avocados are changing the way of life of Peruvian farmers

Maria Margarita Nunez's picture
Recently planted avocado trees in the Alto Laran district, in Peru.
Recently planted avocado trees in the Alto Laran district, in Peru.

A five hours’ drive south of Lima lays the coastal provinces of Chincha. If one heads inland into the deserted mountains that are typical of costal Peru, one would be surprised to find agriculture blanketing the valley floor. For centuries local communities in these rugged terrains have been using water from small meandering streams to grow maize, and eke out a living by selling surpluses at nearby markets. However, in recent years the growth of industrial agriculture has squeezed these communities, making it hard for them to survive in these ancestral lands, forcing many of them to move to nearby cities such as Chincha Alta.

Are Great Teachers Born or Made?

Claudia Costin's picture



Did you have a favorite teacher at school? What made that teacher so special? Teachers are the single most important resource we have to ensure that children learn. But the reality is that many kids across the world don’t get a good quality education.

Pensioners Paying for Projects: A new meaning for PPP in Latin America?

Daniel Pulido's picture
Follow the author on Twitter: @danpulido
 
Public-Private Partnership (PPP) projects in infrastructure have traditionally been financed by banks. However, interest in new funding sources is increasing as long-term money from banks has become more difficult and expensive to get, while the assets held by pension funds and other institutional investors have continued to soar. In a context of low bond yields, pension funds are looking for attractive long-term investment opportunities to diversify their holdings and meet their long-term payment obligations. Realizing an opportunity to match supply and demand, governments and investors in the developed and developing world have turned their attention to Project Bonds, debt instruments issued by PPP project companies in the capital markets as a way to fund infrastructure investments.

These “Project Bonds” mostly target institutional investors - including pension funds, and have generated a great deal of interest among investment bankers, lawyers and investors. All this hype raises a number of questions: Are these “Project Bonds” really living up to expectations? Can governments really rely on Pensioners Paying for Projects (a newfound meaning for PPPs!)? What do we need to do to turn these instruments into a significant source of financing and close the infrastructure investment gap?

What Will the Trade Facilitation Agreement Mean for the Aid for Trade Agenda? New e-Book Provides Answers

Jaime de Melo's picture

The world’s 45 Least Developed Countries that are not oil producers (non-oil LDCs) are exporting less and less in the global market place. Between 1985 and 2012, the world market share of non-oil LDCs’ exports of goods and services fell from 1.2 percent to 0.8 percent—all while their share in world population rose from 7.5 percent to 9.9 percent.

The 2005 Aid for Trade (AFT) initiative was designed to arrest this decline. Yet, LDCs’ trade costs continue to fall less rapidly than those of their competitors.

Clearly, it’s time to re-evaluate the AFT initiative.

A new e-book does just that, and, contrary to what some may think, concludes that the initiative has been beneficial. But due to a collective failure to clearly articulate its results, the achievements of the AFT initiative are now at risk as development budgets come under increasing pressure.

Education as if Economics Mattered

Shanta Devarajan's picture

Children outside school. Bangladesh Education in developing countries is facing problems at all levels:

At the primary level, despite gains in enrollment, the quality is appallingly low.  In Tanzania and India, some 20-30 percent of students in 6th grade could not read at the 2nd grade level. Not surprising since in these countries, teachers in public primary schools are absent 25 percent of the time.  When present, they are in-class teaching only 20 percent of the time.

At the secondary level, the performance of students from the Middle East and North Africa  in international tests such as TIMS is significantly below the developing country average.

At the tertiary level, universities are chronically underfunded and not training students for jobs that the market is demanding - reminiscent of the Woody Allen line, "The food in this restaurant is terrible and the portions are too small."

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