BOLIVARIAN POLICIES UNDERCUT BOLIVIA'S

UNCLAS SECTION 01 OF 03 LA PAZ 000160 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/AND TREASURY FOR SGOOCH MCC FOR AKIRSCHENBAUM E.O. 12958: N/A TAGS: ECON EFIN EAID BL SUBJECT: BOLIVARIAN POLICIES UNDERCUT BOLIVIA'S MICROFINANCE INDUSTRY REF: A. LA PAZ 3402 ¶B. LA PAZ 3463 -------------- Summary -------------- ¶1. (SBU) The GOB issued a supreme decree on January 1 to establish a state development bank to provide subsidized, low-rate credits to small businesses associated with social organizations. Although according to the decree, the development bank will be a second-tier institution, rather than a first-tier bank that would be in direct competition with the private sector, GOB officials and the regulations governing the bank indicate that it may actually be a first-tier bank in disguise. World Bank and Inter-American Development Bank representatives told Econoff on January 17 that, although they are concerned about the potential negative impact of the bank, they plan to support it, arguing that through engagement they will be able to shape the bank in a positive way to minimize harm. The International Monetary Fund (IMF) representative suggested that Venezuela's purchase of a prominent Bolivian microfinance institution, Prodem, (ref B) would likely damage the sector more than the development bank. Representatives from Bolivia's world-model microfinance sector told Emboffs on January 19 that they hope the government and Prodem lending programs reach a different market than the one they are serving so that the impact will be limited, but fear that these state-financed programs may put downward pressure on interest rates and erode repayment culture. They are concerned that the government may implement interest rate caps and impose directed lending requirements, as the Venezuelan government has done. However, for now, the government's plans for the development bank and Prodem's plans are unclear. End summary. -------------- GOB Decree Establishes State Development Bank -------------- ¶2. (SBU) The GOB issued a supreme decree on January 1 to establish a state development bank, which is the centerpiece of its five-year national development plan emitted in June ¶2006. Previous government statements indicated that the development bank will provide low-rate credits to micro, small, and medium enterprises affiliated with social organizations and syndicates (ref A). According to the decree, an existing state lending institution, the Bolivian National Financier (NAFIBO),will be transformed into the Productive Development Bank (BDP),a second-tier lending entity, by expanding NAFIBO's capacity through regulatory changes. During the coming year, the BDP will conduct audits of another state lending entity, the Financial System Development Fund (FONDESIF),and certain FONDESIF assets will be transferred to the BDP, with the eventual goal of phasing out FONDESIF. ¶3. (SBU) Although according to the decree the BDP will be a second-tier institution, meaning that it will lend funds to existing financial institutions to on-lend to clients rather than lending directly to clients in unfair, subsidized competition with private sector financial institutions, GOB officials and the regulations governing the BDP indicate that it may be a wolf disguised in sheep's clothing. A government official indicated in a meeting with USAID that the BDP would identify loan recipients by name, which if true, would mean that the first-tier banks would have limited control over credit risk assessment of clients. BDP regulations allow for repayment risk to be shifted from the first-tier banks to the LA PAZ 00000160 002 OF 003 BDP in loan contracts with clients, supporting the theory that the BDP will actually be controlling the lending funds and making decisions regarding how to disburse them. -------------- -------------- IFIs Concerned About Bank, But Plan to Support It -------------- -------------- ¶4. (SBU) In a meeting on January 17, representatives from the Andean Development Corporation (CAF),Inter-American Development Bank (IDB),and the World Bank told Econoff that their institutions plan to support the BDP through either lending or technical assistance. While the CAF representative seemed supportive of the GOB's approach, the IDB and World Bank representatives expressed concern about the potential negative impact of the BDP on Bolivia's world-class microfinance industry, but argued that by engaging the GOB on the development bank, they would be able to shape the bank in a positive way, whereas if they did not engage, the government may implement a poorly-designed development bank that would do even greater harm to the private sector. The International Financial Institution (IFI) representatives agreed that the BDP would likely be more a subsidy transfer mechanism than a lending entity and anticipated that repayment rates would be low. They also agreed that the BDP's impact on the private sector would depend on both the design and the size of the BDP's lending program. Press reports indicated that the BDP has USD 30 million of lending capital, while government officials have indicated in meetings with Emboffs that the bank has between USD 40 and USD 175 million, with up to USD 70 million from Venezuela. The IFI representatives were unclear how much Venezuelan funding is mere talk and how much has actually materialized, as Venezuela does not participate in donor coordination meetings. ¶5. (SBU) The International Monetary Fund (IMF) representative expressed reservations about the GOB's ability to implement the BDP, and argued that the bigger threat to the sector is Venezuelan state-owned Industrial Bank's recent purchase of Prodem, one of the largest and most important Bolivian microfinance institutions (ref B). He feared that Venezuelan financing of Prodem could reach levels equivalent to the total amount of lending by the entire Bolivian microfinance sector last year, which would have an enormous impact on the sector if Prodem offered subsidized credit and harmed Bolivia's repayment culture. -------------- -------------- Microfinance NGOs Concerned About Bank and Venezuela -------------- -------------- ¶6. (SBU) Bolivia's microfinance sector has developed into a world model, sustainable industry during the past two decades with considerable support from USAID in lending capital and technical assistance. The industry now serves approximately 540,000 clients, has an outstanding portfolio of approximately USD 700 million, and generally offers lower interest rates than microfinance institutions in the rest of Latin America. In a round table discussion at USAID on January 19, microfinance representatives explained that about 80 percent of their loans are for commerce and services, with only about 20 percent going to production. The government aims to focus on providing credit to production, particularly in rural areas which are less saturated, so the regulated microfinance network hopes that the government will reach a different market than the one they serve -- one that would not likely be profitable for nor compete with the private financial sector. The General Manager of BancoSol calculated LA PAZ 00000160 003 OF 003 that the BDP should have USD 150 million in capital, based on the combination of NAFIBO, FONDESIF, and regional fund capital, which could be leveraged ten times for a total lending capacity of USD 1.5 billion. ¶7. (SBU) The microfinance representatives' two main concerns regarding the development bank and the Venezuelan purchase of Prodem are anticipated downward pressure on interest rates and possible damage to Bolivia's good repayment culture. Average interest rates are around 20 percent currently, with a focus on short-term working capital loans. The representatives feared possible GOB attempts to impose single-digit lending ceilings or to impose GOB-directed, sectorial lending requirements by decree, as the Venezuelan government has done. However, for now, the government's plans for the BDP and Prodem's plans are unclear. The representatives explained that the government is divided and does not have a clear policy and that they do not expect to have a more certain idea of the future until after the Constituent Assembly terminates in August 2007. The microfinance network is engaging the government in attempts to shape the BDP in as positive a way as possible, but noted that it is difficult to hold technical conversations with the GOB, which is focused on political results. -------------- Comment -------------- ¶8. (SBU) The impact of the state development bank and Venezuelan-owned Prodem on the private microfinance sector will depend on the design and size of the bank's and Prodem's lending programs. We will continue to monitor this issue closely. End comment. URS