PAPER WRAP-UP: Cautious Resilience: The Impact of the Global Financial Crisis on Latin American & Caribbean Microfinance Institutions, by Sebastian von Stauffenberg

Sebastian von Stauffenberg, MicroRate’s author of the 52 page report, provides a framework for how the impact of the global financial crisis on Latin America and the Caribbean MFIs evolved during the last quarter of 2008.

While MFIs initially reported that the global financial crisis had yet to affect the economy in the LAC region, the latest data suggests that lending in 2008 slowed more dramatically than MFIs admitted to in October and November 2008. MFIs reduced the number of loans to higher risk clients, enforced stricter lending criteria and strengthened provisioning policies, with some MFIs reducing their average loan balance.

Foreign exchange volatility was also a risk that could potentially impede capital flows from rich countries to MFIs. Also, consumer credit and lending to small business entities poses risk; however, it is viewed that short-term lending (microcredit-to highly flexible clients) for productive and not consumption usage may provide greater resistance to the crisis.

Microfinance investment vehicles (MIVs) also reduced their lending in Q4 2008 due to the instability of the financial markets (not necessarily due to funding difficulties). In addition, MIVs were accumulating cash in anticipation of an investor slowdown or the possibility of an increase in redemptions.

MicroRate suggests that portfolio quality has deteriorated somewhat but that this is possibly due to the consequence of slowing portfolio growth. MicroRate also expects that MFIs will be greatly affected by the global crisis due to the fact that they are more “tightly integrated” with the financial sector than was the case in the past. In addition, “microcredit” lending has expanded to include many different forms that were not previously considered by MFIs.

While MicroRate believes it is impossible to predict how/when any negative effects will impact the LAC region. The latest figures from the International Monetary Fund estimates a GDP range of 1.9 to 3.25 percent. Inflation for the LAC region rose to almost 9 percent by October 2008. The report suggests that the estimates reflect an overall weak financial outlook with a continued deceleration in the global credit and commodity markets.

Latin American reserves and FDI inflows to LAC (as a result of open markets) have increased. According to MicroRate, FDI inflows to LAC have increased roughly by USD 30 billion in 2007, with Latin American Reserves estimated to be over USD 500 million for 2009.

Interestingly enough, MicroRate reports that LAC GDP growth trends show a direct correlation (simultaneously or slightly delayed) to the last four U.S recessions. However, in the 2008 recession there is a 1:1 correlation with the LAC region in terms of severity and timing of the economic crisis.

MicroRate notes that while sovereign credit ratings are on a downward retreat. Data obtained from Fitch Ratings illustrate that four of the ten ratings as of Q4 2008 are either in default (Ecuador in December 2008), received a downgrade (Ecuador, Jamaica and Venezuela), or listed as negative outlook (El Salvador, Jamaica and Mexico).

Remittances in LAC are expected to decline (roughly to USD 58 billion) in 2009. According to the Inter-American Development Bank, 2008 remittances are equivalent to 10-25 percent of GDP for seven countries (Guyana, Haiti, Honduras, El Salvador, Nicaragua, Jamaica and Guatemala) with four additional countries over 5 percent of GDP (Belize, Dominica Republic, Ecuador, Bolivia and Paraguay).

MicroRate believes that the expected growth rate for MFIs in 2009 is projected to decrease significantly, reflecting only a 10% growth. The report attributes the decline in growth to declining economies, tightening liquidity, stricter lending policies, decreasing average loan size, shifting portfolio mix and focus on less competitive market segments.

Additional challenges for MFIs in the LAC region are the regulatory obstacles, risk and expenses incurred when transforming into deposit-making institutions. A key risk is the possibility that depositors may also stop saving as the economic situation worsens.

Credit to MFIs has become more expensive with the average increase of 200-600 bps (in local currency). With nearly all funding sources being constrained and local credit disappearing, MFIs are now confronted with the choice to assume FX risk (when borrowing hard currencies) or curtail portfolio growth. MicroRate reports that the top five risks for MFIs are decreases in their liquidity, deterioration of their loan portfolio, increasing credit risk profiles of clients, increasing costs of funding, and the possibility of government interference.

The report continues to provide country profiles on Bolivia, Colombia, Ecuador, Mexico, Nicaragua, and Peru with insight to the microfinance and MIV funding environment. MFIs in the LAC region have been successful at diversifying their sources of funding. The financial crisis has not greatly affected deposits in the region; however, local commercial banks have recently retreated from investing in microfinance. Governments are also increasing funding for microfinance through second tier wholesale banks in order to offset the tightening of local credit markets.

Microfinance investment vehicles are reported to honor their present commitments and renew old loans; however, loans to new clients are carefully made with extreme caution placed towards new investments. The report states that MIVs generally expect their portfolio quality to decline in 2009. While there has been no default in principal or interest repayments to the MIVs, the general consensus is that they are at or near their maximum exposures in the LAC region (particularly with Peru, Bolivia, and Nicaragua).

By Zoran Stanisljevic

Resources:

MicroRate Homepage: Cautious Resilience: The Impact of the Global Financial Crisis on Latin American & Caribbean Microfinance Institutions, March 2009

Similar Posts: