Interesting links Development Policy Lending (DPL) Press release Country Assistance Strategy 2005-2010 Ministry of Economics and Finance (s) Project basic data Name: First Programmatic Reform Implementation Development Policy Loan Amount: U$S 100 million Project number: P083927

This is the first time the Bank has issued a bond in a foreign currency to provide local currencyfinancing to a member country, a “back to back” disbursement of a specific loan.  It will be used to fund Uruguay’s First Programmatic Reform Implementation Development Policy Loan approved by the Bank last year to strengthen capital markets, achieve higher sustainable growth rates, and fight poverty and inequality. 

The bond is a Uruguayan Peso (UYU) 1,981.53 million (US$100 million) inflation-indexed Euronote carrying a coupon of 3.4 percent and will mature on April 15, 2017.  It was issued on May 28 and proved to be very popular with investors both in Uruguay and overseas. Demand was oversubscribed, tripling the fixed notional amount offered.  Domestic institutional investors bought approximately 75 percent of the issue, with the most purchased by Republica AFAP, Uruguay’s largest pension fund, and the remaining 25 percent bought by North American and European investors.

While the World Bank has previously issued bonds in Mexican Pesos, Chilean Pesos, Brazilian Reais, and Colombian Pesos a back-to-back disbursement in a foreign currency for a loan is new territory for the Bank.

During negotiations, the Uruguayan government expressed interest in financing the loan in pesos to limit its foreign currency debt.  Investors were also attracted to the diversity benefits of holding a bond in Uruguayan pesos and the World Bank’s AAA credit rating.  The loan is also a landmark for Uruguay, highlighting the depth, breadth and liquidity of its local capital market.

“This investment is a milestone in the development of the Uruguayan Pension Fund System since this is the first triple-A investment denominated in local currency which contributes towards diversifying the credit risk of our portfolios,” said Martin Larzabal, Republica AFAP’s portfolio manager.  Deutsche Bank was the sole arranger of this transaction.  Zia Huque, Deutsche Bank’s Global Head of Syndicate said that “the deal illustrates that the World Bank continues to be a market leader in innovative emerging markets bond issues,” noting the strong interest worldwide in the loan.

More innovations like this are likely to follow.  Last October the Bank announced a $5 billion fund to invest in developing countries’ local debt markets.  “A number of our clients are interested in increasing the share of local currency financing in their public debt,” said Kenneth Lay, vice-president and treasurer of the World Bank. “We are pleased that this issue facilitates that process,” he said. 

The Uruguay loan is intended to fund the expansion of domestic reforms to expand the recovery from the economic shock of 2002. The loan will support tax reforms, improvements in the business climate and capital markets and the social welfare system.  While foreign investment has improved since the crisis, it remains far below that of countries with similar income levels, and the government plans to use part of the DPL to reduce costs to business, and improve investor protections and contract registration and enforcement.  It also plans to develop a comprehensive strategy to improve capital market regulation.

In December, 2006, the government passed comprehensive tax reform legislation establishing a personal income tax, reducing value-added tax and corporate tax rates, and reducing minor taxes while broadening the value-added tax base. The loan will help Uruguay expand its tax administration to enforce the new laws and collect increased revenue.

Further, Uruguay seeks to make substantial improvements to its social welfare system. While unemployment jumped from 10 percent in the late 1990s to 17 percent in 2002, barely six percent of the unemployed received benefits. Contributions to the unemployment insurance program also fell due to the rise in unemployed workers and an increase in Uruguayans working in the informal sector. The government launched new income support programs in 2000 and 2004 and a new social emergency program, PANES, in 2005. The DPL will help sustain the income support programs and phase out PANES in favor of new permanent program.