Natural evolution: Record Galapagos deal sparks clamour for eco-friendly debt swaps

Credit Suisse AG

09/06/2023 17:39

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      Ecuador scored $1.1 billion Galapagos conservation debt
swap 
    

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      Record deal has sparked clamour among other countries 
    

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      A multi-country debt swap seen as next big milestone 
    

  
    By Marc Jones
       LONDON, June 9 (Reuters) - The record $1.1 billion
debt-for-nature swap Ecuador just pulled off to protect its
unique Galapagos Islands is creating a clamour among other
nature-rich but cash-poor countries eager to follow suit.
    While a number of governments already had plans in the
pipeline before Ecuador's success, those who put these types of
deals together say that breaking the $1 billion barrier has
fundamentally changed what is possible.
    At their simplest, in debt-for-nature swaps a country's
government bonds or loans are bought up by a bank or specialist
investor and replaced with cheaper ones, usually with the help
of a multilateral development bank "credit guarantee". 
    As those guarantees protect buyers of the new bonds if the
country isn't able to pay the money back, the interest rate is
lower, allowing the government involved to spend the savings on
conservation.
    Credit Suisse banker Ramzi Issa, who was involved in the
Galapagos deal and a key architect of other recent transactions
in Belize and Barbados, described this as a holy grail for
eco-finance experts.
    Ecuador has committed to spend about $18 million dollars
annually for at least the next 20 years on conservation in the
Galapagos, the remote islands whose unique animal life inspired
Charles Darwin's Theory of Evolution.
    "I think this transaction in particular, which is
unprecedented in many ways - in size, in funding and in terms of
the environmental commitments - has got people saying, ok this
is now a real thing," Issa said. 
    "What we have seen is that conversations that we had in the
past and that went sideways for some time have been
reinvigorated, and some of those that were moving along have
been accelerated," he added.
    The growing appetite comes as record numbers of developing
world governments face debt pressures due to higher global
interest rates. 
    Gabon is expected to be the next country to seal a swap in
the coming weeks, but the model is also starting to produce
offshoots.
    Ilan Goldfajn, president of the Inter-American Development
Bank, which provided the credit guarantee for the Galapagos
deal, said recently that it is working on a debt-for-climate
swap, where the savings would go towards climate change
adaptation schemes.
    Scott Nathan, the head of the U.S. International Development
Finance Corporation (DFC), which provided the political risk
insurance for the Ecuador and Belize deals - another key tool in
 lowering borrowing costs - said debt-for-health and
debt-for-gender equality were also possibilities.
    "There is no shortage of opportunities," Nathan said. "We
want to be as innovative as possible."
    
    NEXT MILESTONE
    Debt-for-nature swaps are not new. There have been around
140 over the past 35 years, but even including last month's
super-sized Galapagos deal they have only involved around $5
billion of debt altogether.
    Such initiatives are expected to receive more backing later
this month, when French President Emmanuel Macron and Barbados'
Prime Minister Mia Mottley host a summit in Paris to discuss
climate and developmental financing.
    The top-level attendees will be urged to do more, not only
debt swaps, but also by providing foreign exchange guarantees
and automatic debt-payment breaks for countries hit by
climate-related disasters. 
    As well as Gabon, a handful of other African countries are
also working on debt-for-nature deals bankers say, as is Sri
Lanka and a clutch of Caribbean and Indian Ocean islands. 
    Credit Suisse's Issa believes a multi-country swap will be
the next big milestone though. 
    Colombia, Costa Rica, Ecuador and Panama have set up the
Eastern "Tropical Pacific Marine Corridor", which could soon see
the world's largest transboundary marine biosphere established. 
    Kenya, Mozambique, Tanzania, Seychelles and others are also
creating a "Great Blue Wall" in the Western Indian Ocean where
every single coral reef is at risk of collapse in the next 50
years.
    "Seeing something that has a group of countries involved
would be amazing," Issa said. "Logistically it is more complex
but the likely impact would be tremendous," he added, explaining
how countries often have very different debt profiles.  
    Ecuador says it is eyeing another transaction to capitalise
on the halo effect from the Galapagos deal. Conservationists
hope it will focus on protecting more of the country's share of
the Amazon rainforest.
    Some of those directly involved in last month's swap think
it would make sense to let the market absorb that one before
going ahead, but DFC's Nathan believes countries should strike
while the iron is hot.
    "Sitting back and waiting when there are opportunities out
there doesn't make any sense to me," he said. "We are going to
keep pushing forward."

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 (Additional reporting by Simon Jessop; Editing by Sharon
Singleton)
 ((marc.jones@thomsonreuters.com; +44 (0)20 7513 4042; Reuters
Messaging: marc.jones.thomsonreuters.com@reuters.net  Twitter
@marcjonesrtrs))