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

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FILE PHOTO: Giant tortoises are seen in Floreana Island at Galapagos National Park, Ecuador, October 8, 2016. REUTERS/Nacho Doce/File Photo

LONDON (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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