The Philippines has received more catastrophe protection with the help of the World Bank, as its government has signed up to another $500 million catastrophe contingent line-of-credit through a new Catastrophe-Deferred Drawdown Option arrangement, dubbed CAT-DDO 4.
The Philippines has benefited from these novel catastrophe contingent credit arrangements before, having had two specific Catastrophe-Deferred Drawdown Options in place before.
They have proven their worth as well, as the country drew-down from one of these arrangements back in 2018.
The Philippines received a payout of almost $500 million to assist with recovery from 2018’s typhoon Mangkhut, after the countries catastrophe contingent line of credit (CAT DDO) from the World Bank was triggered.
The new CAT-DDO arrangement is designed to “strengthen the Philippines’ institutional and financial capacity to manage risks from climate change, natural disasters, and disease outbreaks,” the World Bank explained.
The Fourth Disaster Risk Management Development Policy Loan with a Catastrophe-Deferred Drawdown Option (CAT-DDO 4), to give the arrangement its full name, will provide the Philippines with US $500 million of capital that it can activate on a state of emergency declaration, helping it to manage the financial impacts of natural or man-made disasters and disease outbreaks.
“This contingent funding mechanism protects the Philippines’ fiscal health following natural disasters and disease outbreaks, helps develop sustainable risk financing mechanisms for local government units, and cushions poor and vulnerable households from the impact of disasters,” explained Ndiamé Diop, World Bank Country Director for Brunei, Malaysia, Philippines and Thailand. “If not managed well, these shocks can exacerbate poverty through the loss of lives, destruction of assets, disruption of economic activities and trade, and indirect impacts on health, mobility, and access to education.”
The catastrophe contingent capital can be drawn-down on the declaration of a State of Calamity by the Government of the Republic of the Philippines, due to an imminent or occurring natural catastrophe or a declaration of a State of Public Health Emergency.
That provides much-needed liquidity at the point of disaster, making these instruments akin to catastrophe bonds, in how they secure a line of catastrophe contingent funding.
The line of credit is available for three years to begin and can be renewed for up to fifteen years.
The CAT-DDO sits alongside various insurance and reinsurance arrangements that the Philippines has, which largely protect it against natural catastrophes and severe weather events.
These include parametric insurance, microinsurance, reinsurance for state assets and infrastructure, as well as the Philippines catastrophe bond that was issued with the support of the World Bank, the $225 million IBRD CAR 123-124 cat bond from 2019.
Guaranteed lines of credit, that can be triggered by specific disaster scenarios, are a valuable piece of disaster risk management resources for many countries, with the help of the World Bank and other agencies.
Ultimately, the goal in time would be to reduce the need for debt and to encourage premium payment to support private market risk transfer, insurance and reinsurance uptake.
In time, it is possible that countries like the Philippines look to expand coverage from catastrophe bonds, so that they can downsize contingent credit facilities like this.