The Catastrophe Deferred Drawdown Option (Cat DDO) provides assurance of rapid access to funds at cost-effective levels after a natural disaster has occurred. Guatemala, one of the top five high-risk countries in the world in terms of vulnerability to three or more hazards, requested and received a Development Policy Loan (DPL) with a Cat DDO that complements other financial instruments and disaster risk management measures in place in the country. Two major disasters struck the country in 2010, and Guatemala used the Cat DDO to finance reconstruction and other expenses related to the natural disasters. 2005, the country experienced 62 natural disasters, which affected approximately six million people. Guatemala, one of the largest economies in Central Since 1969, Guatemala has been building institutions America, made significant progress in achieving in order to better respond to events affecting its macroeconomic and democratic stability after a 36- macroeconomic stability. Since 2005, the country has year civil war. Prudent macroeconomic taken significant steps to move from a reactive to a management enabled an annual average growth of proactive approach to addressing disaster risk by 4.2% between 2004 and 2007. However, the global investing in risk mitigation measures. economic crisis of 2008-2009 had a significant impact on the country. Remittances —a key driver of Guatemala’s economy— dropped by 9.5% in 2009. Exports to the US, its main trade partner, also fell. Natural disasters can throw important long-term Guatemala is also challenged by significant development programs off course by forcing a exposure to natural disasters. Between 1902 and government to divert resources to respond to an immediate crisis. The Government of Guatemala an adequate macroeconomic framework and disaster wanted to ensure that they had access to funds risk management program in place, which is immediately after a natural disaster, while other periodically reviewed by the World Bank. sources of financing (concessional funding, bilateral aid, and reconstruction loans) were being mobilized. This would allow them to respond quickly to The Cat DDO allowed the government to quickly emergency needs, without hampering the continuity respond to the damages caused by the eruption of the of development programs. Pacaya volcano and the Agatha tropical storm in May 2010. The cost of the two disasters was US$982 million, approximately 2.6% of the 2009 GDP. A loan from the International Bank for In June 2010, the government disbursed the full Reconstruction and Development (IBRD) with a balance of the Cat DDO to finance part of the Catastrophe Deferred Drawdown Option (Cat DDO), reconstruction and other expenses. a form of contingent financing offered by the Bank that provides countries with assurance of rapid access to funds at cost-effective levels after a natural disaster has occurred, was part of the solution to Guatemala’s challenge. Guatemala Approval Date April 14, 2009 requested and received a US$85 million Amount and Development Policy Loan (DPL) with a Cat DDO in US$85 million Currency April 2009. Repayment 24 years of final maturity The Cat DDO provides immediate liquidity up to Schedule (including a 9 year grace US$500 million or 0.25% of GDP (whichever is less) period) with leveled to IBRD member countries in the event of a natural amortizations of principal) Interest Rate disaster. Funds may be disbursed (partially or in full) Fixed at 4.77% for 24 years when a state of emergency is declared by the Disbursement Period 3 years; renewable up to government. 15 years if original The Cat DDO has a revolving feature, that is, program remains in place Fees amounts repaid prior to the closing date of the 0.25% Front-End Fee1 project are available for subsequent disbursements. Guatemala also has the flexibility to change the repayment schedule for each new disbursement before it is disbursed, which allows it to achieve the best combination of grace period and final payment maturity. The Cat DDO is most effective as part of a broader risk management strategy adopted by the country. To qualify for the Cat DDO, Guatemala had to have Miguel Navarro-Martin, Head of Banking Products, mnavarromartin@worldbank.org, +1 (202) 458 4722 1 On August 5, 2009, IBRD increased the front-end fee from 0.25 percent to 0.50 percent and introduced a 0.25 percent renewal fee for new DPLs with a Cat DDO Photo Credits Front: Scott Walace / World Bank