In what could be a revolutionary master-stroke in development bank funding, ADB president Takehiko Nakao plans to gear up the bank’s finances to build up $50bn of resources without requiring an extra cent from its shareholders or donors.
By combining soft loan funds provided by donors with the bank’s ordinary capital, the ADB will leverage its expanded equity base more effectively and to become a significantly more muscular player in development financing, he told Emerging Markets.
The ADB president brushed off fears of a possible China-induced economic slowdown in Asia, saying he was very “sanguine and optimistic” about regional prospects overall. He also said that mounting geopolitical tensions in northeast Asia are having no impact on ADB operations.
Under Nakao’s plans, the ADB would build on the move taken by his predecessor Haruhiko Kuroda to secure an unprecedented tripling of the bank’s capital base, known as Ordinary Capital Resources (OCR), to $16.4bn.
The problem for the ADB was there was a limit to how much the bank could borrow or gear up and still preserve its AAA credit rating, said Nakao.
By combining the $33.3bn of funds held in what is known as the ADB’s Asian Development Fund with the OCR money to create $49.7bn of financing, the bank will sharply increase its potential to leverage total financing operations without damaging the ADB’s prime credit rating, he added.
Financing coup
If Nakao wins support from ADB shareholders and donors, which he told Emerging Markets he is confident of, he will have pulled off a financial coup equal to that of his predecessor several years ago.
“No other multilateral development bank has done anything like this,” Nakao told a press conference yesterday in Astana.
Nakao’s scheme is “very innovative,” said ADB vice president Bindu Lohani. “It will make us a much bigger bank [with greater] resources without the need for a new capital subscription,” he told Emerging Markets. “We will be using existing resources which have not been leveraged up to now.”
The new financing plan was “really important” he said, at a time when the needs for long term development finance of a fast-expanding Asian region were rising rapidly, and when many borrowers were graduating from poor to middle income status and losing access to ADB concessional finance.
Even with the boost from $10bn to $14bn annually that his plan will provide to the ADB’s lending power, and after factoring in $7bn of co-financing the bank attracts, its resources still pale against an $800bn annual infrastructure bill in Asia, Nakao admitted.
Faced with fiscal problems of their own, many of the ADB’s 67 regional and non-regional shareholders are in no position to cough up extra capital or donor funds for the bank to allow it to meet the demands of an increasingly capital-hungry region, Nakao noted.
But the ability to gear up on a much expanded capital base will make the ADB a much more important player in its own right.
Nakao hopes to implement the new structure by 2017 when the next donor replenishment of the ADF is due, he told Emerging Markets. If so, the amount of money that the donors will need to provide to top up the fund will be reduced significantly, he added.