The world’s multilateral development banks are preparing their joint response to the G-20’s call last year to find ways to increase lending capacity, as the infrastructure gap yawns to levels that will be out of reach without global co-operation.
The World Bank Group, the Inter-American Development Bank, the African Development Bank, Asian Development Bank, European Investment Bank and the European Bank for Reconstruction and Development will release their plan to optimise their balance sheets and co-operate with each other to increase lending capacity at the G-20 meeting of finance ministers and central bank governors in Chengdu in July.
The group is said to have finalised the plan very recently. It does not yet include the AIIB and NDB since they might still not have mature risk and capital adequacy policies, according to an ADB official.
In August last year, the G-20 called on MDBs to find ways to optimise their balance sheets, including developing new tools to diversify their portfolios and funding options, including securitization and exposure exchanges.
A recent report from Standard & Poor’s estimated that 19 MDBs they rated could expand their loan books by $1tr without facing downgrades — an estimate that left out potentially important ratings factors such as a shareholder country downgrade and the leverage and capital restrictions MDBs impose on themselves to ensure high ratings.
Several senior funding officials at leading MDBs speaking with Emerging Markets said that that estimate was vastly optimistic. Those officials spoke on condition of anonymity because of the politically sensitive nature of the topic. “I don’t think it’s realistic at all,” said one.
CAPITAL INCREASE
Estimates on the global infrastructure gap are varied, but consultancy McKinsey recently said that, including more expensive sustainable infrastructure projects, the gap could be more than $90tr by 2030 — meaning even a $1tr increase in lending capacity will not foot the bill. Economists and MDB officials agree that the number is too high for development banks to bridge on their own using their current models.
Many officials at MDBs say that increasing the participation of the private sector will be key. But alongside that, officials are looking for innovative ways to make their own balance sheets go further.
The most recent examples of this drive include the World Bank’s exposure exchange with AfDB and IADB in December, helping those two MDBs find capital relief via portfolio diversification.
ADB will next year merge with its soft loan facility, the Asian Development Fund, tripling its equity base. In April IADB approved a similar move at its annual meeting, and is preparing a merger with its Fund for Special Operations — a move it thinks will increase its main financing source by 20%.
And even after the ADB-ADF merger, the bank may well look into a general capital increase, according to one ADB official, who cited public statements by president Takehiko Nakao.
In the last 50 years, the official said, ABD shareholders have contributed only some $7bn in equity. “If we go back to our shareholders soon, it really would be fair,” the official said.