Crisis Talk — with Jingdong Hua of the World Bank
Jingdong Hua has seen his fair share of crises. In Africa when the Rwandan genocide happened, in the Philippines when the Asian tsunami hit, in New York City when the twin towers fell on 9/11, he now finds himself in Washington, DC at one of the key institutions the world is desperately looking to to lead it out of the coronavirus crisis.
As vice-president and treasurer of the World Bank, he has a unique view: in the foreground theglobal and local bond markets, in the middle ground the vast needs of nations that are being damaged so badly by the pandemic and in the background the multilateral system, of which the World Bank is a driving force.
In this interview with GlobalCapital's Toby Fildes, Jingdong Hua admits that this is uncharted territory, but argues that multilateral banks have what it takes to help developing countries respond to the health, social, and economic impacts of Covid-19.
Heike Reichelt, head of investor relations and new products at the World Bank, also joined the interview.
GlobalCapital: You’ve worked in these markets for many years; what do you think of these past weeks of crisis?
Jingdong Hua, World Bank: In the past 26 years I have worked in five international organisations across several continents. So I’ve had my fair share of natural and man-made crises, and of course all the financial crises.
Every crisis is different, and therefore the response is different. Yet I have to say I have deeper appreciation for those folks in 1944, when they met in Bretton Woods in New Hampshire — they really deserve some credit.
We’re in uncharted territory. The European Central Bank is doing a lot of work, the Federal Reserve and the government here and in other OECD countries. Though under stress, they do have the financial means, both from central bank and government, to take care of citizens and the immediate response.
What about all those vulnerable countries that we have to deal with? In times of crisis, their access to finance from other sources is severely constrained. Many African countries in the last decade and a half have been able to go to euro or dollar markets and raise money. The cost may be high, but they at least felt confident they were building their reputations in the market. But when the crisis happened, their access stopped.
So it is in times of crisis that the value of multilateral banks really shines through. And I feel really honoured to be treasurer of the World Bank in this challenging time.
Of course the first need is preparedness — being able to deal with the pandemic. But then there is economic contagion. We’ve just published a report on the collapsing commodities, of course oil, but also copper, other metals. Many countries rely on commodity exports as a big part of their government revenue. Because of the sharply shrunken demand, they face a double whammy.
Another issue is the potential severe drop in remittances. I believe our president David Malpass mentioned a number of over $100bn. This is really procyclical against developing countries: when you need the money, your own citizens’ ability to remit money has gone away. For some countries, a quarter of their GDP or even more is remittances.
So the access to finance really now has to come to us, whether it’s multilateral banks, bilateral donors or the IMF. This is why the World Bank, in co-ordination with the IMF and other multilaterals, has been very fast in coming up with a rapid package of assistance. The World Bank Group announced $150bn or $160bn over 15 months to help developing countries respond to the health, social and economic impacts of Covid-19.
You add up all of the regional development banks and it’s another $100bn. Who else will come up with that quarter of a trillion dollars?
This is the role we play. We connect global savings to much needed finance, in this critical time. This calendar year I think the World Bank will reach a milestone — since our first bond in 1946, we will have reached the $1tr mark.
You mentioned the Bretton Woods agreement in 1944, when international financial institutions including the World Bank were set up. Can you envisage something like that happening again in response to this crisis? Is there a need for another look at the multilateral development bank system? I can’t compare this crisis to any other but the Second World War in its destructiveness.
Bretton Woods has already created a workable model. Over the past seven decades, institutions following this model have been created along the way. In 1944 they created the International Bank for Reconstruction and Development and the International Monetary Fund.
Then the International Development Association came into being, the International Finance Corporation, the African Development Bank, Inter-American Development Bank, Asian Development Bank and now you have the Asian Infrastructure Investment Bank.
The model is very simple: you leverage a small capital base provided by member governments, give it a conservative financial policy and let us tap into global savings through the bond market.
At IBRD, we can leverage our capital up to five times. Although we don’t charge market rates when we lend to developing countries, we charge sufficient margins so that we are a good going concern. Shareholders don’t demand a dividend, so we can invest and generate a modest income, which makes the capital base grow on its own organically.
For shareholders, in a counterfactual way, if they had bought US Treasuries instead, actually the return we have grown on the initial paid-in capital is slightly better. Which means we have done well, both for the shareholders and for the world.
That is the Bretton Woods model, which is being repeated by new multilateral development institutions being created at the moment. So we don’t need to reinvent the wheel.
Are shareholders being supportive of the World Bank Group increasing its activities to counteract Covid-19?
Oh, absolutely. The World Bank was fast in coming up with a global package and it was approved by our board in an unprecedented timeframe.
Phase one addresses primarily the immediate need of countries to get their health sectors ready for the pandemic. Then there is a medium to long term, bigger package to deal with the economic and social fallout. Our board has very quickly approved 40-50 projects. [This has grown, in the meantime, to projects in over 100 countries.]
So we have overwhelming support from our shareholders.
Are you confident there will be enough money to deal with this crisis?
Our package is pretty unprecedented — it’s for the next 15 months. You also have to consider the absorbing capabilities of the countries, because we need to make sure the programmes are well designed, used quickly, but prudently to make sure they achieve the intended purposes.
So I believe as a first round of assistance we are quite alright. And because we have four institutions for this — the IBRD, IDA and IFC, as well as the Multilateral Investment Guarantee Agency, we have a pretty broad toolkit, including to support middle income countries, which face different challenges from the poorest countries. In the private sector, where many SMEs are really desperate, the IFC could play a key role in helping them. Personally I think this is a very impressive package.
You’re going through the initial response now. But it seems likely that, given the hugely increased needs in the developing world, sooner rather than later, the MDBs are going to ask for more capital. Are you worried that when that happens, some of that capital won’t be forthcoming?
We last had a global financial crisis in 2008 and that’s when all the MDBs got a round of capital increases. That was fine. In this crisis, the World Bank Group has been very fortunate, because two years ahead, we were able to obtain a capital increase for IBRD and IFC.
IDA has a three year replenishment cycle, when the donors and recipient countries get together to talk about what it needs. That is ongoing.
And I am confident, as we are just commencing the latest IDA implementation, we do have two or three years to reflect. This particular IDA replenishment is the biggest ever, which has allowed us to frontload so much for IDA countries.
So I think we immediately are in very good shape. Down the road, would the shareholders consider a capital increase? Who knows.
In the past few years there have been some political challenges to the idea of multilateralism. Do you think this crisis might usher in a new golden age of multilateralism, given that so much international co-operation is needed?
All my life I have been working for Bretton Woods institutions and the United Nations — I worked for UNDP for six years. They have been an incredible and unique source of finance, sometimes the only source of finance, when crisis happens to many vulnerable countries.
As a finance professional I am a very strong supporter of the Bretton Woods institutions and what they can do. Anything that can strengthen our capability, so that we are always prepared, we are always there to help vulnerable countries, addressing their needs and also global public goods, is something that seems quite straightforward.
The World Bank has issued Covid-19-related bonds, but what do you think labelling bonds achieves? Do you get a bigger investor base or tighter pricing?
The community thoughts and the market have been evolving. The World Bank certainly has been a pioneer, from creating the green bond label to standardising it through an earmarking approach, to our latest thinking of using broader sustainable bonds.
Of course, everything we do is about impact, sustainability, global public goods, and we uphold the best international practices and standards.
Being one of the largest issuers, we are cognisant that we send signals. We are very purposeful in using that signal to bring investors’ attention to many of the global public goods that we need to address.
I was in Japan last year, and I was interviewed about our thematic bond relating to addressing food waste. The journalist asked me to drill down on what food waste meant. So I learnt that a quarter of the world’s fresh water is wasted because of wastage on food and it’s the third largest carbon emitter after energy and transport.
Somehow, when we used this label to bring awareness to Japanese investors, it took root. We raised about $2bn, more than half of it from Japanese investors. So it really gave me a sense of the great importance of using this to address many different things, whether it be gender lens, climate, nutrition, ocean pollution and so on.
So in this crisis when we issued bonds to finance our activities, Heike Reichelt and our investor relations team did several weeks of background work to sensitise investors about how we are working with member countries as they address the social and environmental impact of Covid-19.
So I think it’s great that we are using our franchise name to address global issues to raise awareness, so investors not only buy our bonds, which are the best bonds in the world, but also there is an added element of feeling good that they have supported global, sustainable development directly. This is a really fantastic added value that we bring to capital markets.
Have you noticed any change in your investor base since the beginning of the crisis?
Let me first praise our funding and IR teams, because you can’t just go to any investor cold. It takes years and decades of work of educating investors, whether it be big institutional, small institutional, municipal governments, retail. But we do see many more investors coming in.
When in the middle of April we raised about $15bn in one week, we had over 300 investors. In the dollar benchmark about 200 investors came in. Whatever asset class, whatever investor class, as long as they are there to buy triple-A rated bonds, they all came in.
In 2008, for a while the US guaranteed banking debt, so you had a flood of triple-A bonds. In this crisis our triple-A is very sought after, so I’m not surprised that with limited supply, investors who can get their hands on our bonds all came in.
Heike Reichelt, World Bank: There are investors who don’t typically buy triple-A rated bonds, but in times like these they do, for safety. It takes time to build relationships, a lot of them just know of us because of what we do, and that awareness has definitely increased. So we did see some investors we knew, and maybe they have bought our bonds here and there, but it was almost like they were all in there — all in one bond. Some investors buy us in different currencies. But the dollar book of almost 200 investors was amazing — that’s much more than usual. And obviously the $8bn size of that bond was a record as well.
Many supranationals have been issuing social bonds in this crisis, with the proceeds used for their coronavirus responses. Do you think this crisis might give a lift to the social bucket of ESG finance? And is there a danger that the environmental bit might be pushed to one side for a while?
Jingdong Hua: You always have to prioritise immediate emergencies. Just like us, I can understand why other MDBs connect their bonds to Covid-19, to bring attention to the immediate, urgent need of our client countries.
Our commitment to global public goods including climate is longstanding and certainly, once the need of the immediate crisis subsides, we will resume financing a broader range of medium to long term projects — infrastructure, financial reform and so on. So I don’t see any contradictions.
Many cities and countries are greener because of social distancing and lockdown, so I hope this gives citizens a sense that good air is good for all of us.
Our long term priorities are global public goods, including universal health coverage, nutrition, climate, equality, women, entrepreneurship, education, that are reflected in the Sustainable Development Goals we are committed to.
So longer term, when the world comes back to normal, we will go back to normal in terms of addressing those.
Everyone is talking about the need to be better prepared for the next pandemic, but what should countries realistically do to prepare for that? And what can capital markets do?
I’m not a health expert. But to borrow the 75 years’ experience of the World Bank, we can always learn from the last crisis and previous experiences so countries can get better prepared.
I have every confidence we will synthesise all the good and bad experiences through this pandemic and make some good advisory services to our client countries.
One parallel I can draw was the severe damage to the Asian tiger economies caused by the Asian financial crisis in 1997. That led to a rapid development of domestic and regional capital markets in Asia, especially east Asia. Building a robust, domestic currency-based savings and financial architecture makes a country much more resilient when the next crisis hits.
So overall, the impact to Asia of the global financial crisis in 2008 was less severe than the Asian crisis, because Asian countries had learnt those lessons.
The World Bank has been active in recent years designing and helping to execute pandemic catastrophe bonds. Is this something you could do more of, to help countries prepare?
Yes, when it comes to natural disasters like earthquakes and hurricanes, that’s very well established. We have been working with insurance companies and the capital markets to help countries mitigate the damage through cat bonds. That has been a huge success.
When it comes to pandemics, the data points are much less rigorous. The world’s first pandemic bond, which we issued, has just been triggered. As a first innovation, it’s very valuable.
Nobody should expect the first innovation to be the perfect product. You learn from the design, and hopefully that can inform us how to figure out a better way of using insurance to address pandemics through the power of capital markets.
There has been some astonishment that it has only just been triggered. Do you have some sympathy with that view?
The Pandemic Emergency Facility was designed in the wake of the 2014-15 Ebola outbreak with a range of pandemic experts involved to advise on what they thought was the best balance. Now the bond has been triggered and the PEF has allocated $195m to 60-odd low income countries who are struggling with this pandemic.
Interview was conducted on April 30, 2020