When former managing director of the Capital Markets department at the International Finance Corporation (IFC) David Gill published a book last year, he called it Tales of a financial frontiersman – the story of an institution that in the past boldly went where private markets dared not go to help found what became known as “emerging markets”.
Alongside Gill (a one-time Canadian naval officer and investment banker recruited to the IFC by the almost legendary former World Bank president Robert MacNamara) another pioneer in the capital markets department of IFC was Antoine van Agtmael, who claims to have invented the term “emerging markets”, which has since been joined by “frontier markets”.
Is the pioneering spirit that saw the IFC help found the world’s first emerging market funds in the early 1980s and which lured figures such as the late John Templeton and Mark Mobius to invest in these markets still alive? Or has the institution, as some claim, lost the boldness and imagination that made it a global leader in capital market development?
The IFC nowadays has $5.5 billion-worth of assets under management in half a dozen equity and other funds. But some critics say that the development of this side of its business has not lived up to the promise of the pioneering days, and that the IFC has been preoccupied with co-financing rather than leveraging its unique position as the “world’s largest global development institution”.
Current IFC executive vice-president and CEO Jin-Yong Cai does not see things in this way, however. “We view capital markets as the key enabler [for emerging economy development],” Cai tells Emerging Markets. “It doesn’t matter how much foreign money comes in” to a developing country, “it’s always going to be complementary” to a country’s total needs. Capital market development “is our core mission”, he insists.
A Chinese national who started at the World Bank Group in 1990 and returned to take the top spot at the IFC just one year ago, Cai worked in the financial services industry for 20 years. That included 12 years with Goldman Sachs Group, where he was part of Goldman Sachs’ global leadership team and its top executive in China. Before that, he held senior positions in Morgan Stanley’s investment banking division, including a period of secondment to the China International Capital Corporation.
“The majority of the funds for emerging markets will have to come from local sources, and the fact is that savings in many countries are not mobilized because of the lack of capital markets,” says Cai. “After the [global] financial crisis, people realized that mobilizing money through the typical bank channel is very inefficient and sometimes very risky. We have in many places been using our own balance sheet or working with clients to issue local currency bonds. We have done several, and we have plans to do more,” he adds. In recent years, the IFC has issued bonds in a dozen local currencies, from the Brazilian real to the Russian rouble, and provided $10 billion in local currency financing across 58 currencies.
“We are working with our World Bank colleagues and people of a similar mind to make sure that over time we can develop a healthy local bond market. When you think of financing for infrastructure, the bond market will be up there, and certainly equity markets are important. We do both. We have good expertise, and this is an area where we will do more,” says Cai.
BIG CHALLENGE
But the challenge of developing local currency bond markets in emerging economies is vastly larger than the response so far, and some argue that the IFC could have done more in this area in which others such as the Asian Development Bank have been highly active. The IFC was at the frontier of equity market development in emerging economies, but it has yet to have a similar impact on bond market development, said one regional development bank official who declined to be named.
Ernest Kepper, another former IFC senior official who worked closely with MacNamara, has long argued that creating and advancing local banking systems across the developing world is an area where more could have been done in response to local needs. Given its status as a supranational institution operating on behalf of more than 180 governments and with power to push for reforms on behalf of the global financial community, the IFC is well placed to promote development of emerging market financial systems, some say.
The IFC does have holdings in financial institutions around the world that have provided access to finance in 72 countries. “In the real sector, we do direct investment, but working with global financial institutions we also provide funding,” says Cai. “If we use one dollar to invest in a financial institution that can lend 10 dollars, we are going to be doing far more. It is a combination of putting money directly in a transaction and also leveraging other capabilities.”
According to the IFC’s latest annual report, new investments by the corporation climbed to an all-time high of nearly $25 billion (in the financial year 2012/13) including funds mobilized from other investors, thereby providing capital to more than 600 projects and companies across the world. “We invested $18.3 billion from our own accounts and mobilized $6.5 billion from other investors,” the IFC said. “At a time of declining official aid flows to developing countries, these investments had an impact in every region of the world. IFC now has an investment portfolio of nearly $50 billion in nearly 2,000 companies in 126 countries.”
Through its wholly-owned subsidiary IFC Asset Management Company (AMC), the IFC nowadays has half a dozen funds that aim “to provide investors with access to IFC’s emerging markets investment pipeline and to expand the supply of long-term capital to these markets.” But compared with the long-term investment needs of emerging economies, AMC’s $5.5 billion of assets under management is somewhat underwhelming. These sums, along with the general size of the IFC’s balance sheet, pale alongside what the Washington-based institution itself acknowledges to be the size of global financial needs. According to the IFC’s 2013 annual report, “$1 trillion a year in financing is needed to modernize infrastructure in developing countries.” And that says nothing of a host of other investments.
A report produced earlier this year by the G30 group of central bank governors, financiers and others suggested that the world’s leading economies will need huge investment in the short to near term, but are unlikely to get it without “reforms that can strengthen the flow of capital into long-term investments by governments, institutional and individual investors”. Long-term investment in nine economies – the US, UK, Germany, France, Japan, China, India, Brazil and Mexico – totalled $11.7 trillion in 2010, and could grow to $19 trillion by 2020, with China alone accounting for around half of the increase, the report suggested.
PRIVATE SECTOR
Neither the IFC itself nor the multilateral development institutions as a whole can hope to supply anything approaching these sums of money on their own, and so most of them focus increasingly on co-financing with the private sector and on acting as a “catalyst” for private flows. But some argue that the IFC especially should focus more on helping emerging economies to develop their
banking, equity and bond markets to the point where these are capable of channelling more local savings into infrastructure and business investment to free them of their dependence on foreign direct investment.
Cai says meanwhile that his vision is for the IFC to “evolve in the market place. We need to become what I would call the leading adviser, financier and co-investor/partner,” he says in an interview. “The most important transactions are in emerging markets, and our unique value proposition is certainly to do finance, but that is not the only thing we should be doing. The needs of emerging markets – for infrastructure, health education, job creation – are huge. What we offer is our global knowledge, our ability to get transactions consummated, executed and delivered intact and our ability to help mitigate risk.”
There is “no shortage of demand in the world, but there is a shortage of bankable projects,” says Cai. “Our mission is to leverage our brand and our ability to make many transactions that are not bankable become bankable.” In pursuit of this process, IFC deploys its capital, but its “core proposition” is its skill in creating bankable transactions, he adds. “I used to work in a private-sector investment bank and [the likes of] Goldman and Morgan Stanley add their value. But in the mitigation of risk I think we have more to offer. We are not competing with [private investment banks]. Sometimes we are partners and work together, but I feel that the unique value proposition that we can offer is something that you don’t find in any other place. We do have more credibility. We are owned by 184 countries, [and] their views are more objective. I don’t necessarily agree with the perception that sees private banks as if they had some kind of ulterior [motive] for themselves. We are very much looking at private investment banks as our partners.”
One former IFC executive suggests that the world has changed since the pioneering days of the corporation. “It seems that the developing world has changed dramatically for the better in the recent past, from a predominantly low-income world to a predominantly middle-income world. Even sub-Saharan Africa has shown promising progress in the recent years,” he says.
The developing world, according to him, has increased its business and management level of competence, while there appears to be a deteriorating quality and skill mix of World Bank and IFC staff. The bank/IFC has placed a premium on specific “processing skills” rather than professional skills and broader economic experience, he adds. Now, “the sons and daughters of local business owners in developing countries are better educated and more experienced than some World Bank Group staff.”