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Emerging Markets

A capital idea

The ADB is set for a record capital increase. But even armed with a stronger base, the lender will find it hard to compensate for the plunge in private capital flows, says its president Haruhiko Kuroda

With $100 billion of new capital now virtually under his belt, ADB president Haruhiko Kuroda is confident that the bank can play a much bigger role in helping Asia to weather a global crisis whose aftermath, he says, will continue for several years.

The worst of the crisis will be “over next year” Kuroda tells Emerging Markets. But even after that the ADB will need to maintain a much increased rate of lending, he says.

Getting the unanimous approval of the bank’s executive directors for a 200% increase in the ADB’s capital – from around $55 billion to nearer $165 billion – was a real feather in Kuroda’s cap. But it came at the price of the ADB having to agree a series of reforms in its operations.

ADB governors are also expected to have voted in favour of the capital increase by the time of the annual meeting, Kuroda says in an interview, although members have up to 18 months to confirm their subscriptions. This should clear the decks for discussion in Bali on the bank’s role as a crisis lender as well as on major new initiatives on Asian infrastructure proposed in a joint report by the ADB and the Asian Development Bank Institute (ADBI) in a report to be launched in Bali.

While relations between the ADB and western shareholders are smoother now than in the past, tensions have emerged among some regional shareholders. The Country Partnership Strategy for India, scheduled for discussion on March 29, was “deferred at the request of a Board member”, an ADB official said. He did not name the member, but sources said China objected to aid going to Indian projects in the Aronachal Pradesh area where the two giant nations have a territorial dispute.

CRISIS MANAGEMENT

Larger issues are occupying the president’s attention at present, however. This year will mark the “severest” period of the global crisis, Kuroda suggests to Emerging Markets. “But next year the impact will continue to be felt, and only from 2011 will medium-term sustainable growth come back,” he says. Last year, the ADB stepped up its lending by 5% to $10.5 billion, but this year it is expected to surge to $16 billion as the bank pumps out money to countries struggling to cope with the crisis.

Lending will probably be around $15 billion next year also before settling back to an increased annual average of $11–12 billion, ADB managing director Rajat Nag tells Emerging Markets. In this sense, the capital increase has come just in time. It follows a campaign of intense negotiation and shuttle diplomacy among the ADB’s leading shareholders by Kuroda, whose quiet determination also secured an $11.3 billion replenishment for the bank’s soft loans arm, the Asian Development Fund (ADF), in May 2008.

“For 2009, originally we thought that some $9 billion of lending from ordinary capital resources and $3 billion from the ADF would be enough,” says Kuroda. “But because of the worsening financial crisis and the slowing of economic growth within the region, more financial assistance has been requested.” The ADB president estimates that by the time the crisis is over, the ADB will have disbursed some $10 billion in special assistance.

“Things changed dramatically after the financial crisis worsened last September,” Kuroda notes. “This meant that the General Capital Increase became more urgent. ADB shareholders have come to recognize that the impact on developing countries of the global financial and economic crisis has been more serious than expected, and that for recovery of the global economy it is very important to provide financial assistance to developing countries.”

Making up the difference

ADB developing member countries are turning to the bank in increasing numbers to help them make good some of the shortfalls in private capital flows into Asia, bank officials say. In some cases too, Asian governments are too cash-strapped to meet their originally targeted share of infrastructure and other projects, and are looking to the ADB to help make up the difference.

But even armed with a stronger capital base, it will be “very difficult” for the ADB to compensate for the plunge in private capital flows, Kuroda says. China, India and Vietnam continue to receive “large and increasing flows” of foreign direct investment, but these have fallen in the case of other Asian countries, and other capital flows have “declined sharply”, he notes. “I don’t think portfolio flows will come back to Asia on a large scale any time soon.”

A NEW ASIA

The Asia that emerges in the aftermath of the current crisis will look different from an economic perspective than the continent that went into the crisis, Kuroda suggests. A greater stress on domestic demand will replace or supplement the former heavy dependence on external markets, he predicts. This means that the ADB will have to change its operations accordingly.

“Already in China we have substantially changed our operations, from coastal areas [these have shifted] to inland provinces, and from reliance on the transport sector to energy, environment and education. Also, we have been active in clean energy development in China. In Indonesia, we have been helping the government to improve the regulatory framework and to improve capacity so as to make public/private partnerships for infrastructure go smoothly.

“Many south-east Asian economies including Indonesia, Thailand, Philippines are very much dependent on exports, but they have also started to rebalance their economies. For smaller economies it may be more difficult because they tend to be more export-dependent,” he says, citing examples such as Singapore and Hong Kong as well as Vietnam, Thailand and Malaysia. China and India are less export dependent and should be able to adjust more easily.

Apart from the extra financing burdens that the current crisis is imposing upon the ADB and its developing member countries, the cost is going to be heavy also in terms of poverty reduction and social development, Kuroda acknowledges. “According to our estimates, compared with a hypothetical continuation of the robust growth [that Asia enjoyed up to] 2007, more than 60 million additional people will be left in poverty,” he says.

“Last year, the most serious and urgent issue [facing Asia] was the impact on the poor of the fuel and food crisis. We provided emergency assistance to [poorer countries] so that they could supply targeted assistance to the poor. This time the impact is more diffuse and affects basically all developing countries and social strata. We will try to assist governments to provide employment through fiscal stimulus measures and targeted support to the poor.”

Infrastructure development

The biggest financial burden facing Asian economies in coming years will be in infrastructure development, on which the ADB and ADBI say that the region as a whole needs to spend a massive $8 trillion over the coming decade. The joint report proposes a new Asian Infrastructure Fund to channel funds not only from the ADB but also from other multilateral sources such as the World Bank as well as bilateral official and private-sector sources into the sector.

“This is practical and realistic [as a concept], and we have already started to solicit bilateral and multilateral institutions to cofinance infrastructure investment in Asia,” says Kuroda. “At some stage we hope that a fund could be formed. It could be an independent legal entity or it could be just a framework. Asean [Association of South-East Asian Nations] is arguing for a fund, [and] I think eventually that there will be a legal entity with its own balance sheet.”

The ADB/ADBI report also calls for a Pan-Asia Infrastructure Forum to be set up to coordinate planning and provision of regional infrastructure. “This is a very ambitious idea,” Kuroda acknowledges. “It is up to Asian policy-makers to decide whether they are interested in not only national or subregional infrastructure but also in an Asia-wide improvement in connectivity,” he says. There is “no consensus” on this at present, Kuroda admits, but he hopes to see an East Asia infrastructure forum founded initially and a pan-Asia forum later.

Chiang Mai changes

Apart from the infrastructure debate, the annual meeting is expected to see Asean+3 finance ministers boost from $80 billion to $120 billion the size of the network of bilateral currency swaps known as the Chiang Mai Initiative (CMI) and to multilateralize management of the scheme. But the ministers may continue to haggle over where to locate a proposed new secretariat for the Asean+3 group so that it can act as a policy coordination unit for the enhanced CMI.

Some have questioned the role and relevance of the CMI in view of the stepped-up role of the IMF, and Kuroda notes that the IMF is poised to give crisis aid to Pakistan, Mongolia and Sri Lanka. “But fortunately many Asian countries have not been faced with a balance of payments crisis, unlike 12 years ago,” at the time of the Asian financial crisis. “In that sense, the IMF is not coming back to Asia on a large scale,” and a regional liquidity arrangement can still play a useful role, Kuroda insists.


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