The development financing role of multilateral development banks (MDBs) in emerging and developing countries is becoming more prominent and should be bolstered by the New Development Bank BRICS (NDB BRICS,) which officially opened its doors recently.
NDB BRICS is a MDB operated by the BRICS states (Brazil, Russia, India, China and South Africa) as an alternative to the existing US-dominated World Bank and International Monetary Fund (IMF.) While the launch of NDB BRICS may serve to raise the profile of development finance in Africa, MDBs have been operating on the continent for many years, financing infrastructure, sustainability and development-related projects.
MDBs’ role in funding growth slowed post the global financial crisis, when Africa’s above-trend economic prospects resulted in private sector investors capitalising on faster growth in the region. However, slowing global growth (including in emerging/developing markets and key regions such as China) and low commodity prices have driven a ‘risk-off’ investment stance, resulting in a withdrawal of liquidity from emerging markets, and weakened prospects, currencies and national balance sheets in these countries.
This slowdown in global growth and diminishing appetite for emerging market risk has highlighted the critical role that MDB’s play in the facilitation of investment in infrastructure development, trade and the economic integration, the development of the financial sector and systems, and the development of housing and mortgage markets. The role played by MDBs in emerging market investment and infrastructure development has also seen a shift to a more cooperative approach between parties in the international financial framework, including continental MDBs, global supranational institutions, and international and African commercial banks. Increased collaboration and cooperation, together with a rise in infrastructure project size/complexity, is resulting in a move from bilateral to multilateral/syndicated lending and project management.
The five major MDBs on the African continent are the African Development Bank (the continental section of the World Bank,) PTA Bank, Shelter Afrique, the East African Development Bank (EADB), and the Africa Finance Corporation. As supranational institutions formed by two or more countries or governments to promote social and economic development within the member states, MDBs are not restricted to a sovereign credit rating ceiling, typically aim to maximise development impact rather than profit, and are primarily equity-funded by contributions from member states. The rising prominence of MDBs as large lenders for trade and infrastructure development finance has also been reflected in their credit ratings. PTA Bank and EADB are both examples of this trend.
PTA Bank had its national scale long-term rating upgraded from AA+ (KE) to AAA (KE) by GCR in September 2015, driven by its favourable strategic position on the African continent, derived from its development mandate and broad equity participation. The ratings also reflect its ability to attract funding, balance sheet growth, sound liquidity position and earnings track record, and enhanced risk management framework. Furthermore, PTA Bank is growing its reputation as a channel for commercial and European development funds (through syndication and Eurobond issues.)
EADB - which has a development mandate in the East African Community member countries - had its long-term national and international scale ratings upgraded to AA+ (UG), (KE), (TZ), (RW) and BB+ respectively by GCR in November 2015. Strong capitalisation and liquidity, member support, and improving asset quality and profitability supported the upgrades.
Shelter Afrique, with its mandate to support the development and efficient delivery of affordable housing and commercial real estate in Africa, had its national scale ratings of AA(KE) and A1+(KE) affirmed in the long term and short term respectively by GCR in September 2015.
Meanwhile, the new NDB BRICS will finance infrastructure and sustainable development projects in the BRICS states and other emerging and developing countries.
The growing prominence, financial strength and collaboration between MDBs in the global and African contexts should be viewed as positive influences for the continent. Given the volatile economic conditions and consequent withdrawal of some private investment from emerging markets, MDBs are providing a reliable, secure and increasingly attractive means to financing crucial developmental projects in Africa.