COVID-19: How multilateral development banks can lead through a crisis

coronavirus dutch

(Micheile Henderson, Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Leslie Maasdorp, Vice President, New Development Bank

  • Brics countries (Brazil, Russia, India, China, South Africa) are some of the worst affected by the global pandemic.
  • The role of the BRICS New Development Bank during COVID-19 has validated the original rationale to create a new multilateral development bank.
  • As the Bank turns five, what has been its key achievements?

As the COVID-19 pandemic rapidly spread from Wuhan in Hubei province to surrounding regions, the Chinese Government turned to the newest multilateral development bank, the BRICS New Development Bank (NDB) for support. Within weeks of the loan approval, the NDB disbursed $1bn to Hubei, Henan and Guangdong, the three most affected provinces in China. This loan, the single largest of the Bank to date, was earmarked to provide financial support for unplanned emergency health expenditure related to the fight against COVID-19.

Like the rest of the world, BRICS countries are attempting to overcome the global health pandemic and it’s devastating economic effects. Of huge concern is the real fear that the present crisis has the potential to reverse the hard fought economic progress made in BRICS countries over the past two decades.

MDB’s are uniquely positioned to tackle global challenges

The COVID-19 pandemic has shown yet again, just how critical multilateral development banks (MDB’s) are in moments of crisis. MDB’s are uniquely structured to tackle challenges that cross national borders. Such challenges like climate change or global pandemics, by definition, demand cross border solutions. Furthermore, MDB’s play a crucial role to help counteract the pro-cyclical nature of financial markets as private banks tend to lend too much during boom times and then ration credit during economic downturns. In 2008 for example, when few financial institutions were lending during the global financial crisis, it was the multilateral development banks which significantly increased their lending.

The resulting health and economic crisis prompted by COVID-19 called for rapid, large scale and unprecedented responses. To this end, the New Development Bank (NDB) repurposed its lending program and responded swiftly with bold action to help BRICS bolster their defense against the pandemic. Shortly after the outbreak, the NDB announced a $10bn Emergency Assistance Program with a more flexible and streamlined process for processing and disbursing loans. Under usual circumstances, it can take several months for loans to be disbursed for an infrastructure project. Disbursements for COVID-19 related assistance were made as bullet payments within three to four weeks after the loans were approved.

Given the fiscal constraints faced by most BRICS countries, the NDB, alongside other MDB’s has become a key instrument to complement the governments limited resources to fight the pandemic. To date, the Bank approved and largely disbursed $4bn, which comprised of a $1bn COVID-19 response loan each to China, Brazil, India and South Africa. The full $10bn to be allocated during 2020 represents additional development assistance which would not have been available if the NDB was not created five years ago.

NDB marks five years

In the midst of the present crisis, the bank is marking its fifth anniversary. It was exactly five summers ago when the BRICS countries launched an ambitious project to create a new multilateral development Bank headquartered in Shanghai, China. The core purpose of the NDB is to mobilize resources for infrastructure and sustainable development. Sustainable infrastructure in this sense refers to investments in sectors such as energy generation, water and sanitation, transport and communication. Endowed with a subscribed capital base of $50bn, the NDB has played an indispensable role in providing additional pools of capital to BRICS countries, to fund their sustainable infrastructure and economic development agenda.

The journey began in temporary offices on a single floor, in Lujiazui, the financial heartland of Shanghai, with a team of five executives, each representing a BRICS nation. A complete start-up in every respect, NDB at the time, had no other full time staff, no technology systems or infrastructure of any kind.

What has since been achieved?

  • Fast forward to July 2020, and the NDB has an approved loan book of USD18.3bn representing 56 significant infrastructure projects spread across the BRICS countries.
  • The Bank has established a reputation as a leader in green and sustainable infrastructure and green finance. NDB launched its first capital market transaction in 2016 as a green bond when it became the first multilateral development bank to issue a green bond in the Chinese bond market. The proceeds of this bond was devoted to finance five renewable energy projects in BRICS countries.
  • Since inception the NDB developed a strategy to finance its infrastructure program in local currency of its member countries. To give effect to this, the Bank successfully registered a RMB10bn bond program in China and issued the full amount in successive bond issuances. In addition, the Bank registered a R10bn bond program on the JSE in South Africa and a RUB100bn bond program on the Moscow Exchange.
  • In 2019, the Bank registered a $50bn global EMTN bond program and in June 2020, during COVID-19 NDB, successfully launched its debut benchmark USD1.5bn bond issuance.
  • Crucially, the Bank obtained two AA+ international credit ratings from Standard & Poor and Fitch and a AAA international rating from Japan Credit Rating Agency and ACRA. The average credit rating of the BRICS countries is BBB-. The Bank has therefore managed to obtain an international stamp of credit worthiness significantly above that of its shareholders, which enables it to lend to its member countries at very competitive rates.
  • Finally, the Bank is on course to expand its membership to include new shareholders beyond the BRICS nations and grow into a fully-fledged global financial institution.

These core achievements strongly validate the original rationale and dream of the BRICS nations to create a new emerging market focused multilateral development bank.

Rattling off these milestones may seem that it was all smooth sailing. Far from it, from day one, the Bank faced considerable headwinds and obstacles. Several BRICS member countries faced spiraling fiscal deficits, weak economic growth, political upheaval culminating in sovereign downgrades, which in two instances, namely Brazil and South Africa, led to sub-investment grade status.

The Bank’s fifth anniversary marks the end of the single five-year term of the inaugural President of the NDB, KV Kamath. He played an indispensable role in leading NDB from complete start-up, through a growth phase, and now into a fully-fledged, respected new multilateral development bank.

In the turmoil of COVID-19, the NDB has cemented its place as one of the most important sources of external financing to BRICS countries. It’s most immediate and urgent challenge is to support the economic recovery and chart a new course for growth as the pandemic continues to wreak havoc in BRICS economies.

Leslie Maasdorp is Vice President and CFO of the New Development Bank and a Young Global Leader alumnus.

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