The crane at the top of the 30-storey New Development Bank’s brand new headquarters, currently under construction, is clearly visible from the bank’s existing premises in Shanghai’s financial heartland of Lujiazui. In 2021, NDB will take occupation of its new permanent home.
This image of a fresh skyscraper in Shanghai symbolizes the progress of the bank, which four years ago was a mere dream, a start-up in every respect. NDB remains, of course, a work in progress but has now successfully evolved from a start-up and is well on its way to becoming a fully fledged multilateral development bank. Multilateral development banks are essentially global financial institutions backed by governments to provide long-term finance for sustainable infrastructure such as roads, rail, ports, power and telecommunications. This is usually done in the form of loans, equity, guarantees and other financial instruments.
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The fourth anniversary of the NDB is a timely moment to pause and reflect on what it has achieved and key challenges it faces, and to consider its next steps. Here’s a potted history. The bank was established in July 2015 by the BRICS countries (Brazil, Russia, India, China and South Africa). The aim of the bank is to mobilize funding for infrastructure and sustainable development. It’s ownership structure is unique, as the BRICS countries each have an equal share and no country has any veto power. The backdrop to its creation is rooted in the real and continuing power shift in the international system, from the developed industrialized world towards emerging market economies. In this sense, the bank is a physical expression of the desire of emerging markets to play a bigger role in global governance. Moreover, investment in new sustainable infrastructure is falling significantly short of the levels required to keep pace with economic growth.
NDB was created to help fill this funding gap in the BRICS economies, and was intended to grow its global scope over time. The bank, with its subscribed capital base of US$50bn, is now poised to become a meaningful additional source of long-term finance for infrastructure in its member countries.
Fast forward to 2019 and three achievements are worth highlighting. These are: a loan book of $10.2bn, one AAA and two AA+ international credit ratings and the successfully launch of capital-raising activities in local currencies. We’ll have a closer look at them below.
Rapid growth in loan book, with a strong green footprint
The Bank’s 37 infrastructure loans to date, with a total value of $10.2bn, cover sectors from transport to renewable energy, water and urban renewal. Historically, borrowers have often complained about long lead times and complex procedures in their dealings with development finance institutions. For this reason, the NDB from its inception streamlined its processes to enhance the speed of loan approvals. It helps to be small, agile and nimble in the initial years. In concrete terms, this has resulted in all its loans being approved within a period of six months. More importantly, the bank aims to preserve speed of execution as a comparative advantage into the future. Time will tell if it’s possible to be a perpetual start-up in the medium term, and to use newness as a source of durable advantage. Meanwhile, sustainability is core to the mandate prescribed by the bank’s founders. The NDB plans to increase the stock of green infrastructure in its portfolio, which involves prioritizing investments in renewable energy, energy efficiency, sustainable waste management and clean transportation.
Impressive credit ratings
The New Development Bank obtained a AAA international credit rating from Japan Credit Rating Agency in August 2019, and a AA+ rating in 2018 from Standard & Poor and Fitch respectively. These ratings are considerably above the average for the BRICS countries. High credit ratings are a core aspect of the business model for multilateral development banks (MDBs). This is because access to domestic and international capital markets is essential to their operations. Bonds issued by AA+ or AAA-rated institutions have the highest credit quality – or, put differently, the smallest risk of default. A high credit rating therefore enables MDB’s to raise capital relatively cheaply from the bond markets and lend onwards at interest rates lower than what could be obtained by sovereign borrowers themselves. The lower cost of borrowing is a significant advantage for development finance institutions, as it enables the banks to pass on that benefit in the form of competitive interest rates for their loans.
Multilateral banks typically have two kinds of members: borrowing and non-borrowing. At present, the NDB is unique among its global peers in having only borrowers as shareholders. The bank has broken new ground in that there are no comparable financial institutions in emerging markets with such high credit quality and without any highly rated non-borrowing members as shareholders.
Local currency financing
The NDB has successfully registered local currency bond programs in China (RMB10bn), South Africa (R10bn) and is about to complete the registration of a ruble program (RUB100bn), with India and Brazil to follow next. To date, two RMB bond issuances have been completed in China, when RMB6bn was raised in two tranches of RMB3bn in 2016 and 2019 respectively. The bank is committed to making local currency funding available to all its member countries.
Traditionally, multilateral development banks have provided most of their financing in foreign currency, such as US dollars or euros. However, the volatility in currency markets has made borrowers much more sensitive to potential currency mismatches. Since most of the revenues of infrastructure projects are in any event denominated in local currency, it makes sound business sense to avoid the currency mismatch by raising bonds in the domestic capital markets of our members. Green finance has gained significant momentum in recent years, with the rapid growth in the green bond market. The NDB did its first capital raising in China as a green bond, and aims to be a regular issuer in green and sustainable finance.
These achievements took place in a challenging operating environment. Growing tensions in international markets, combined with other domestic challenges, impacted negatively on the macroeconomic climate in BRICS member countries. In addition, the foundations of international cooperation and multilateralism has been weakened and a worrying trend has emerged of protectionism and more inward-looking policies. Fortunately for the NDB, the BRICS countries are fully committed to protect the fabric of multilateralism and have provided strong shareholder support to the bank.
Looking forward, the NDB has three broad priorities. In the initial years, its lending activities were directed towards governments and state-owned enterprises. The focus is now shifting towards lending to the private sector and expanding the products beyond loans to include equity, guarantees and credit enhancement. Second, in line with the original intent of the founders, the process of membership expansion beyond BRICS countries will begin. Third, technology and innovation will transform the manner in which roads, ports, power and other infrastructure is designed and implemented. Major opportunities exist to tap the potential of these new technologies. As a freshly minted development institution, the bank aims to embrace and explore this potential.
The NDB has come of age. Given the scale of financing needed in BRICS countries, the journey to build a fit-for-purpose multilateral bank in a rapidly changing global landscape has just begun.
Leslie Maasdorp is vice-president and CFO of the NDB. He is member of the World Economic Forum’s Global Future Council on Infrastructure.