NDB can support emerging markets’ upward trend

Source:Global Times Published: 2018/9/10 19:23:39

Leslie Maasdorp Photo: VCG

Editor's Note:

Last month, Fitch Ratings and S&P Global Ratings (S&P) predicted a stable outlook for the New Development Bank (NDB), which was set up by the BRICS (Brazil, Russia, India, China and South Africa) to mobilize resources for investment in infrastructure and sustainable development projects in emerging economies. The NDB has been playing an active role in projects in Africa and other continents since it was founded in 2014. The recognition by two top international rating agencies marks a milestone for the multilateral finance institution, as well as the achievement of the BRICS. While the 2018 Forum on China-Africa Cooperation (FOCAC) summit was held in Beijing, Global Times (GT) correspondent Bai Yunyi interviewed Leslie Maasdorp (Maasdorp), vice president and chief financial officer of the NDB, to discuss the bank's management practice and how it has been able to get to such a robust position.

GT: Recently the NDB received an AA+ rating from S&P and Fitch Ratings. What does this mean for the future development of the NDB? How has the NDB managed to get this high rating in such a short time?

Maasdorp: A high credit rating means that the bank is very credit-worthy. There is a very low probability that it will ever default. A bank that has a high rating can also raise money in the debt capital markets cheaply. In other words, our cost of funds is very low, which means we can use that money to lend for projects in our member countries, and this is a multilateral development bank's essential function.

A high credit rating also gives us the ability to raise money internationally, for instance in London or New York, and in any of the major stock exchanges. So the bank will be able to significantly expand its lending, and its ability to help build more dams, more power stations and more infrastructure projects.

The second significant aspect I want to highlight is that this year we lent mainly to governments and to state-owned enterprises. But we are now also lending to the private sector, because there's a huge financing gap between the infrastructure that is needed and the amount of money that is available. Obviously, a high credit rating helps us to mobilize more private sector funding, because it makes people want to do business with you.

Regarding why we could get this high rating in such a short time, basically a rating depends on a number of factors. Firstly, it depends on having very high capitalization, which means you've got a huge amount of capital from your member countries. Many multilateral development banks have a capitalization smaller than ours.

The second reason is our leverage ratio is very low. When we give loans for every two dollars, we have one dollar in the bank, while commercial banks have a much higher leverage ratio. So we are more conservative from a risk management perspective.

We also have very strong support from the five member countries. Nowadays, more than half of the world's foreign exchange reserves comes from developing countries, and they are the main contributors to economic growth. Obviously, the credit agencies recognize this support.

GT: When you make loan decisions, what kind of projects do you prefer? Do you take into account the social impact of these projects?

Maasdorp: We focus on developmental impact. We don't do projects for short-term commercial returns. This bank has been created, like other multilateral banks, to focus on the long term. So we look at economic, developmental and social impact. We would, for example, sometimes build a road even if there's no immediate economic return from the project. But we know if you link rural areas to urban areas, people will be able to take agricultural products to urban areas and sell them at higher prices and have a better quality of life. So we look at projects in terms of the development impact that they will have.

We also look at environmental sustainability as a major issue. The projects have to demonstrate they can reduce carbon emissions. As China has developed over the last 35 years, there has been massive damage to the environment as a result of the rapid growth. The quality of air, water and soil have been affected.

So China is now focused on cleaning up the environment. Almost every project we're doing here in China is clean. For example, we've got a solar rooftop project in Shanghai, which is focused on creating more renewable energy.

GT: Making the best possible loan decisions, free of political bias, is always a challenge at multilateral development banks. How does the NDB avoid that trap?

Maasdorp: The bank is a creation of the governments, and the governments are the shareholders. They provide strategic oversight for the bank, but the bank runs on a commercial basis, meaning that the bank makes its own decisions. For example, there's an investment committee with five people - the president of the bank, plus four other vice presidents. Five of us make investment decisions, but there's no government representation here. We obviously listen to what the governments' medium-term priorities are, we look at the governments' strategic national development plans, and then we make decisions independently. So we can say it in this way: We take into account the political variables, but we are not directed by the governments.

GT: For many emerging economies, corruption is a considerable challenge. How does the NDB make itself corruption-proof?

Maasdorp: Corruption is a modern challenge that you find throughout business as well as in government. It is very important for banks like ourselves to have firm and clear policies to start with. The NDB has a very strong anti-corruption policy, and if a project doesn't meet our threshold, we would simply walk away.

Also, we conduct strict legal due diligence on every single project. The project design and its appraisal process are very vigorous within the bank. And we can walk away at any stage from a project if we feel that there is evidence of corruption.

GT: Nowadays a lot of emerging economies are facing serious problems - China is in a trade row with the US, Russia has been hit by sanctions from Western countries, and Brazil is still in recession. How will the NDB cope with this situation?

Maasdorp: It is a troubling time for many emerging markets right now. The first point that I would make is that this bank was created with very long-term aspirations. As I said earlier, the trajectory of emerging markets and the proportion of their contribution to the world economy is going to increase significantly in the next 10 or 20 years. Everybody, even emerging market skeptics, will tell you that.

When you look at which will be the top 10 economies in 2050, six or seven of those economies are emerging markets. You can find this result in all the studies. So the long-term trajectory is promising because demographics is an important driver of economic growth in most of these countries. For example, 40 percent of the entire labor force in the world in 2050 will come from Africa, because the population is so young.

Developing countries will continue to drive economic growth. There will be cyclical downturns, but the overall trajectory is upward. As a bank, we acknowledge that there are challenges that these countries face and we take note of it, but we are highly rated so it doesn't really affect us in a direct way. We believe our member countries have plans in place to come out of the economic downturn.

Posted in: INSIDER'S EYE

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