It might not be the most obvious Triple A entity in the world. But the African Development Bank has its status as a multilateral development bank and the strength of its shareholders to thank for its Triple A ratings. It has avoided the impact of the credit crisis so far and seen interest in its activities at an all-time high, writes Savita Iyer.
The credit crunch that has hammered most debt issuers around the world has not had any impact upon the African Development Bank. On the contrary, the global repricing of risk and the flight to quality it has engendered have proven to be such blessings for the bank, that it has had no problems thus far this year raising US$1.2bn in a combination of public and private debt offerings – two-thirds of the US$1.9bn it requires for 2008.
Nor has the crisis in the global markets had an effect on the AfDB’s African Development Fund – the bank’s pool of cash used to make low-cost loans intended to aid the Africa’s development. Indeed, the replenishment of the ADF which was completed in December 2007 reached some US$9bn – the greatest ever, said the bank’s treasurer Pierre Van Petheghem.
“It’s clear that the donor community’s interest in the development of Africa is at an all-time high,” said Van Petheghem. “The interest in Africa has been growing alongside African growth, which has been increasing for the last six years. The entire environment in Africa is a lot more conducive to business now; many more countries are at peace, although there are still problem spots, and the policies of most countries are going in the right direction.”
But despite this positive momentum and the AfDB’s financial security, there is still a lot to be done to further the bank’s two major goals: the development of infrastructure – clean, safe water and power, in particular – and the African private sector.
These areas are where the bank continues to focus its greatest funding efforts, Van Petheghem said, and the two are inexorably linked, since proper private sector development can only help facilitate the requisite funds for infrastructure development.
Indeed, the private sector has been officially recognized as the engine of growth for African economies in the drive to reduce poverty, attain the millennium development goals and foster both economic development and regional integration, said Tim Turner, who heads up private sector operations at the AfDB. In 2007, the AfDB’s private sector operations reached a record level of US$1.5bn, compared to only US$420m the year before. The bank financed 17 private sector operations, six of which supported regional integration, Turner said.
Aside from the important role it plays in funding infrastructure projects, the private sector activities of the AfDB also focus on strengthening the financial systems of its member nations and improving the investment climate across Africa. Deepening local financial markets in Africa is extremely important, Van Petheghem said, for both the future development of these nations and the activities of the AfDB itself.
He cites the example of the three South African rand-denominated bonds issued by the AfDB, the most recent of which sold in early April.
“All these bonds were issued onshore in South Africa and sold to local investors, underscoring our goal of doing transactions in Africa that are denominated in African currencies,” said Van Petheghem. “Raising money in a local currency, then lending in that same currency, responds to the needs of clients who want more and more loans in their own currency to fund projects and generate revenues in their currency, in order to mitigate all foreign currency risk. This demand is still marginal today but we expect it to grow.”
Certainly, developing local capital markets is a pivotal part of long-term, sustainable development. The AfDB has already issued bonds in Botswana pula; Tanzanian shilling; Ghanaian cedi; Nigerian naira and Kenyan shilling, all of which were sold in European markets to international investors. And though South Africa is the market of the moment for local currency borrowings, Van Petheghem believes that other African nations such as Ghana and Gabon – both of which have had success borrowing for the very first time in international markets during very turbulent times – might well prove to be lucrative local markets of the future.
“For us, [the success of sovereign bond deals from] Ghana and Gabon are fantastic signals, and the fact that they can fund themselves on international markets, and, in the case of Ghana, use the proceeds for further development is extremely welcome,” said Van Petheghem.
So far this year, the ADB has issued bonds in the US, in Canada, Australia and New Zealand. Japan’s Yuridashi market has also been an important source of funding for the bank.