Out of the shadows

Asian Development Bank Special Report 2018
15 min read
Steve Garton

President Takehiko Nakao says the Asian Development Bank can play a bigger role than ever in promoting the region’s development.

Walking down one of the long corridors in the ADB’s headquarters in Manila, it is often difficult to make out who is coming in the opposite direction. With the bright sunlight streaming in from a distant window, faces are hidden in shadow until they are close up.

In silhouette, the ADB’s profile today looks much the same as it did when Takehiko Nakao took over as president in 2013. On closer inspection, though, one thing quickly becomes clear: it’s bigger. Much bigger.

The ADB has added a few notches to its belt under Nakao. Strengthening its balance sheet in early 2017 by bringing together its ordinary capital resources and concessional funding has given the bank extra financial firepower, with over US$19bn of loans and grants approved in 2017 – up 46% from US$13.1bn in 2012. It has also expanded into new areas, embracing the use of alternative financings such as equity investments and revamping its suite of knowledge and advisory services.

Nakao is now overseeing the finishing touches to Strategy 2030, a long-term roadmap that will guide the bank’s objectives for the next decade.

The latest draft, which is up for discussion during this year’s annual meetings on May 2-5 in Manila, encapsulates the changes. While the current Strategy 2020 called for “An Asia and Pacific Region Free of Poverty”, the updated framework adds a number of new elements to the agenda: “Under Strategy 2030, ADB will sustain its efforts to eradicate extreme poverty, given the region’s unfinished poverty agenda, and expand its vision to achieve a prosperous, inclusive, resilient, and sustainable Asia and the Pacific.”

Nakao says a lot has changed since the previous document was written in 2008, before the global financial crisis.

“There are so many changes,” he said. “We face the reality that we still live in such a volatile world, and capital movement often causes some volatilities, even crises. We know that. We should care more about disasters, and climate change is becoming more imminent. There are global goals – SDGs [Sustainable Development Goals] – and the Paris agreement. We should care about all these issues.”

This does not mean the ADB is abandoning its roots. Nakao says Asia has made “remarkable progress” in poverty reduction, but that mission is not yet complete. Some 330 million people are still living below the poverty line of US$1.90 a day.

ADB has the firepower to take on the expanded challenge. The merger of the concessional Asia Development Fund with the bank’s ordinary resources added US$30.7bn to the bank’s reserves at the start of 2017, taking its equity capital to US$50.3bn without the need to call on shareholders for a general capital increase – no easy task given the current US administration’s hostility towards the multilateral system.

With an agreed minimum equity-to-loan ratio of 34% (a conservative number by any commercial bank capital standard), the new capital structure means the ADB can take its outstanding loans from the current US$100.9bn to close to US$150bn before it needs to ask for more money.

That, according to Nakao, will fund the ADB’s operations to 2025.

“Although it’s not realistic to keep up with the speed of growth of GDP in Asia … we at least want to increase our lending and grant operations without seeking a capital increase,” he said.


There is no doubt that the bank has the opportunity to do more to support Asian development. Finding a consensus around where those resources should be deployed, however, has been far harder.

Some shareholders want it to prioritise lending to the poorest countries, in keeping with its traditional mission of eliminating poverty. Others want it to broaden its vision, to keep pace with new and emerging challenges across its entire membership.

Nakao argues the bank can satisfy both camps.

“Generally MDBs are (being) asked to do several things. One is to use our own equity more efficiently, which we did. Another is to make our system more efficient, including human resources and so on. We are asked to mobilise and catalyse more private resources, in addition to our own resources, by promoting cofinancing with the private sector operations, by doing more work related to PPP … Some shareholders want us to pay more attention to poorer countries instead of upper-middle-income countries.

“We are doing these things. But in our strategy we want to continue to engage upper-middle-income countries, like China.”

This approach is reflected in the Strategy 2030 document, which calls for the bank to take a differentiated approach to its engagement with developing member countries. The framework proposes to treat borrowing nations in three distinct groups: upper-middle-income countries, where the ADB will focus on knowledge sharing and promoting resilience rather than pure financing; low-income and lower-middle-income countries, where long-term financing will be more important; and the small island nations and conflict-affected situations, where the ADB will prioritise financial support and expand its concessional operations.

“It’s not to move away from upper-middle-income countries, but we think different approaches work for different countries,” said Nakao.


China, Asia’s biggest economy, remains a major borrower, accounting for about 15% of the ADB’s operations. It is hard to argue that, with US$3trn of foreign exchange reserves, it needs the ADB’s money to build more bridges or roads, but recent projects suggest it does see value in the bank’s expertise.

The ADB has signed a string of projects in China that focus on environmental issues, such as a US$499m loan last November to help improve air quality in Beijing, the third in a series since 2013, and US$1.2m of technical assistance to support research into carbon capture and storage technology, approved in March.

Nakao met China’s then Finance Minister Xiao Jie five times in 2017, underlining the extent of the partnership on both sides.

“It’s not lending; it’s not the money they care about. It’s about financing together with knowledge,” said Nakao. “We are doing things together. We share knowledge together. That’s very important.”

There are other reasons to work closely with China, given the country’s importance in the region and the introduction of two new, China-backed multilateral development banks, the Asian Infrastructure Investment Bank and the New Development Bank. In all cases, the ADB intends to work in partnership, not opposition.

“For Asia, engagement with China is so important. Without China as a borrowing country our influence and our relevance in this region is more limited,” said Nakao.


Nakao wants the ADB to move with the times, and is positioning it as a modern, technologically sophisticated institution – not the slow-moving multilateral model that has attracted criticism in Washington and elsewhere.

The Strategy 2030 blueprint makes specific reference to supporting the development of the digital economy across Asia, as well as transforming the bank’s own approach to enhance access to its knowledge and create a ‘culture of innovation’ to respond to its clients’ needs.

Work is under way to upgrade the bank’s internal systems. And regular visitors will notice that, already, the WiFi routers throughout the Manila offices are far faster and more reliable than before.

Nakao sees technology as an opportunity to accelerate Asia’s development, through the use of more efficient supply chains and productivity gains that can boost consumption and drive economic growth. He points to a recent visit to Dhaka, Bangladesh, where an ADB-backed US$536m project to finance monitoring systems and metering has helped cut losses from the city’s water supply to less than 3%.

“We need to redouble our efforts to pay attention to the most advanced technologies, new ideas,” he said. “It is really a challenge. If we are not agile enough to take in new technologies we will lose our relevance.”

This commitment to embracing technology includes exploring new financial instruments.

Private sector operations accounted for US$3.2bn of the ADB’s US$19.1bn of commitments approved in 2017, and included some novel – and profitable – investments.

The bank invested in the initial public offerings of two Thai power producers in 2017, taking a Bt1.97bn (US$57.7m) stake in B Grimm Power’s July listing and committing a further Bt2.88bn to Gulf Energy’s November float. Those have been enormously successful investments so far, handing the ADB a total paper profit of US$87m with the stocks up 67% and 48% at the time of writing.

The ADB is also poised to take a US$57.5m stake in Bangladesh’s Summit Power International as a cornerstone investor in its Singapore Exchange IPO. That stock is due to begin trading on April 30.

“We are increasing our private sector operations, both through loans to private sector companies and investments in private equity. If we can make some money from it, that impacts our equity, and our lending is based on the equity-to-loan ratio,” said Nakao.


Nakao hopes that these changes will ensure that the ADB remains relevant as the region continues to grow.

The bank is projecting a healthy 6.0% growth rate across developing Asia in 2018, up from its earlier estimate of 5.8% as a result of strong global trade flows and rising domestic demand.

But he acknowledges that the growing popularity of protectionist policies, especially in the US, is a risk for the region.

US President Donald Trump has escalated trade tensions with China in recent weeks, imposing tariffs on imports of steel and aluminium in March and threatening to target another US$150bn of Chinese goods in early April. That has triggered a tit-for-tat reaction from China and raised fears of a trade war between the world’s two biggest economies.

“To me what is important is to understand why this happens and to address these inequality issues and jobs issues in more constructive ways,” said Nakao. “Of course trade barriers and protectionist policies should not be the answer, but at the same time what the US has been doing, yes it’s worrying, but it is very specific.”

Nakao points to a very strong increase in trade in 2017, with exports rising 4.9% and imports by 7.7% in real terms in the region’s 10 largest economies, as a reason to be confident for Asia’s future. With solid growth in China, firmer commodity prices and improved intra-Asian trade links, trade flows can withstand the threat of tariffs.

“I’m not worried about trade, in short,” he said.

The US administration’s focus on stimulating the domestic economy has seen it turn away from global institutions, adding to the challenge for multilateral development banks that count the US among their major shareholders.

US Treasury secretary Steven Mnuchin rejected a US$13bn capital increase for the World Bank in October, complaining that it was not using its existing capital well enough.

But the Trump administration has proven hard to read. Recent reports of a deal between Mnuchin and World Bank President Jin Yong Kim suggest that the US may be willing to back the capital raising if the bank scales back its lending to China.

Trump has also claimed his openness to a trade deal with China – at least in his tweets – and has floated the idea of rejoining the Trans-Pacific Partnership, the Obama-era trade deal that he had enthusiastically rejected only three days after his inauguration.

Nakao does not see a big impact on Asia or the ADB’s operations, though he is keen to point out that all the bank’s shareholders have a say in its operations.

And when it comes to securing donor support for concessional operations and climate initiatives, Asia’s growing economies are also taking up some of the slack.

Nakao notes that South Korea and China have expressed willingness to increase their concessional support, even if the US approach has become “more rigorous”.

“I’m not worried about concessional support for us,” he said.

But in some ways the US has had a big hand in shaping Strategy 2030, by forcing multilaterals to review the way they go about operations and be more efficient in how they use resources.

The 2018 annual meeting is a case in point. The last time Manila hosted the meetings, in 2012, it used the Philippine International Convention Center across town. This time, the sessions are to be held in the ADB’s own headquarters in Ortigas, keeping the costs down in an environment that Nakao says will be “less ritual, less ceremonial, with more concrete discussions”.

Technology, again, is in line for a central role in the discussions.

“One (objective) is to renew our collaboration with the host country. Another is how Asia can continue to grow and reduce poverty based on its growth momentum and new technologies,” said Nakao.

“Technology is one of the important issues to make this meeting more interesting.”

To see the digital version of this roundtable, please click here

To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com

Out of the shadows