The coronavirus will affect the face and focus of development banks and commercial lenders, undermine balance sheets and credit ratings of sovereign states, and even alter how and if multilaterals fund themselves, a top development official warns.
In an interview with Euromoney, Tomoyuki Kimura, director general in charge of strategy, policy and partnerships at the Asian Development Bank (ADB), says the scale of the financial aid to be extended to member countries due to Covid-19 “will be far greater than the support they needed at the time of the Lehman shock”.
Kimura describes the coronavirus as a “more complex” challenge than the global financial crisis (GFC), which he watched unfold from his office in Manila. He said commercial banks had to balance the conflicting needs of shareholders and society, and determine what comes first, profit or people.
“This crisis is likely to negatively affect the balance sheets of commercial banks and undermine their profitability,” he says. “While I believe they are willing to support societies and economies and clients, they may well be less able to do so due to the impact of this crisis.”
Kimura points to the good work commercial banks do in green finance, supporting the UN’s Sustainable Development Goals (SDGs).
However, asked if they can maintain their focus on sustainability, with Covid-19 set to stretch balance sheets and temper profit, he says he has a “pessimistic view”. Banks, he says, “have to trade off [their] approach with profitability given [they] are not profit allocators but profit makers”.
On March 18, ADB president Masatsugu Asakawa unveiled a $6.5 billion funding package, on top of $225 million already committed to governments and businesses. The larger package includes $3.5 billion for troubled nation states, with $1.6 billion earmarked for micro-firms and SME, and for bolstering trade and supply chains.
Most of that will be short-term capital to be channelled to the private sector via financial intermediaries.
“[T]his is what is needed most at the moment,” Kimura says.
During the past week, the ADB has disbursed $500,000 to the Maldives, $1 million to Mongolia and $3 million to Indonesia and the Philippines, and more will follow.
Kimura says the ADB has the “financial capacity to provide additional resources while prudently managing risk”.
He said its financial situation is “far stronger today” than it was 10 years ago, due to several rounds of capital raising in the wake of the GFC, and the merger of the bank’s regular and concessional balance sheets.
Scale of problem
However, a big issue is that the ADB doesn’t know the scale of the problem it – or any of us – faces. The coronavirus has shaken markets and threatens to bring global production to a standstill. Yet the ADB “can’t estimate what scale of additional resources is needed, how many countries will need our help, or what countries face the greatest peril or even what future risks they will face”.
Asked to identify the main concern for the ADB and other development banks, Kimura replies: “The greatest risk we face is the potential credit-rating downgrade of our developing member countries due to the Covid-19 pandemic, especially those we have high exposure to. [The] ADB’s ability to continue providing support is contingent on maintaining a strong capital position.”
We have good experience in designing social protection such as our conditional cash transfer programmes. Such programmes can provide health and education grants, and support the most vulnerable people during this crisis- Tomoyuki Kimura, ADB
The bank will “reprioritize” its pipeline – likely meaning delays to some projects and the fast-tracking of others that improve public health. Kimura admits “adverse impacts are likely to be unavoidable on existing and planned projects”.
By looking to “focus on our areas of strength”, he said the ADB can mitigate the worst effects of coronavirus.
“We have good experience in designing social protection such as our conditional cash transfer programmes,” he says, which includes a $400 million package in the Philippines. “Such programmes can provide health and education grants, and support the most vulnerable people during this crisis.”
No one can visualize the world that emerges from these dark times, but Kimura points to a few likely consequences. One is the impact on infrastructure. He rewinds 30 years, to a time when infrastructure development in emerging markets “was our business, and there were very few commercial banks involved in that area”.
These days, banks are more willing “to lend to PPP [public-private partnership] projects and private-sector infrastructure, so the boundary between commercial banks and development institutes is more nebulous.
“As banks are less able to take on financial risks [after Covid-19], it may be that our roles become bigger. That will require more capital in the long term to maintain a strong balance sheet.”
And that is where a final but key challenge enters the fray. After the GFC, sovereign states were happy, even keen, to fund IFIs, but even before coronavirus, development banks were facing off against sovereigns wary of signing more cheques, particularly in the west.
Kimura saw this first-hand when the ADB negotiated ADF 13, the latest restocking of its Asian Development Fund (ADF), with the aim of funding operations from 2021-2024.
“[Prior] to the crisis, some [European] donors, said it is becoming more difficult to spend taxpayers’ money on emerging Asia,” he says. “They preferred instead to focus on Africa, and they expect the ADF facility to be more self-financed by ADB in the future.
“But then this crisis hits and it will impact our shareholders – to maintain this model will be more difficult, but even more important.”
Coronavirus will only “accelerate deployment of capital by multilateral development banks”, the ADB’s policy chief says.
The question is, where will the money come from?