The European Bank for Reconstruction Development is gearing up for a wave of demand for emergency financing as the Covid-19 crisis prompts global banks to pull back from emerging markets.
Jürgen Rigterink, the EBRD’s first vice-president, says access to funding across the bank’s region – which covers 38 countries in central and eastern Europe and around the Mediterranean – has deteriorated since the start of the crisis.
“Global banks may be publicly insisting that their risk appetite towards emerging markets hasn’t changed, but when you dig a bit deeper, they will admit that their country ratings, and therefore their country limits, have decreased,” he says.
“That means capital markets will be less accessible and more expensive for borrowers from some emerging markets, and certain investors will likely pull back from these jurisdictions. We are already seeing former clients who haven’t needed our help for many years coming back and asking for support.”
Fortunately, the EBRD has plenty of firepower. The bank, which focuses on private-sector development, has €17 billion of available paid-in capital and accumulated reserves. It also has access to €23.5 billion of callable capital.
To speed up disbursements, on March 13 the EBRD’s shareholders approved a €1 billion fast-track funding mechanism. Requests for support through the ‘Covid-19 Solidarity Package’, which was increased to €4 billion on Thursday, will go through a streamlined approval process.
“For example, a normal proposal has to go through a two-stage review process, whereas for this we will do just one stage,” says Rigterink. “We have also increased the delegated authority we have from the resident board and reduced the timeline in which individual shareholders can raise comments.
“The idea is to give us more flexibility so that we can react much more quickly to client needs than before.”
What we don’t want to do is support very strong Western organizations to de-risk their balance sheet without any commitment from them that they will put our money to work in emerging markets- Jürgen Rigterink, EBRD
He notes that not all projects will be eligible for consideration.
“Where we have enough time or we are dealing with a new client, then we will go through the normal process,” he adds. “The new process will be for existing clients where we have already done the due diligence.”
Within a month, the EBRD had received applications for funding from the solidarity package worth €800 million, and on April 16 the first approvals were announced. Three Uzbek banks – Asaka Bank, Ipoteka Bank and Uzpromstroybank – were allocated $150 million in trade finance facilities.
Banks are also expected to account for a large chunk of the remainder of the package. The EBRD has traditionally relied on commercial lenders to deploy financing, particularly to the crucial small and medium-sized enterprise segment.
“We have more than 100 direct SME relationships, but our total direct exposure to smaller SMEs is less than €200 million,” says Rigterink.
Jürgen Rigterink, the EBRD’s first vice-president
Banks in the EBRD’s countries of operations are in a much better position today than they were going into the 2008 financial crisis in terms of balance-sheet strength, funding composition and capital buffers, Rigterink notes.
The EBRD is keen to ensure, however, that any funding disbursed to commercial lenders over the coming months is used for the intended purposes.
“What we don’t want to do is support very strong Western organizations to de-risk their balance sheet without any commitment from them that they will put our money to work in emerging markets,” says Rigterink.
“It’s good that banks are proactive and want to increase their liquidity buffers, but we want to make sure that we are not just replacing other players and that when we invest in a bank or through a bank, the money actually ends up where it’s needed in the real economy.”
Some of the hardest-hit countries in the EBRD’s region will likely be those that are heavily dependent on tourism, including Georgia, Montenegro and Croatia. Falls in remittances will also affect the likes of Tajikistan and Armenia, while central Europe is most vulnerable to disruption in global supply chains.
This crisis is clearly too big for any single government or institution to deal with, so we need to all work together as we did in 2008- Jürgen Rigterink
Rigterink notes, however, that the need for EBRD support will also depend on governments’ financial positions going into the Covid-19 crisis.
“There is a big divergence within our region in terms of fiscal policy space and hence the ability to support local businesses, including EBRD clients,” he says. “Countries such as Montenegro, Lebanon and Greece have less fiscal space than the likes of Kazakhstan, Bulgaria or Poland.”
The EBRD is already seeing strong demand from clients affected by the crisis.
“Among our clients, we are seeing liquidity stress due to payment and collection holidays, revenue loss due to reduced demand and price drops, and supply-chain disruptions,” says Rigterink.
“Currency deprecation is impacting debt-service capacity and increasing the price of imports; and even for good names the cost of funding is increasing. Already every week we have dozens of requests for payment deferrals, in some instances for debt rescheduling, currency conversions and liquidity support.”
Covid-19 has also hit the EBRD’s pre-crisis project pipeline.
More than 150 previously approved projects totalling nearly €3 billion have been postponed. A further €2 billion of projects have been removed from the pipeline. This decline has been largely offset by new project applications, however, and the EBRD’s investment target for this year remains unchanged at more than €10 billion.
“It’s hard to say how much will be part of the solidarity package,” says Rigterink. “We expect that almost all client proposals over the coming months will have some kind of crisis element. We may also see a difference in the composition of products.”
This could include a rise in direct investments in equity, an area that was side-lined during the recent emerging markets boom.
“So far, nearly all the financing requests we’ve received have been on the liquidity side, as is usually the case during a crisis,” says Rigterink. “However, I expect that in the next three to six months we will get more requests for capital support.
“Over the past few years the volume of equity investments by the EBRD has been relatively low, partly due to the fact that valuations in emerging markets were very high. As valuations fall there will be good opportunities for the EBRD to step in as a shareholder in many countries and many sectors.”
The second round of the solidarity package also includes a new vital infrastructure support programme that will provide working capital lines either through EBRD client banks or directly to municipalities and utilities – particularly small and medium-sized ones, says Rigterink
“We will also offer emergency and stabilization liquidity through direct loans to infrastructure providers and investment financing for public-sector clients that are unable to meet their commitments,” he adds.
He is adamant, however, that the EBRD’s work will not clash with that of other international financial institutions in its countries of operation.
“We are not competing with other IFIs, we are complementary to them,” he says. “This crisis is clearly too big for any single government or institution to deal with, so we need to all work together as we did in 2008.
“At the start of the crisis we immediately began engaging with other IFIs to coordinate and calibrate our response. We also reached out to our clients and to governments in the region to quickly take stock of the most urgent needs and adapt our response accordingly.”
The idea is for each IFI to leverage its comparative advantage, Rigterink adds.
“As the EBRD, we can bring to the table our private-sector focus and our strength in areas such as green transition, local capital markets and local currency funding capacity,” he says.
“Our regional and local presence is also particularly useful in this situation because our client intimacy is truly second to none.”
He also rejects suggestions that the Covid-19 crisis will affect the EBRD’s drive to improve environmental standards across its region.
“The greening of the economy is a long-term trend, and a crisis won’t stop it,” he says.
“There may be a short-term blip, because obviously if companies have to choose between survival and green, they will choose survival, but in the medium and long term, I think the green revolution we are seeing will, if anything, gain in pace.
“Technology is such that green energy has become cheaper than conventional energy sources.”
Crisis delays EBRD leadership succession
The Covid-19 crisis has affected the EBRD as well as its clients. Not only did the switch to home working across the bank prove challenging for its IT systems, but the appointment of a new president has also had to be postponed.
The incumbent, Suma Chakrabarti, is scheduled to step down in early July after eight years in post. Governors representing the bank’s 71 global shareholders were due to vote on his successor at the annual meeting in London in May.
After that was cancelled in late March, the election was postponed until the autumn. The EBRD has declined to give an exact date.
There has also been no clarification on whether Chakrabarti will stay on until a new president is elected or whether, as has happened previously, the first vice-president – in this case Jürgen Rigterink – might take over as acting president.
The candidates for the presidency have, however, been released.
The favourite is rumoured to be the French candidate, Odile Renaud Basso, head of the French Treasury. Other candidates are former Italian finance minister Pier Carlo Padoan and the current Polish finance minister, Tadeusz Koscinski.