General Emerging Markets

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Frontier Debt’s Exacting Exploration Excitement

2020 April 2 by

Following consecutive years of double-digit gains above the core sovereign bond benchmark, and with crowded trades in the main emerging market local and external instruments, investment houses pre-virus were touting fundamental frontier allocations based on diversification and underlying country improvements. They argue that risk re-pricing can partially offset illiquidity, although the credits have not been tested in crisis and remain outside standard ETFs, Last year’s big winners were Egypt and Ukraine, while Kazakhstan and Kenya lagged the JP Morgan EMBI and GBI-EM indices. A major debt and equity rebounder predicted for 2020 is Pakistan with another IMF program, with inflows into domestic Treasury bills yielding almost 15% as the currency stabilizes. Economic growth will be 2-3% on fiscal and current account adjustments, as double-digit inflation drops from prior depreciation and bad farming results. The balance of payments gap should halve to 2.5% of GDP with import compression, as reserves are bolstered by fresh foreign direct and portfolio investment. The exchange rate stance has moved from pegged to flexible and at 155/dollar currently is roughly fair value. International reserves remain negative on a net basis but Fund injections aim to restore balance, with the government coalition in slight majority in parliament. Tax revenue may reach 15% of GDP this fiscal year on a wider base and with spending cuts almost eliminate the primary deficit. Energy reform will entail costs over time, and anti-money laundering compliance is outstanding to avoid FATF sanctions. Geopolitics is not in the equation, with India again stoking tensions in Kashmir and denying Muslims future citizenship under a proposed law. Daily T-bill market turnover is over $300 million, with frequent auctions and narrow bid-ask spreads compared with frontier rivals, on 10% withholding tax according to JP Morgan research.

In Africa Ghana and Nigeria are back in favor after foreign investors were subject to access and rule changes resulting in the latter’s local index exclusion. Ghana’s twin deficits are under stricter control heading into end-year elections, with a several billion dollar financial sector cleanup consolidating banks and holding executives accountable for crimes and mismanagement. The crackdown suspended bank shares on the stock exchange prompting removal from the MSCI frontier rung, and potential reinstatement awaits the index provider’s next review. Inflation is in single digits as the central bank is poised to lower 15% interest rates. The current account gap is put at 4% this year, but the currency should be steady on external bond inflow momentum and calmer capital flight after successful poll transitions. A good medium term yield curve is offset by thin trading, but authorities are trying to launch derivatives for further liquidity. In Nigeria the reserve drain has bottomed at around $35 billion, and the central bank has turned its attention from currency intervention to reigniting credit and economic growth. It recently barred domestic buyers from high-yield open market operation (OMO) paper so that banks eventually have more room to extend loans especially to non-oil smaller business. Pension funds and corporations shifted their portfolios into other government instruments, and foreign investors now holding half the amount will be the main OMO target to whet their broad fixed income appetite. The naira after previous convulsions should only fall toward 370 over the coming months as import and dealing grips relent from past seizure.

The World Bank’s Empty Shaft Prospecting

2020 March 26 by

The World Bank’s January Global Economic Prospects issued before the coronavirus surge found “marked deceleration” in global growth last year affecting over half of emerging economies, with the average around 3.5% on weak manufacturing. This year’s projection is only 4%, half a point below previous forecasts, as trade will only expand 2% despite the US-China first phase deal. “Subdued” financial market sentiment will continue and flatten commodity prices, and even with monetary easing about one-third of the developing country universe can expect lower growth. In the medium term low income countries will set the fastest pace at 5.5%, but per-capita income and poverty levels will barely budge. High debt and lagging productivity block anti-shock capacity as traditional policy space is thin. Food and fuel cost controls mask actual inflation, and fiscal deficits limit countercyclical spending as tax bases are unable to support investment and social safety nets. Business climate improvement and technology integration are unfinished agendas, as weather emergencies and energy needs demand “green” solutions, according to the publication. China’s expansion will dip under 6% for the first time in three decades, with total debt over 250% of GDP. Both exports and domestic demand are down, and budget and credit measures cannot reverse the trend. The drag contributes to Asian cross-border goods and services slowdown, with construction and tourism softening for the latter. Protectionist levies affected over $1 trillion in world commerce last year, overshadowing a few new bilateral and multilateral free trade accords most notably a Pan-African one.

Over $10 trillion or one-quarter of global debt has negative yields, spurring emerging market borrowing at narrow spreads although lower-rated sovereigns may not benefit. Most currencies continue to depreciate against the dollar, and FDI slipped in all regions through the first half of 2019 outstripped by remittances. Oil was off 10% to $60/barrel, and agricultural and metals values also fell. Commodity exporters grew just 1.5%, half the figure for importers led in Asia by China and the Philippines. Almost the entire pickup this year will come from a handful of major markets, including Brazil, India, Mexico, Russia and Turkey. Extreme poverty defined as living on less than two dollars a day dropped by a billion people in recent decades, but double that number have no basic sanitation access. The infrastructure elements of the Sustainable Development Goals call for unlikely annual investment over 5% of GDP for poor and middle-income economies, with Africa especially at the bottom as conflict and penury concentrate there, the report warns. On purchasing power parity basis China is now one-fifth of world output and integral in auto and other supply chains at risk from further tariff and geopolitical struggles. Emerging market credit booms have been mostly for consumption, and contagion may center on common foreign investor ownership of local bonds. Social unrest and climate change have economic and financial implications across the asset class yet to be calculated, and China’s excessive leverage can best be tackled over time that may not be available. Almost half of developing markets have insufficient reserves, and macro-prudential policies often stifle banking and securities modernization. Output per worker is less than one-fifth the advance economy result, with a century required to close half the gap as another grim reading.

Low Income Economies’ Bottoming Out Bottlenecks

2020 February 28 by

The IMF with a new managing director in place committed to boosting poor country performance, released a mixed annual assessment of 60 members in the category, defined as per capital income under $2700. It covers one-fifth of world population but only 5% of output, with average 5% GDP growth through 2019. Commodity producers lagged more diversified exporters and fragile states were at the bottom. Public debt rose in half the group, and the tax/GDP ratio remains below 15% despite VAT application potential. Bank failures with weak resolution and deposit insurance schemes were a drag, and the longer-term outlook is tied to productivity and business climate improvements along current emerging market standards, the paper notes. It underscores “striking heterogeneity” between fuel and non-fuel commodity frontier market spreads with international financial access. Oil prices rebounded the past year in contrast with the agriculture and metals complex, and half a dozen African sovereigns were repeat bond issuers. Tajikistan, Papua New Guinea and Benin debuted, but half of markets do not receive portfolio inflows and FDI is still the dominant overall source. Remittances and aid increased, but the latter merely retraced previous drops. Growth leaders like Laos and Rwanda benefited from relative diversification and large-scale infrastructure projects, while disaster and war-affected Afghanistan and Mozambique were laggards. Commodity economies have smaller average fiscal deficits at 2.5% of GDP, with tax collection unchanged despite priority status under the Addis Ababa domestic resource agenda. Policy and revenue administration reforms helped selectively, but VAT design and implementation is an outstanding task. On public debt primary and off-budget deficits have been the main drivers, with 45% at high risk or in distress. Non-fuel exporters had the worst current account gaps at 5% of output, often due to capital equipment import surges. International reserves are under the three months trade need threshold, and inflation moderated to 4%, with flexible exchange rate countries easing the most. Interest rate reduction followed, but private credit slackened in one-third the cohort.

On an ominous note, the evaluation cited financial sector difficulties in 40%, double the fraction in 2016. Bank capital adequacy is stable, but bad loans have spiked above 10% in half of countries on a combination of factors, including lower export values and mounting government arrears. Correspondent relationships ended over money laundering and terrorism concerns in places like Nicaragua, Solomon Islands and Nicaragua. Almost 40% of the population now has account access with mobile catalysts, versus over 60% in emerging markets. Only one-tenth if customers have any savings, and private credit to GDP is minimal at 20%. Human capital in terms of education and health is a basic obstacle but labor quality, technology, and the investment climate are broader considerations for infrastructure and World Bank “Doing Business” attention. Power grids and school enrollment have expanded from low bases, with efficiency and results still to be tested. Environmental and China trade risks also cloud the future, with a cross-section of poor economies in the value chain or shipping raw materials for Asian demand. Through the publication date Chinese “A” shares up 30% continued to top the core and frontier MSCI indices, with the so-called “Next 11” barely positive reflecting Fund ambivalence.

Index Performance’s Elaborate Endurance Formula

2020 February 13 by

With a last quarter surge after a rocky start in 2019, the main emerging market stock and bond indices managed 15% gains, largely due to relief from negative economic policy and performance expectations. The US Federal Reserve reversed signaled monetary tightening; Washington and Beijing agreed to roll back retaliatory tariffs in their trade and investment showdown; energy and food price inflation resisted geopolitical and climate stress; and developing country growth was only around half a percent below the magic 5% threshold investors consider fast-track. With this worst-case avoidance including, plunge into advanced economies’ negative debt yields, a handful of currencies were up against the strong dollar, as the Dow Jones Index’s return was double double the MSCI benchmark.

Fund flow numbers for the year were over $60 billion positive and $10 billion negative for the respective fixed income and equity asset classes, with retail support the key driver, according to data trackers. On a regional basis, Asia was the best stock performer as its top export technology was also the leading sector. Europe and Latin America lagged from crises in Turkey and Argentina, while the latter experienced a broader setback as civil unrest over stagnant incomes spread throughout the continent. In structural reform, India as a standout example lost luster as it threatened new taxes and restrictions and grappled with non-bank collapse into Prime Minister Modi’s second term. In China second-tier banks were rescued but wider feared carnage did not materialize, but in 2020 economic and financial sector woes must be handled more decisively if fund managers are to retain faith in immediate fundamentals and the longer term major emerging market story.

So-called frontier markets were more judged on individual merits in 2019, with a mixed outcome. Dedicated mutual funds showed outflows, and their returns exceeded the index on external sovereign debt but lagged the equity core universe. Central Europe had this split result, as Ukraine bonds rallied after presidential and parliamentary elections but stocks slid. In the Middle East, the landmark Aramco oil company flotation valuing it at $2 trillion on the Saudi Arabian bourse grabbed headlines, but attracted only local buyers as foreign ones questioned governance and transparency.  Lebanon was at the bottom of performance ranks as street protests coincided with bank runs, exchange rate depreciation, and possible debt default. In Africa Kenya’s 40% jump was an exception to disappointments elsewhere, including a decline half that size in Nigeria. The region was virtually alone in promoting a breakthrough direct and portfolio investment narrative, as a 40-member pan-African free trade agreement was signed, which will be under scrutiny this year for initial implementation.

While traditional metrics did not meet an affirmative test or got benefit of the doubt last year, the renewed screening bar going forward will be complicated by acceptance of ESG criteria as important allocation factors. Environmental, education, health, and corporate and government integrity issues increasingly feature in analysis, amid launch of new industry associations and category benchmarks. Green bonds, including from emerging markets China, Korea and Brazil, have grown to $250 billion outstanding despite continued issuance classification and cost difficulties, as global mainstream investors pledge higher exposure. The Ebola virus resurfaced in Africa, and the swine flu epidemic in Asia is a lingering concern. In Latin America the Venezuelan displacement crisis reached historic proportion as millions flee economic and social misery for neighbors caught in their own poverty and rule of law vise. For 2020 the United Nations requested over $1 billion in international aid, as a previous appeal for half that amount fell short. December‘s Global Refugee Forum in Geneva urged private finance to help fill the gap, previewing future contours of the emerging market selection matrix. Winners this year could be countries like Colombia, intent on preserving an investment grade rating with fiscal discipline steps and displaced population funding innovation, as the asset class lure turns more creative and insistent.

USAID’s Private Sector Curt Courtship

2020 January 30 by

As the new Development Finance Corporation absorbs its credit guarantee arm and its first leader with a health care investing background promises transformation, AID proper is spotlighting its 50-page private sector involvement strategy as a breakthrough in its own right despite lingering business and financial community doubts. At the outset it acknowledges that donor agencies alone cannot realize the UN’s Sustainability Goals, and that complex conflicts and disasters demand original humanitarian response. The outreach across all programs and project cycles fits with the ultimate aim of self-reliance through market-based solutions and systems to enable country graduation, according to the Administrator. The document cites existing collaborations like the thousands of companies in the Global Alliance and dedicated food and power initiatives accounting for tens of billions of dollars. Joint work applies across infrastructure and thematic sectors like democracy and governance and has been successful in housing and payment pilots in tough locations Afghanistan and Haiti. Partnerships can be formal or informal but depend on mutual trust often lacking with preconceptions about commercial and foreign policy interests. When AID was created fifty years ago private capital was just one-quarter of total low and middle-income economy flows versus 85% today, even though fragile states are bypassed altogether. Over the next decade consumer spending in these place will grow three times faster than in advanced economies, as one-quarter of funds worldwide are managed with environmental and social screens. The private sector creates 90% of developing world jobs and spearheads technology transfer and supply chain integration. It joined with the Agency to promote Digital Principles with over 50 multinational firm signatories, and can help close the women-led business gap estimated at $300 billion annually. In this fashion the government can offer networks, policy expertise and convening power to harness innovation and scale and produce shared knowledge and concept applications. Other financial tools beyond credit authority are available As in Africa and Central America with agricultural lending and resource pooling feasibility studies and test cases can introduce lasting changes, the strategy emphasizes.

While recognizing the importance of due diligence it pledges to honor intellectual property and proprietary information, and avoid potential market distortions. The paper charges all missions abroad and headquarters units with preparing action plans and measuring results, and setting a longer-term evidence and learning agenda. An appendix lists “myths’’ that should be put to rest, including that profit motive is anathema, and that procurement rules bar separate commercial communication. Traditionally the focus was associated with economic growth, but the intent now is to encompass all activities. Despite the bottom-line ambitions in the outline, critics point out that President Trump’s overall aid priorities are for massive cuts and ties to domestic political imperatives. In the Ukraine saga military support has been in the headlines overshadowing an active financial market development program over decades since post-communist independence. Efforts there were often plagued by local corruption and lack of capacity that emerging market investors were quick to highlight as obstacles to be subject to combined crackdown. Privatization through the dormant stock exchange could be a vehicle for engagement proof, but union will be on hold pending the outcome of the simultaneous impeachment ceremony.

US Development Finance’s Forgotten Franchise

2020 January 17 by

The new US International Development Finance Corporation (DFC), merging the foreign private investment promotion agency OPIC with the credit support functions of the main overseas development arm USAID, started in October with rare bipartisan political and consensus emerging market expert backing. Recommendations to overhaul the decades-old model dated back to the Obama administration. It gained momentum under President Trump, who has otherwise moved to cut economic assistance, as a financing and geopolitical competitor to China’s global multi-trillion dollar Belt and Road Initiative. The restructuring doubled OPIC’s original balance sheet exposure limit to $60 billion, and added equity to debt, guarantees and risk insurance in the toolbox to spur direct and portfolio inflows to low and middle-income countries.

A September report by the Washington-based Center for Strategic and International Studies (CSIS) acknowledges that the DFC cannot match China’s policy banks and state enterprises “dollar for dollar” in underwriting infrastructure and natural projects throughout Asia, Africa and Latin America. It advises focus on other potential comparative advantages such as technology transfer, small business funding, and capital market creation.

This last category, concentrating on stock exchange launch and modernization, can be an all-encompassing theme with maximum “bang for the buck.” At the same time, it could revive the US aid establishment’s glory days during the 1990s and early 2000s, when securities market introduction was a priority in post-communist and socialist transition economies in Europe and frontier and developing markets worldwide. Emerging market investors, in search of an underlying story for the asset class into the future, could in turn organize dedicated advisory groups as in the past.

CSIS predicts that internal administration and strategy delays will likely keep annual DFC commitments below $10 billion in the initial phase. It begins with 300 staff and a 90-country portfolio, and a lower minimum US investor participation requirement. A fifteen-member board of directors from the cabinet and outside government, and independent panel of academics and advocates yet to be named, will provide governance and guidance. Inherited operations total close to $25 billion with a roughly even split between regions, and one-quarter in “fragile” states.

From a foreign policy perspective, job creation and private sector growth are priorities in the Middle East and Africa to counter terrorism, and in Central America’s Northern Triangle of El Salvador, Guatemala and Honduras to curb mass migration. In Africa, the intent is to leverage parallel US government programs on power generation and trade.  DFC also has expanded authority to offer technical assistance and local currency debt guarantees and to diversify the range of existing venture capital “enterprise funds.” Earlier versions spurred private equity takeoff throughout Central and Eastern Europe, which in turn spurred European Bank for Reconstruction and Development support for public markets.  

OPIC, over its 40-year life, could claim no net cost to the taxpayer as earnings were returned to the budget, often under risk-averse management as high-return assets subsidized poor country engagement. USAID over the past fifteen years largely abandoned capital markets as a core emphasis, as technical assistance shifted to a small Treasury Department unit promoting government bonds throughout the developing world.

After the fall of the Berlin Wall thirty years ago, the US administrations relied on a private sector ecosystem to advance financial market transformation that has since withered. Wall Street bankers and fund managers took short-term assignments in Europe and elsewhere under a Financial Services Volunteer Corps still in existence, and the Nasdaq dispatched experts and encouraged nascent stock exchanges to adopt its over the counter system, as with the Rasdaq in Romania. After the emerging market term was first coined in the late 1980s, Washington had a roster of brokerage executives on hand to travel to far-flung destinations like Kenya preaching the securities gospel.

The African Development Bank has since launched its own initiative mainly for bond markets, and the continent now has half a dozen regional equity components on the benchmark MSCI frontier stock market index. Performance has been overwhelmingly negative this year, as foreign investors decry chronic liquidity and size constraints. Stock exchanges in East and West Africa have long explored cross-trading and consolidation with little progress, as South Africa remains the runaway depth and diversity leader, according to an annual reference compiled by regional banking giant Absa in collaboration with London’s Official Monetary and Financial Institutions Forum (OMFIF). The continent and other overlooked regions such as Central Asia, where Uzbekistan is in startup mode, could be early targets for DFC “soft” infrastructure help in contrast with China’s approach. The payoffs would come in stock market volume and results reflecting increased private company access to finance in the frontier universe, as well as official reputation and investor coalition revival for an impressive triple bottom line debut.   

Sovereign Debt’s Unprincipled Practice Path

2019 December 6 by

The IIF’s annual report on its 15-year old voluntary market-based sovereign debt restructuring principles and related investor relations practices offered mixed sustainability and transparency views. It noted that emerging debt is over one-quarter of the $250 trillion global total, above 300% of GDP, and that half the frontier country amount is in foreign currency with associated refinancing risk. Excluding China, non-resident capital inflows will rise $75 billion to $700 billion this year on yield search despite trade battles, as interest expense increases as a budget item at the same time climate change costs are absorbed. The report finds that good policies and communication over the past decade since crisis have bolstered confidence, as it probes recent defaults in Barbados, Congo, and Mozambique to draw cautions. It focuses on the 35 recipients of official debt relief under a program coinciding with principles launch, with private investors now holding one-fifth of public external obligations. Non-Paris Club bilateral creditors and episodes of “unreported debt” are now prominent. Zambia may soon fall into the hidden and restructured category, and Gambia is a special case where overlapping lines from “plurilateral” providers must be resolved.

Mozambique’s Eurobond exchange offer is due end-October with a collective action clause to reach near unanimous participation, following years of fitful dialogue with discovery of unauthorized loans and IMF program suspension. The former finance minister and Swiss and Russian bank executives are under indictment in the US for corruption and bribery, and the country’s constitutional court struck down previous government guarantees on tuna company debt. The new bond yields are half the former 10% until 2023 when they again revert, with maturities stretching past 2030. An engagement provision reflecting the London-based International Capital Markets Association model was added, and the Fund disbursed an emergency $120 million credit in cyclones’ wake. However debt/GDP is above 100% despite two-thirds at concessional rates, evoking the prospect of near-term renegotiation. The Congo Republic rescheduled with Chinese sources, including unaccounted for construction facilities with the Public Works Ministry. Over $350 million was cancelled, and the IMF approved a $450 million arrangement in July with $900 million in commercial and official arrears still outstanding. Two big oil trading firm are in “good faith “talks with the amount due approaching China’s 20% of GDP and complex pre-financing structures delaying resolution.

Barbados reorganized domestic debt at 80% of the load last year, and proposed large haircuts and maturity extensions international bondholders initially rejected. It received a fresh package of bilateral and multilateral loans after finding pension liabilities hiking the GDP ratio to 150%. Central bank claims were excluded from the local workout, which paved the way for a $300 million Fund deal. The IIF also looked at Puerto Rico, Venezuela and Argentina, with Caracas not paying an October state oil company installment but the Trump administration’s sanctions preventing Citgo asset seizure pending possible internationally-recognized Guiado government takeover. In investor relations norms Ecuador, Egypt, Ghana and Lebanon improved 5+ points in the 40-country scorecard, but Brazil, Mexico and South Africa as seasoned and sophisticated issuers continued to lead on office, website, and data availability best practice.

Global Financial Stability’s Stretched Credulity

2019 November 22 by

The IMF’s October Global Financial Stability publication tracked the relentless government bond negative yield total, now $15 trillion or one-third of the industrial world stock, as interest rate decline also classifies the same portion of emerging market issuers as “overvalued.” It believes equities in contrast are closer to fairly priced, with risk appetite there under trade and economic growth pinches. Excluding China with marginal tightening monetary conditions are easier across the universe and sovereign placement from frontier countries picked up the past six months. Banking systems at high vulnerability include Brazil, India, Korea and Turkey and small and midsize Chinese lenders had funding squeezes requiring rescues. Non-banks in 80% of major financial sectors are under scrutiny, equal to the crisis peak a decade ago, as insurers like Taiwan life firms and institutional investors increase speculative positions. Corporations and households are also overleveraged, the latter particular in Asia as central banks have imposed macro-prudential consumer and mortgage exposure curbs. Developing country debt sustainability is again an issue particularly for low-income borrowers, as global policy coordination may have slackened in recent years with urgency over tackling new ESG challenges, the review points out. External high-yield names are more mispriced than investment-grade counterparts, with half in the B or lower rated category subject to sudden spread widening or access cutoff with global stress. State-owned enterprises, which are half the corporate asset class and one-third the EMBI benchmark, are a “growing concern” with falling profitability and steeper leverage among hydrocarbon producers especially. Their credit ratings have slipped and few have an explicit guarantee for otherwise contingent liabilities. Trouble or default would likely spill over into the sovereign and fallen angels dropping to speculative grade have a narrower investor base.

 Hard currency frontier activity is on track for an annual record and the amount outstanding has tripled the past five years to $200 billion. For the average issuer this debt is 7% of GDP or half of reserves, and over the medium term servicing will spike. Commercial financing engagement has joined with the official shift to non-Paris Club creditor dominance, where China’s restructuring approach differs from Western norms. Commodity-linked loans can backfire with collateral seizure, and record-keeping and reporting is often slipshod in poorer economies. The IMF and IIF are promoting transparency and capacity-building initiatives along these lines, and policymaker should develop local capital markets as a backstop and avoid unproductive obligations in the first place, the report advises. In cross-border banking generally dollar shortages are widespread and likely contributed to reduced emerging market lines the last quarters. Additional bilateral swap facilities with the US Federal Reserve could help alleviate the crunch, after Brazil and Mexico were recipients during the 2008 financial crisis. Sustainable portfolio investment is a burgeoning field with asset size estimated in the trillions to tens of trillions of dollars, despite the lack of accepted definitions or outperformance over conventional allocation. In fixed income the style is most advanced, with green and social bond alternatives. Equities have both negative and positive screening for ESG criteria, and ratings agencies and the IMF in its surveillance are formally incorporating them. China as a leading sponsor is pushing at the same time for international adoption of its green bond rules, as a broader G-20 consensus is still budding.

US Development Finance’s China Finesse

2019 November 1 by

The US International Development Finance Corporation (DFC), combining the overseas private investment arm OPIC and credit operations of the main development agency USAID, formally opened for business under an overarching aim to compete better with China’s multi-trillion dollar Belt and Road program. It has a higher $60 billion exposure cap and wider array of debt, equity and guarantee tools to spur direct and portfolio inflows into low and middle-income economies, and is also designed to promote national security migration and counter-terrorism priorities.

 According to a September Center for Strategic and International Studies (CSIS) report, the new entity will counter China’s “aggressive influence” funding infrastructure and natural resource projects throughout Asia, Africa and Latin America, even though it cannot match Beijing’s heft “dollar for dollar” though state enterprises and policy banks. Supporters believe the DFC’s comparative advantage can be in peer collaboration and technology transfer, and targeting small and mid-size companies and capital market creation where Beijing lags. However CSIS notes that even as Washington’s approach is reinforced to contrast with China’s “export-based politically-driven” model, early expectations should be modest. Annual financing will remain below $10 billion, and internal organization delays could combine with geographic, sector and structural confusion in the initial rollout.

 The launch coincides with the Trump Administration’s continuing efforts to slash foreign aid, with the first year budget request below $1 billion. OPIC during an almost 40 year life  had no net cost to the taxpayer as proceeds were returned to the Treasury, but this argument did not sway the proposed appropriation despite bipartisan consensus on modernizing the US financing apparatus and arsenal. Foreign policy officials weighed in that expanded job creation sources are needed to combat violent extremism in the Middle East and Africa, and curb mass emigration from Central America’s Northern Triangle, but immediate intelligence and security considerations drove allocation. The DFC starts with 300 staff and a 90-country portfolio, and a liability limit doubled from the previous $30 billion. It relaxed criteria for American company participation, formerly at one-quarter of equity, for more local investor scope. Along with the fifteen member board of directors from the cabinet and outside government, an independent advisory panel was set up drawing from think tanks and advocacy groups.

The DFC inherits a $23 billion portfolio about evenly split by region and 25% geared toward fragile states, with financial and power sector concentration. Direct loans were 70% of activity, followed by political risk insurance and investment fund stakes at 15% each. With additional powers it can take equity positions, offer technical assistance and local currency guarantees, and start venture capital enterprise funds. An immediate focus is women’s economic empowerment and it has signed agreements with the Inter-American Development Bank and World Bank to back Latin America and global business growth. In Africa the intent is to leverage the existing Power and Prosper Africa initiatives and work with the Millennium Challenge Corporation, which uses specific economic policy and performance criteria, on country-designed infrastructure frameworks and schemes.

The CSIS paper warns that contrary to hype the DFC is unlikely to double legacy commitments in the near term, as it undergoes teething pains and looks for openings to balance heightened risk and impact. Its role is to catalyze private financing where unavailable, but then to leave the scene with access, and otherwise to complement foreign aid for humanitarian and environmental purposes. The DFC should fit with USAID’s “Journey to Reliance” strategy for concessional assistance graduation, with local capital market development reprised from decades ago, during the post-communist transition, as a major theme. Low-income country engagement may have to be subsidized from high-earning assets, and the initial 7-year authorization should not be a deadline to rush internal and external preparations, especially to shift OPIC’s traditional demand-driven tendency, analysts believe. Functioning money and government bond markets may have to precede corporate debt and equity emphasis, and the Treasury Department has a dedicated technical expert program for support. The study calls for a new generation of enterprise funds in overlooked locations like Central America, currently reeling from poverty and safety threats in El Salvador, Guatemala and Honduras with emigration waves. With such innovation the ecosystem there could eventually evolve to gain admittance to the MSCI frontier equity index, with a 6% gain through the third quarter double the core roster’s.

The SDGs’ Bland Blend Recipe

2019 November 1 by

The September UN General Assembly hosted further meetings and reports on financing the 2030 Sustainable Development Goals after a special summer session, with tepid reviews of public-private “blended” and bilateral and multilateral lender contributions. Official/commercial facilitator Convergence, founded after the 2015 Addis Ababa summit calling for partnerships, issued an annual update of transaction, investor and thematic trends. Its database covers $150 billion in funds and projects, at median $65 million size, concentrated regionally in Africa. Energy and financial services are the leading industries, with concessional debt or equity the main instrument. Goal focus is on Economic Growth (8) and Infrastructure (9), and commercial banks are more active than local and foreign institutional investors. Agriculture and health and low-income and small island states are drawing new interest, but volume is still only $15 billion/year, and only “scaling up” to close an estimated $2.5 trillion gap in the next decade will boost living standards as agreed. Bonds and notes have been used in just one-tenth of deals, and Asia is catching up with Africa with a 30% share, half in India. Latin America had more leverage at 5 times and an average $115 million commitment.

 Renewable energy is popular in that sector accounting for 40% of the total, and addresses the separate Climate Change goal (7). Financial industry priorities have shifted to capital markets and small business access from broader inclusion. Guarantees and risk insurance apply in one-third of cases, while technical assistance has fallen as a tool. Entrepreneurs are the chief target across traditional and social enterprise, micro-finance and family farms, and only 10% have reached completion stage with final evaluation. Public and philanthropic sources are respectively 40% and 15% of the total, with USAID and the World Bank among the top in their cohorts. The EU and Canada have announced new multi-billion dollar facilities, and big emerging markets like Indonesia and South Africa are also sponsors. Impact investors including Calvert and Blue Orchard have been stalwarts, and European and Japanese banks dominate the commercial ranks versus asset managers, insurers and pension funds with “limited” participation, Convergence finds. “Better blending” initiatives through the OECD and other bodies have gained momentum the past year, but different definitions and practices continue to thwart “billions to trillions” ambitions, it concludes.

A separate Center for Global Development paper criticizes the seventeen development lenders involved on a Blended Finance Task Force as “marginal, not transformational,” and points out that private investment cannot deliver the range of infrastructure, health and education demands with consumers earning a few dollars daily. A decade ago, the World Bank’s IFC arm pledged half of operations in the poorest countries, but its recent portfolio peak was 25% and has since slipped. Official institution guarantees, loans and equity back just half a percent of developing economy total allocation, and the catalytic leverage effect is less than 1:1 under strict methodology. Pilots like the African Development Bank’s Infrastructure Fund and USAID’s Power Africa show “little success” in terms of the bankable project pipeline, and few deals can be identified where subsidies ensure viability. The missing piece is marked expansion of traditional aid to meet another elusive goal as a portion of donor national income, CGD suggests.