While G20 leaders have praised the swift response of development banks in deploying funding to low-income countries, they have also called on these organizations, together with the private sector, to further step up the coordination of their actions.
Public-sector relief packages are large, targeted and essential – the World Bank Group has pledged $160 billion – but not enough to help low-income countries fight the immediate impact of the disease, nor to help them cope with a longer-term economic slowdown.
International Development Association (IDA)-eligible countries have a fiscal need of between $150 billion and $200 billion to deal with the health and economic implications of Covid-19, according to the Center for Global Development (CGD), but much of sub-Saharan Africa falls through funding gaps in part because investing there is deemed too risky.
It is likely as the crisis continues, investors will want to put money to work in an investment grade instrument – it could be only way to deploy private-sector capital
– Peter Sullivan, Citi
Investment banks have a central role to play here. Large-scale relief packages, such as the $1 billion pledged by Standard Chartered, are good start, but many banks are dealing with the economic slowdown, increased costs and squeezed margins in their main markets.
How can commercial and multilateral banks best work together to bring essential funding to IDA countries? Blended finance is one approach.
Citi has put forward to the World Bank a proposal for a Covid-19 fund that would provide access to funding for sovereigns, while crowding-in the private sector, Peter Sullivan, Citi’s head of public sector Africa, tells Euromoney.
The fund would be structured to protect private-sector creditors with the World Bank absorbing the first loss, other development finance institutions taking the second and a mezzanine tranche of commercial debt – offered by a consortium of investment banks – to support a senior tranche into which the private sector would be willing to invest.
“Right now, African sovereigns do not have access to capital markets,” he says. “What we could do is to create a Covid-19 fund where funds would be available to sovereigns at a fund level.”
Sullivan says that the fund could reach $100 billion in size, depending on how much first loss is available through the multilateral development banks (MDBs) and bilateral donors such as the UK Department for International Development and Germany’s KfW.
“The fund’s originators can work with rating agencies to secure the appropriate ratings for the different tranches with a target investment grade rating for the senior debt tranche,” says Sullivan.
Investors withdrew some $62 billion of funds from emerging markets in the first quarter, twice the size of outflows recorded at the peak of the global financial crisis, according to the Institute of International Finance.
“It is likely as the crisis continues, investors will want to put money to work in an investment grade instrument – it could be only way to deploy private-sector capital,” says Sullivan.
Citi’s Covid-19 fund is not the first of its kind. Sullivan points to the Global Fund, of which Bill and Melinda Gates were seed financers, established in 2002 in response to the AIDS, tuberculosis and malaria crises.
The Global Fund raises more than $4 billion a year, with 93% of the funding coming from donor governments and 7% from the private sector.
What we are doing right now is a combination of speaking to clients in Africa and understanding what their real needs are, and touching base with our MDB partners
– Claire Coustar, Deutsche Bank
The CGD has also proposed a fund structure, the Stretch Fund, which it will says will bridge the risk gap between development finance institutions (DFIs) and impact investors.
“What is missing are investors that target investments at scale with sub-market risk-adjusted returns and high development impact,” says Nancy Lee, senior policy fellow at CGD.
“There’s a big surge in demand for subordinated debt and equity because somebody had to absorb the risk of the crisis itself,” she says.
Citi’s Sullivan says that the Covid-19 fund could be up and running in a matter of weeks, but others warn that the response will not be quick enough, and that commercial and multilateral banks would do better to use existing channels to generate and disburse funds.
“The idea of having a Covid fund is interesting and a good idea, but the question is how long will it take, how are you going to deploy it and who is going to deploy it,” says Sérgio Pimenta, IFC regional vice president for the Middle East and Africa.
“It is very positive that when the need is the greatest, everyone comes with new ideas, but the approach we have taken so far, mostly for efficiency’s sake, is to align with existing instruments,” he says.
Claire Coustar, Deutsche Bank’s head of coverage for CEEMEA and head of emerging market structuring, agrees that leverage existing structures would work best.
“For me, old tested products that have worked in the past, like guarantee structures, would bring commercial banks to the table when it comes to weaker EM names.”
Instruments like partial credit guarantees or non-honouring sovereign guarantees, used by the World Bank Group to bring in private sector funds, can have a multiplier effect on the lending support provided by these DFIs, which can then be deployed to emerging market counterparties.
“What we are doing right now is a combination of speaking to clients in Africa and understanding what their real needs are, and touching base with our MDB partners – MIGA, IBRD, AfDB – and speaking to them about how we can work with them.”
Coustar says that while the DFIs have been quick to respond, there has not been as much direct engagement with the commercial financial sector as she would have liked. At times like these it is important to work with the commercial sector to find the optimal way to leverage private-sector funding support into the emerging markets, she says.
Guarantees could also help investment banks take more risk on their balance sheet.
For example, in December 2018 and early 2019, Ukraine leveraged a $750 million policy-based guarantee to raise about $1 billion of long-term funding from Deutsche Bank.
Deutsche is also working with its African clients to spot opportunities in hugely dislocated markets. Issuers of floating rate bonds for example can lock in lower rates, which translates to a longer-term interest cost saving.
Another way of leveraging private-sector funding is through the bond markets. Despite extreme volatility in financial markets, Eurobonds are providing access to private-sector funding sources.
At the end of March the African Development Bank raised $3 billion with its largest-ever bond placement, a 0.75% three-year Fight Covid-19 social bond arranged by Bank of America Securities, Citi, Crédit Agricole, Goldman Sachs and TD Securities.
The World Bank’s Pandemic Bond has come under scrutiny, however. In Europe, banks have endorsed growing calls for jointly issued sovereign coronabonds.