With a simply trick, the Asian Development Bank will greatly increase its financial fire power. Is there a catch? Is the move a reaction to competition by China’s new development bank, asks Andreas Becker in Frankfurt.
It sounds like financial wizardry: Starting next year, the Asian Development Bank (ADB) will have 50 percent more money to give away in loans and grants to fund projects all over Asia.
The ADB basically draws on two pools of money. One consists of the equity provided by its 67 member countries, with the biggest stakes coming from Japan and the US. This pool is called Ordinary Capital Resources (OCR) and has a volume of about 17 billion dollars ($14.8 billion euros).
“Based on these 17 billion dollars, we go out in the market and borrow money,” explains Indu Bushan, director general of the bank’s strategy and policy department. Because of its AAA-rating, the bank is in a position to borrow cheaply.
In financial language, the process of borrowing money is called leveraging. It enables the ADB to give out more loans to countries and projects than it normally could. “Based on these 17 billion dollars, we have outstanding loans of about 64 billion dollars,” Bushan tells DW. OCR loans are given to Asian middle-income countries, which have to pay market rates for their loans.
Two pools of money
Poorer countries get better deals – lower interest rates and more time to pay back. They can also receive grants. This money comes from the bank’s second pool of financing, the Asian Development Fund (ADF). “It’s like a bank account,” says Bushan. “Donors put money in that bank account, and we use it to give out either loans or grants.”
The major donors are the industrialized member countries of the development bank: Japan, the US, Australia and the European countries, including Germany. Every four years, this fund for poorer recipients is replenished with new donations. No additional leveraging is done. The fund is worth 34 billion dollars, with outstanding loans of 30 billion dollars.
The difference in these two pools of money shows the power of leveraging. “In OCR, for each dollar of equity, we are providing loans of about four dollars,” says Bushan. “In ADF, for each dollar of equity, we are proving loans of 0.9 dollars.”
It’s obvious: the Ordinary Capital Resources (OCR) provide more bang for the buck. According to Bushan, ADB President Takehiko Nakao insisted on finding a more efficient way to use the ADF money, which goes to poorer countries, when he took office three years ago.
Where is the catch?
The result looks like a cheap accounting trick to the untrained eye: The bank decided to leverage both pools of money, the 17 billion dollars from OCR and the 34 billion from ADF.
“Our equity then becomes about 50 billion dollars,” explains Bushan. “We can then go to the financial markets and expand our loan portfolio to about 150 billion dollars.” That is 50 billion more than the bank was able to provide before.
Increasing financial fire power by 50 percent without putting in more money sounds just too good to be true. Bushan insists the ADB did its best to look for the catch and found none. External consultants, other banks, rating agencies and member countries all gave their thumbs-up. The change will become effective January 2017.
But if this move is as ingenious as it sounds, why did it take so long to emerge? After all, the Asian Development Fund was established in 1973, and the money was never leveraged.
“Maybe this question was also asked when the wheel was invented,” jokes Bushan. On a more serious note, he adds that the recipient countries are now less poor than they were in the 1970s, and have shown a strong track record with almost no defaults on loans. In other words, lending them money is less risky today than it used to be.
The ratings agencies have signaled the Asian Development Bank is likely to keep its triple-A status after the change, says Bushan.
Getting ready for competition
But he insists the plan to increase the ADB’s fire power has had nothing to do with the emergence of a big competitor, the Chinese-led Asian Infrastructure and Investment Bank. The AIIB was launched in January this year, equipped with seed capital of 100 billion dollars, twice that of the ADB.
Indeed, Bushan says, the ADB started working on its plan before the AIIB was even mentioned. But not very long before. According to Bushan, ADB President Nakao floated the plan in June 2013. In October the same year, Chinese President Xi Jinping publicly proposed setting up an Asian infrastructure bank.
The move reflected China’s growing frustration over having little say in the ADB, which is controlled by Japan und the USA. Up to this very day, both countries still refuse to join the Chinese initative, whereas Germany and most other ADB members do take part.
Despite all this, ADB President Nakao did his best to portray both banks as partners, not competitors. During the annual meeting of the Asian Development Bank in Frankfurt, he signed a memorandum of understanding with Jin Liqun, his counterpart at the AIIB, to cofinance development projects.
“Our region needs huge amounts of resources,” Indu Bushan says. “One more player is always welcome.” Especially,” he adds, “since ADB’s new focus on sustainable development projects and efforts to combat climate change will require more money, not less.”