Fresh firepower of $115bn for the AfDB to deploy on the continent
After the tough negotiations, the "historic decision" will allow the African Development Bank AfDB) to meet its mandate, according to AfDB President Akinwumi Adesina .
The shareholders of the pan-African financial institution, meeting in Abidjan on 31 October, agreed to double the African Development Bank’s authorized capital to $208 billion.
A compromise with non-African shareholders
Three scenarios had been discussed over the past year for the African Development Bank’s capital increase: increases of 100%, 150% and 200%.
Akinwumi Adesina’s team, supported by several African shareholders, advocated this third option, arguing that it was essential for the Bank’s “High 5” plan to continue (enlighten, feed, industrialize, integrate Africa and improve people’s quality of life). Non-regional shareholders have long favoured a more moderate enhancement, sometimes with reservations about the effectiveness of the bank’s disbursements and operations.
These foreign shareholders (United States, France, England, etc.) represent 41.1% of the Bank’s shareholding. They are the most highly rated shareholders and those whose equity participation – and the implicit guarantee that they will come to the bank’s rescue in the event of a crisis – is the most reassuring for AfDB lenders.
In the end, the bank’s capital increases by 125% to $208 billion, an increase of “$115 billion” announced Akinwumi Adesina. This intermediate scenario allows the AfDB to “continue its loan growth focused on its High Fives priorities while maintaining robust capital adequacy metrics that support its credit profile,” says David Rogovic, a Vice President – Senior Analyst in Moody’s Sovereign Risk Group.
An essential decision to continue lending
During Akinwumi Adesina’s presidency, at the helm since September 2015, the AfDB significantly increased its lending, in line with the Nigerian leader’s ambitious programme. The bank’s outstanding loans increased from USD 17.83 billion in 2015 to USD 26.3 billion at the end of 2018, nearly 80% of which was made up of sovereign loans. A ramp-up supported mainly by debt, whose stock increased from $22.8 billion in 2015 to $33.365 billion last year.
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However, the AfDB Board of Directors has capped the Bank’s total outstanding debt at 100% of the “usable capital”. The latter is composed of the paid-up capital, reserves and callable capital of the “member countries rated A- or better” (see below).
Since 2015, its debt to usable capital ratio has risen from 58% to 83%. Pending a capital increase – initially anticipated a year ago at the Busan Annual Meetings in Korea – the bank had slowed the pace of growth in its loans (+$1.16 billion net increase in outstanding loans in 2018, compared to +$4.82 billion in 2017 and +$2.463 billion in 2016).
The AfDB boss reminded everyone: “With your decision on the General Capital Increase, we will refuel. It is a historic moment, for a historic decision. Your final decision on the General Capital Increase will reverberate around the world. It will help us take a giant leap forward for Africa,” he told the Board of Governors, convened at an extraordinary meeting on 31 October 2019 in Abidjan, where the AfDB is based.
What to expect from the new resources?
The AfDB says it has contributed, over the past four years, to connecting “16 million people to the electricity grid”, while “agricultural technologies” have been provided to 70 million Africans, and 31 million people with access to water and sanitation.
With the capital increase, the institution intends to support the “Desert to Power” initiative, which “will provide access to energy for 250 million people throughout the Sahel”. It wants to double its climate and finance portfolio to $25 billion by 2025 and support infrastructure projects – such as the Abidjan-Lagos highway – and the implementation of the African Continental Free Trade Area (Zleca).
Capital paid up, usable, payable….
The USD 115 billion capital increase approved in Abidjan does not imply that this amount will be immediately made available to the AfDB. As was the case with the previous six general capital increases (AGC), notably the one in May 2010, when the bank’s authorised capital almost tripled, only part of these resources will be disbursed. “We expect the vast majority of the GCI to be in the form of callable capital, similar to past GCIs.,” says Moody’s, which points out that for the portion of the capital that will actually be disbursed, “payments will be spread on average over about ten years.
At the end of 2018, the AfDB’s authorized capital reached US$ 93.15 billion, of which only US$ 6.894 billion had actually been disbursed by the AfDB’s shareholder countries (7.4% of the total).
However, the “callable” capital remains crucial for the institution, even if it is not disbursed. Indeed, since these resources can be mobilized in the event of an emergency, this share of capital, particularly that of developed countries, reassures financial markets and is crucial for the AfDB’s rating.
This capital increase “is consistent with Fitch Rating’s assumptions at its latest rating review”, explains Khamro Ruziev, Associate Director au sein de l’équipe Sovereigns & Supranationals de Fitch Ratings, “It will strengthen the bank’s AAA rating which primarily relies on the support from its shareholders. This highlights the importance of the bank’s mandate to boost development in Africa for its shareholders,” the analyst explains.
A plus for Akinwumi Adesina’s candidacy
The approval of this capital increase – although below the levels desired by Akinwumi Adesina’s teams – is nevertheless a sign of confidence in the institution’s president, who will seek a new five-year term in May.
Last May, during the AfDB’s general meetings in Malabo, the re-appointment of the Nigerian leader by acclamation to his post – as had been the case for his two predecessors, Rwandan Donald Kaberuka and Moroccan Omar Kabbaj – was far from a foregone conclusion, with some shareholders preferring a competitive process, when the possibility of a female candidate was not mentioned.
Nothing is yet decided for Akinwumi Adesina, especially on the side of international shareholders. The Trump administration’s emissaries have sometimes been reserved towards the bank’s management, the preponderance of state loans and the role of climate finance in operations, while other shareholders, particularly in Europe, advocate a greater support for fragile countries.
But the AfDB’s boss has several strong constituencies, notably from Nigeria, his native country and the largest African shareholder (9.33%), but also from Côte d’Ivoire.
Ivorian Head of State Alassane Ouattara and Kaba Nialé, his Minister of Planning and Development, have made a particular commitment to Akinwumi Adesina. The same applies to Cesar Augusto Mba Abogo, the Equatorial Guinean Minister of Economy, even if Malabo has not announced its official support.