Afreximbank Gripped by Identity Crisis Amid Surging Growth
Last week’s downgrade of the African Export-Import Bank (Afreximbank) to a notch above junk status by ratings agency, Fitch, immediately focused the minds of analysts across Africa on the Cairo-based multilateral development bank’s growing pains and identity crisis.
New York-based Fitch Ratings cut Afreximbank down to a BBB- rating, with a negative outlook. A worrying climbdown from the BBB stable outlook rating it had enjoyed till then. Fitch noted that the bank was now exposed to higher risk because of the rising prospect of some of its sovereign loans being restructured. Instructively, the Bank’s solvency profile also went down to BBB+ from A-, suggesting institution-specific concerns, and not just its customarily high-risk business environment, are also weighing it down.
But the African Union’s African Peer Review Mechanism — a unit within the continental body that, among other focuses, analyzes international credit ratings of African sovereign debt — on Friday pushed back on Fitch’s assessment. It said Fitch had “misclassified” Afeximbank’s loans to Ghana, South Sudan, and Zambia as “non-performing” using flawed models and by manipulating its own criteria. It insisted that from its legal and accounting review the countries have only “invited” Afreximbank for discussions to restructure but have not actually defaulted.
The APRM’s stance reflects its policy position against the practices of the Big 3 rating agencies: Fitch, Moody’s and Standard & Poor’s.
However, beyond the grand geopolitical context, the situation is straightforward. South Sudan has not only defaulted, but it has also stopped corresponding with Afreximbank on the debt, forcing the latter to resort to the London courts, which have confirmed a default and ruled for recovery. Zambia told the International Monetary Fund in 2022 that it stopped servicing its Afreximbank debt since 2021. It says that it won’t resume until Afreximbank accepts restructuring. Ghana has been equally emphatic.
What more needs to happen before the debts can be classified as “non-performing”?
Afreximbank has given hints about still receiving payments. Since the loans to Ghana, at least, may have been covered by political risk insurance from ATIDI (as per documents sent to the Ghanaian Parliament), the confusion may thus be explainable if ATIDI is covering for Ghana. That would still, nonetheless, reaffirm default.
For what it is worth, Fitch’s yardstick for classifying a sovereign loan from a supranational lender like Afreximbank as “non-performing” is simply that the loan be overdue for six months (compared to three months for Moody’s’). Likewise how it weighs the impact of non-performing loans (NPLs): highest when the aggregate amount of NPLs as a ratio to total loans crosses the 6% threshold. Both criteria have been met.
Some would say that all this murkiness and opacity is part of the problem. So unMDB-like. In the classic MDB-world, facilities extended to sovereigns and the servicing record are a matter of routine scrutiny.
It is notable that Afreximbank recently secured a triple A rating from a Chinese agency, CCXI, and enjoys an equally high one from another African-based one, GCR. As is always the case with credit ratings, we are dealing with opinions, based on analytical assumptions. The challenge is that in the world of international finance, some opinions matter more than others. Will investors listen to Fitch or the APRM?
Therein lies Afreximbank’s conundrum. It is one of a number of multilateral development banks that have emerged in the Global South in the last four decades with a tendency to deviate from the orthodox development finance institution blueprint created in 1945 with the establishment of the World Bank.
Under its outgoing president, Professor Benedict Oramah, Afreximbank has pushed the envelope hard on how a development bank should think and act. The Nigerian executive has taken it from 5 million dollars in central bank deposits the year before he took office (i.e. 2014) to roughly $37 billion today. Afreximbank now borrows from everyone, unlike traditional MDBs that tend to stick primarily to the international capital markets. From Gulf arbitrageurs to Japanese speculators, it is as open-minded as it gets. And it steps in where others fear to tread, like breaking camp with other MDBs and lending money to Zimbabwe before reforms demanded by the AfDB-led development finance group.
The development community, led by the Paris Club, long used to the classic MDB pattern, looked on with some trepidation and, as the recent wave of sovereign defaults gathered steam, declared that they don’t recognize Afreximbank as a classic development bank deserving of “preferred creditor treatment” (i.e. spared restructuring of its loans).
A major justification for denying Afreximbank preferred creditor treatment has been the perceived “commercial” nature of its lending (as well as the fact that roughly 40% of its shareholding is in private hands). MDBs, traditionally, tend to be more “concessional” in their rates. Afreximbank’s 2022 loans to Ghana, for instance, had rates as high as 6.85% above the benchmark rate (SOFR) at a time when the equivalent World Bank – IBRD loans were attracting about 1.09% (above SOFR).
Some of Afreximbank’s loans to Ghana even had a tenor of just five years, when the sector is used to seeing MDB loans with a tenor over 30 years. Ghana was also expected to pay private banks like RMB and Stanchart to serve as arrangers and agents, classic commercial arrangements.
Furthermore, the Cairo-based MDB also gives more than 92% of its loans to commercial businesses and non-public entities, rather than to governments, the natural clientele of classic MDBs.
A lot of risk for a lot of reward. Oramah has taken the Bank’s assets to over $40 billion from around $7 billion when he took over in 2015. You don’t fry such a big omelette without breaking a few eggs. Reflecting its high cost of funds, weak credit ratings of its government-shareholders, and its willingness to lend to governments without demanding any policy-related conditions, total interest rates and fees on some of its recent loans to Ghana and Nigeria crossed the 10% and 12% marks, respectively. Its derring-do loan to Zimbabwe had rates that could escalate past 12%.
Actually, one can’t be completely certain that these are the highest rates in its portfolio; unlike the classic MDBs, Afreximbank publishes almost nothing on the fine details of its dealings with borrowers. What there is ample evidence of is that African governments are willing to pay more for flexibility and reward flexible and adaptive development banks with more clout. Which is all nice and sweet until the proverbial stuff hits the fan and the likes of the Paris Club are brought into the picture to help fix things.
At the end of this month, Afreximbank will vote for a new President. He or she would have a tough choice to make: continue the high-stakes comemercial adventurism that has boosted growth, and clout in African capitals, or safeguard the Bank’s MDB-like reputation and privileges. You can bet the bank on this: it won’t be an easy choice.
