"How Adesina intends to fix the AfDB\u2019s race against downgrading"

" \n The African Development Bank is under pressure to maintain its AAA rating, which gives it access to the international financial markets and allows it to sustain its level of activity. \n \n\n \n The African Development Bank (AfDB) is engaged in a race against \u201cdowngrading\u201d. According to our information, the institution chaired by Nigerian Akinwumi Adesina is seriously considering authorising a special capital increase, an exceptional measure to protect its AAA rating. \n \n\n \n Approved by the bank\u2019s board of directors at the end of January, the procedure will be examined by the board of governors at a meeting scheduled for 5 March before, if necessary, being implemented from mid-March onwards. \n \n\n \n Continuation under threat \n \n\n \n For the AfDB, maintaining its AAA rating \u2013 awarded by Fitch Ratings, Standard & Poor\u2019s (S&P), Moody\u2019s and Japan\u2019s JCR \u2013 is crucial. This rating, which is extremely rare on the continent, means that it has a good deficit and has access to the international financial markets. \n \n\n \n It allows AfDB to raise significant amounts of funds even in times of crisis, to access a wide variety of investors and to conduct hedging operations, which guarantees that it can lend to its members over the long term and at advantageous rates. In other words,\u00a0the AAA rating contributes to the bank\u2019s efficiency\u00a0and its operations on the continent. \n \n\n \n However, the Covid-19 crisis and its consequences for AfDB shareholders threaten it. To maintain this rating, Fitch requires the pan-African bank to present sufficient \u201ccallable\u201d capital \u2013 i.e. resources that can be mobilised in case of emergency from countries that hold this AAA rating, i.e. from the AfDB\u2019s non-regional shareholders. \n \n\n \n Hard hits from North America \n \n\n \n However, the amount of \u201ccallable\u201d capital going to countries with a good rating continues to decline. The first major blow came in June 2020 when Fitch downgraded Canada\u2019s rating from AAA to AA+, a major AAA shareholder up to that point. \n \n\n \n In its latest available report on the AfDB,\u00a0published on 21 July, Fitch pointed out that one of the \u201ckey assumptions\u201d made to explain the bank\u2019s unchanged rating was that no other \u201cAAA-rated member state will be downgraded in the medium term.\u201d \n \n\n \n Ten days later, the same agency downgraded the outlook on the bank\u2019s largest AAA shareholder, the US, from \u201cstable\u201d to \u201cnegative\u201d, raising concerns about a future lowering of the country\u2019s rating. S&P had already lowered the country\u2019s rating in 2011 from AAA to AA+, a level that has since remained unchanged according to S&P\u2019s assessment. \n \n\n \n For the AfDB, the consequences are far-reaching.\u00a0According to the bank\u2019s data, Canada\u2019s downgrade resulted in a 25% reduction in lending targets for 2020-2030, from 6.5 billion Units of Account (UA) per year (about \u20ac7.6bn) to an average of 5 billion (about \u20ac5.9bn). \n \n\n \n A possible downgrading of the US rating could lead to an even more drastic reduction in lending activity, which would then fall to an average of UA 3.2 billion per year (around \u20ac3.7bn). This could call into question the legitimacy of the institution and even expose it to legal recourse by borrowers for non-disbursement. \n \n\n \n Harmful ricochet \n \n\n \n The AfDB is acting fast to avoid this disastrous scenario.\u00a0Its board of directors is proposing a temporary increase in \u201ccallable\u201d capital reserved for AAA-rated countries to prevent this catastrophe. The AfDB went from employing 27.2% of total callable capital in 2010 to 16.6% in June 2020. This percentage would fall to 10.2% if the US\u2019 rating fell. \n \n\n \n Four of the AfDB\u2019s \u201cAAA\u201d rated shareholders are expected to participate in this exceptional \u201ccallable\u201d capital increase. They are Germany, Denmark, Sweden and Luxembourg. It would only take effect in the event of a downgrade of the US\u2019 rating and would avoid, by a harmful ripple effect, the lowering of the AfDB\u2019s rating. \n \n\n \n The capital increase in question would give rise to the granting of voting rights (on the basis of one vote for every five shares) without upsetting the bank\u2019s shareholder base. By statute, the ratio must be maintained at 60% voting rights for regional (African) members and 40% for non-regional members. \n \n\n \n In addition to this endeavour to maintain the triple-A,\u00a0the AfDB continues its efforts to conduct the general capital increase, approved on 31 October 2019 and aimed at doubling the institution\u2019s authorised capital (from $93 to $208bn). \n \n\n \n This serves as further proof of the \u201cextraordinary support\u201d demonstrated by the bank\u2019s shareholders, which the rating agencies have taken into account. \n "

"How Adesina intends to fix the AfDB\u2019s race against downgrading"

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