Market Insights en-gb Mon, 16 Sep 2019 23:05:08 GMT 2224 Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead EM is likely to come under pressure this week if risk-off sentiment picks up from the Saudi bombings. The oil producing countries may outperform but we think the global backdrop for EM remains negative, especially as US-China relations remain in flux. While things are not getting worse, neither are they getting better. Meanwhile, markets are coming to grips with the fact that the Fed is unlikely to ease as aggressively as has been priced in. Analysis from Win Thin 16 Sep 2019 Global Market Insights 55 Mon, 16 Sep 2019 08:14:58 GMT China reports August IP and retail sales Monday.  The former is expected to rise 5.2% y/y and the latter by 7.9% y/y, both accelerating from July.  Working level teams from the US and China will meet this week to lay the groundwork for higher level talks planned in October.

Israel reports Q2 GDP Monday.  Over the weekend, August CPI rose 0.6% y/y, as expected.  This remains well below the 1-3% target range and justifies the central bank’s recent move to a more neutral stance.  Next policy meeting is October 7, no change is expected then.  Elections will be held Tuesday, with most polls showing Likud running neck and neck with Blue and White.

Russia reports August IP Monday, which is expected to rise 2.2% y/y vs. 2.8% in July.  August real retail sales will be reported Wednesday, which are expected to rise 0.9% y/y vs. 1.0% in July.  Central bank Governor Nabiullina recently said that monetary policy can currently do little to boost growth.  That said, we expect the bank to cut rates again at the next policy meeting October 25.

Singapore reports August trade data Monday, with NODX expected to contract -10.9% y/y vs. -11.2% in July.  Data continue to come in weak, which supports our view that the MAS will loosen policy at its semiannual policy meeting in October.  Singapore may benefit from ongoing Hong Kong protests,

Colombia reports July IP Tuesday. July trade will be reported Wednesday. Last week, July manufacturing production and retail sales came in stronger than expected.  However, downside risks remain in place and so rates are likely to remain on hold into next year.  Next central bank policy meeting is September 23, no change is expected then.

South Africa reports August CPI and July retail sales Wednesday.  CPI is expected to rise 4.2% y/y vs. 4.0% in July, while sales are expected to rise 2.6% y/y vs. 2.4% in June.  SARB then meets Thursday and is expected to keep rates steady at 6.5%.  A handful of analysts look for a 25 bp cut to 6.25%, and we see risks of a dovish surprise.

Brazil COPOM meets Wednesday and is expected to cut rates 50 bp to 5.5%.  IPCA consumer inflation rose 3.4% y/y in August, in the bottom half of the 2.75-5.75% target range.  Meanwhile, the economy remains sluggish.  Markets are pricing in a 50 bp cut in Q4 that would take the policy rate down to 5.0%.  This would be a risky move, as the risk premium paid for holding Brazil assets is nearly non-existent.

Bank Indonesia meets Thursday and is expected to cut rates 25 bp to 5.25%.  A handful of analysts look for no cut.  CPI rose 3.5% in August, right in the middle of the 2.5-4.5% target range.  With growth expected to remain sluggish, we expect easing to continue into next year.

Taiwan central bank meets Thursday and is expected to keep rates steady at 1.375%.  Taiwan reports August export orders Friday, which are expected to contract -2.6% y/y vs. -3.0% in July.  The entire region continues to suffer from the US-China trade war.  Until tariffs are eliminated, those negative impulses are likely to continue.

Poland reports August industrial output and PPI Thursday.  Output is expected to rise 1.3% y/y and PPI by 0.8% y/y.  August real retail sales will be reported Friday and are expected to rise 5.2% y/y vs. 5.7% in July.  The central bank left rates steady at 1.5% last week and signaled a willingness to cut again if needed.  Next policy meeting is October 2, no change is expected then.

Argentina reports Q2 GDP Thursday, which is expected to grow 0.4% y/y vs. -5.8% in Q1.  If so, this would be the first y/y gain since Q1 2018.  The economy is emerging from its second recession under Macri.  Given the latest round of turmoil, it’s entirely possible that Argentina goes back into recession yet again.  Q2 unemployment will also be reported Thursday.

Macro Global
2222 CASE STUDY: MMK Makes Eurobond Return with Lowest CIS Corporate Coupon in 18 Months Returning to the international market after a 16-year hiatus, the Russian steelmaker issued a USD500mn benchmark dollar Eurobond at just 4.375% coupon – the lowest for any of the region’s corporates in 1.5 years. The USD500mn 5-year saw no new issue premium 13 Sep 2019 Russia & CIS Market Insights 57 Fri, 13 Sep 2019 04:59:35 GMT Background

MMK is one of the largest steel producers in the world and a leader of the industry in Russia, with annual steel products sales of USD8.2bn and EBITDA of USD2.4bn.

Due to the prolonged absence from the international bond markets, the company dubbed the issue a “re-debut”. Among the challenges that faced MMK upon their return were reforms and changes in the country’s legislative landscape, which necessitated a “back to basics” approach from the DCM team.

The issuer held preliminary discussions with the troika of key partners – JP Morgan, Citi and Société Générale – during which it was decided that a loan participation note (LPN) transaction would be the best way forward as investors and funds were looking for guaranteed structures.

MMK came to the market amid dampened bond supply and volatile secondary market trading stemming from global growth slowdown woes; even as the corporate roadshow began, the Moscow Stock Exchange was on a downward trajectory.

However, the timing proved to be congenial, as towards the end of the roadshow stocks saw a significant rebound and a market window opened up for EM issuers following Jerome Powell’s announcement of further offcuts to Fed’s benchmark rate.

Transaction Breakdown

The USD500mn 5-year RegS/144a bond transaction closed on June 14 at an annual coupon rate of 4.375% (payable semi-annually), the lowest coupon by Russian or CIS corporate issuers in 18 months, with a 0bp new issue premium to the implied yield curve of their local industry peers. The issuer was an SPV, MMK International Capital DAC, which was registered in Ireland for the sole purpose of issuing on behalf of MMK.

While the bond can be considered plain vanilla, the use of an SPV allowed MMK to placate the targeted institutional investors that were seeking additional guarantees before coming onboard.

The issue saw USD2.2bn worth of demand at peak, reflecting a 4.5x oversubscription rate.

During the roadshow, the company had two teams on the ground – one in Europe, one in US; the high demand from US accounts resulted in a final allocation of an impressive 31% to American accounts. Another 29% went to Europe, 17% to the UK and 8% to Asia (historically, demand from Asia for steel producers has not been high) and the rest went to investors in other regions.

Russian corporate issuers in months leading up to MMK deal did not see large participation from US accounts due to sanctions risk. A number of factors allowed MMK to overcome those obstacles and attract broad-based appetite. First, while the outlook for the global and Russian steel industry remains tenuous due to both supply demand side concerns stemming from the US-China trade war (China is the largest steel producer in the world), timing the deal to coincide with a lull in tensions was very opportune.

Secondly, as sanctions continue to loom in the background of Russian industrial giants, MMK has the somewhat unique advantage of holding the largest domestic share of the steel market, making it less reliant on global supply chains. With a rise in internal premia after a hike in duty fees and consumption growth set to grow 2%, and with a host of major government-led infrastructure initiatives on the horizon, MMK could safely point to the domestic market as its main focus even if sanctions are tightened.

Notably, a lot of questions (particularly from European investors) were around ESG and the company’s compliance with sustainability principles. This is something that has increasingly become a priority both on a federal and a corporate level, as the company seeks to reduce its carbon imprint and introduce more eco-friendly initiatives. The Treasury team is currently discussing various ESG-linked financing instruments with the Russian government, while also working to create a dedicated ESG-compliance and reporting department internally.

With this transaction, MMK was able to source funds for investing into its capex programme, and refinance existing debt. The Eurobond also altered the company’s debt profile, extending average maturities from 1 to 4 years; it will seek to extend the curve further in the near future.

Deals Deal Case Studies Russia & CIS
2221 Modi’s Growth Plans Could be Hamstrung by Stagnating State Banks Reinvigorated by his recent re-election, President Narendra Modi has vowed to set India on the path towards growth after the country’s weakest GDP print in nearly five years. Aggressive rate cuts, fiscal loosening, and a potential Eurobond issuance may help spark growth, but serious concerns about stagnant public-sector banks weigh heavily on the outlook. Will a possible Eurobond push India's borrowing beyond the limit? 12 Sep 2019 Asia Pacific Market Insights 46 Thu, 12 Sep 2019 05:09:49 GMT Since the high-profile default of IL&FS, a large non-banking financial company (NBFC) focused on infrastructure lending, India’s economy has suffered from a liquidity squeeze. Once an engine of growth in the economy, many NBFCs have struggled to borrow, throttling consumer spending in key sectors of the economy.

In July, the Society of Indian Automobile Manufacturers (SIAM) reported a 30.9% drop in the sale of passenger vehicles, as credit-starved NBFCs were, in turn, unable to lend to car dealers. As auto demand is a key bellwether for both rural and urban demand, the drop is particularly concerning. 

Since his thumping re-election in May 2019, Modi has made no secret of his desire for extend monetary easing in his ardent pursuit of growth, and is increasingly leaning on the Reserve Bank of India to facilitate this. In August, the Reserve Bank of India (RBI) slashed rates for the fourth time this year. The 35bp cut took many by surprise, breaking convention by cutting slightly deeper than the typical 25bp.

Lakshmi Iyer, Chief Investment Officer for Fixed Income at Mumbai-based Kotak Asset Management was welcoming of the RBI’s more hawkish stance on growth.

“We heard from the Governor recently that they will do anything and everything to set us on the path to growth, so it’s good to see that they recognise this requires monetary action too. There has to be a joint effort, so the government and the RBI should work closely together.”

Prakash Sakpal, Asia Economist at ING, is less optimistic.

“The economy doesn’t need any more stimulus. They [RBI] have already done enough easing – we’ve already had three policy rate cuts earlier in the year.”

The government’s cavalier approach to monetary policy will not only push up inflation, which Sakpal forecasts will rise to over 5% by the end of the year. It will also place excess pressure on the currency, which looks set to drop to a minimum of INR72 per USD over the same period. Keeping a cap on inflation are global oil prices, which have so far remained steady.

Whilst Sakpal had originally expected no rate cuts, he has since revised his forecast to account for a total of 50bp of cuts over the next to two RBI meetings.

Public Banks Expected to Drive Growth – Even as they Stagnate

Underpinning Modi’s ambitious spending plans will be India’s sizeable banking sector, though questions remain as to whether this sector – weighed down by governance issues and saddled with high levels of bad loans – is a likely engine for growth.

In an effort to bolster the country’s state banks, the government launched an INR2.1tn recapitalisation programme in October 2017, which has offered some reprieve. From FY19, capital adequacy ratios improved, climbing from 8.2% for Core Equity Tier 1 (CET1) in March 2018 to 9.2% in March 2019. Similarly, non-performing loans (NPL) as a percentage of total loans fell from 10.9% in 2018 to 8.5% in 2019.

Despite this, many NPLs may be difficult to shift. According to a report by Nordea, a sizeable amount of NPLs are linked to the energy sector – problematic given the current oversupply of energy and the general shift towards a low-carbon economy.

As a result, many state banks remain burdened with weak fundamentals, and further recapitalisations may not be forthcoming given the sovereign’s limited fiscal headroom.

“Modi needs the [state] banks to boost his growth agenda, yet they aren’t positioned to grow themselves. Unless anything changes, we could see a similar situation to what occurred in the Philippines, where the private banks will grow and the public sector will stagnate,” argues Ismael Pili, Co-Head of Asian Bank Research at CreditSights. 

In order to grant state banks some relief, the government has taken a more lenient approach to asset quality. Previously, if a borrower defaulted, lenders were given a 180-day period during which the debt could be restructured. This limit has since been relaxed to 210 days.

Such policies have put the government and the RBI at odds. Whilst the RBI has generally favoured more stringent regulation as a means of cleaning up India’s stagnant financiers, the government appears desperate to give state banks the adrenaline shot they need to fuel the economy. It was the RBI that forced India’s state banks to initiate bankruptcy proceedings against twelve of the country’s largest defaulters in 2018, only for nine of these banks to miss the 270-day deadline set by the RBI.

Although in the long-term, private sector banks are likely to boost their market-share, this will remain constrained throughout 2020 as the recapitalisation of state banks provides short-term comfort, according to data from ICRA, an Indian credit rating agency. Private banks are also likely to bear the brunt of declining consumer confidence, as deposit rates are set to fall in favour of public banks. In turn, lending rates may not fall if credit growth remains high, and competition for deposits continues to climb.

In parallel to the expected consolidation in the NBFC sector, mergers amongst state-owned banks are looking increasingly more likely. Following the merger of Bank of Baroda, Dena Bank and Vijaya in April 2019, additional proposals have since been put forward calling for a merger between Punjab National Bank, Union Bank of India and Bank of India.

Modi’s government is also looking to bring India’s struggling state banks to the aid of challenged sectors. The MSME sector, for which the ongoing liquidity squeeze has been particularly acute, has seen the National Small Industries Corporation (NSIC), a government ministry, sign a Memorandum of Understanding with State Bank of India to facilitate additional lending to the sector.

Sovereign Issues

In the face of a domestic liquidity squeeze, stagnating state banks, and an emboldened administration seeking to loosen the purse strings, the government recently proclaimed its intent to issue India’s first Eurobond. For many at home and abroad, this has stirred up a mixture of trepidation and excitement.

For some, the prospect of a debut high-yield sovereign issue from one of the world’s largest economies cannot come quickly enough.  

“Many of us have been waiting for this deal for many years – it would be a very positive signal to the market if India were to issue its first USD-denominated sovereign bond,” says Sergey Dergachev, Portfolio Manager at Union Investments. “It could open the gates to more Indian corporates, it could set a strong benchmark curve, and it would be a great opportunity for those funds that are restricted in terms of LCY exposure to capture Indian risk. Not only would Indian credit capture the high-yields of the Asian growth story, but it also acts as a useful counterweight to China.”

Lakshmi shared a similar enthusiasm for the issuance, noting that India’s bond market has one of the lowest levels of foreign penetration in the world. Just 3% of outstanding notes issued by India-based organisations are held by foreign portfolio investors.

“If there is comfort in the three Cs – carry, currency and capital gains – then I think Indian bonds will make a popular choice for foreign investors,” Lakshmi says.

But despite this, both domestic and foreign investors are wary of a country that saddled with long-term limits to growth.

“Let’s be frank, India is also facing some huge political and economic challenges.  I think its high unemployment, particularly among young people, rigid labour laws, and geopolitical tensions around Kashmir are being under-priced in the risk premia,” Dergachev added.

Others note that, in India, the issue with a potential sovereign bond is not investor appetite, but the government’s renewed passion for spending.

“There’s been huge concern in the market over the past two years”, note Rahul Singh, Portfolio Manager at Mumbai-based LIC Nomura, “My concern is that this can open the door to excessive borrowing in the future.”

Asia Pacific Macro
2220 Benin Minister of Finance on the Country’s Successful Eurobond Debut, Reform, and Development Benin’s debut Eurobond issuance was one of the top sovereign transactions of 2019, decisively putting the country on the map for EM investors. Bonds & Loans caught up with the country’s young and enthusiastic Minister of Finance, Romuald Wadagni, to discuss the government’s borrowing strategy, the country’s impressive growth story, and progress on key reforms. Romuald Wadagni on the government's borrowing strategy 11 Sep 2019 Africa Market Insights 44 Wed, 11 Sep 2019 04:59:11 GMT Bonds & Loans: What is the growth outlook for Benin for the remainder of 2019? What do you see as the major risks weighing on the economy at present and where do you see new growth opportunities emerging?

Romuald Wadagni: Benin’s medium-term outlook is very favourable with a projected growth of 6.7% over 2019-2024 according to IMF forecasts, making Benin the fourth most dynamic economy in Africa. The government’s forecasts are even stronger, with growth expected to reach above 7% in 2019.

Benin’s economic expansion will be driven by strong agricultural production, increasing private investment, and the development of new sectors such as tourism and the digital economy. In particular, Benin has become the first cotton producer in West Africa with more than 700 thousand tons produced in 2018. Benin aims to increase production to 1 million tons by 2021.

The economy will also benefit from a strong increase in energy production capacity with the commissioning of the Maria Gleta thermal power stations – bringing an additional 120MW of capacity online – in 2020. This additional power will notably be used by industry to increase the transformation capacity of raw agricultural products – cotton ginning, oil production, cashew nuts – and allow Benin to move up in the value chain.

On the occasion of the 60th anniversary of Benin’s independence, taking place the 1st of August 2020, many infrastructure projects have been commissioned in Cotonou. For instance, the Marina Boulevard – the road through, which heavy vehicles access the Port of Cotonou – is being fully revamped and enlarged.

Economic dynamism is also supported by many structural reforms implemented by the government since 2016. For instance, the reform of the Property Code in 2017 facilitated the transfer and registration of property, and the use of property as collateral – which has boosted confidence in the financial sector and helped ease access to credit for corporate and retail borrowers. This reform was reinforced in March 2019 through a decree which will allow banks to further decrease the level of non-performing loans by regulating the foreclosure of property.

Bonds & Loans: Benin issued its debut Eurobond earlier this year – which ended up being one of the best performing assets in the African Eurobond space. As this was a debut transaction, what were some of the key things the government needed to focus on, what kind of capabilities did the government need to develop, before it was in a position to issue the bonds?

Romuald Wadagni: Benin had to obtain an inaugural rating from international credit rating agencies, which we did in July 2018 with a B+/Stable from S&P, therefore placing Benin at the top of the WAEMU alongside Senegal. We then had to adopt a patient attitude towards the Eurobond market: When the clouds gathered over the EM bond market in the summer of 2018, we deployed a set of solutions to finance our budget and key projects with structured alternatives.

We had to remain vigilant and anticipate any EM market reversal. Indeed, as a debut issuer, the documentation requirement can be very demanding and seizing the right market window can become challenging. When the favourable market conditions were met in March 2019, we decided to go directly for a Euro-denominated transaction, although this was our inaugural Eurobond issuance.

With the success of the Eurobond, and after the Bonds, Loans & Sukuk conference we attended in Cape Town last year, we have many private and public companies very interested in the capital markets, and particularly in securing ratings. We are working with some of those companies to help them in their approach to securing a credit rating and accessing the bond markets. The fact that the government has gone through that process has created an opportunity for us to help those organisations to access the capital markets.

Bonds & Loans: To what extent did the Bonds, Loans & Sukuk Africa conference help create a platform for Benin to make its first foray into the international capital markets?

Romuald Wadagni: This event was one of the first major conferences I attended as Minister of Economy and Finance. The very constructive exchanges I had on that occasion helped to define the ambitious financing strategy that we are currently implementing.

Bonds & Loans: What guided the decision to issue in EUR instead of USD? Were there structural reasons beyond the CFA franc currency peg that made the EUR market attractive?

Romuald Wadagni: The reasons for issuing in EUR are numerous. We wanted to avoid any FX risk, and since CFA Franc is pegged to the EUR, that was achievable. We also wanted to benefit from much lower base rates in EUR compared to USD. And we also wanted to build a dedicated EUR-focused investor base, which we find to be more stable.

This was actually quite challenging as many issuers generally prefer to issue in USD to benefit from a deeper market, especially for an inaugural Eurobond. In fact, Benin is the first country in Africa to issue an inaugural Eurobond directly in EUR.

Bonds & Loans: What is the Ministry’s borrowing strategy in the near term? To what extent is the government focused on the domestic and regional investor base? How does being part of a common monetary union influence decision-making around where the government sources liquidity?

Romuald Wadagni: The 2019 financing forecast projected that EUR500mn would come from either the regional market or the Eurobond market. Given the success of the Eurobond issuance, we have therefore cancelled issuances planned in the regional market by an equivalent amount.

For the remaining financing needs, we will rely on other sources: capital investments will be funded by concessional or semi-concessional instruments, with the support of International Financial Institutions, the African Development Fund, Eximbanks, while cash requirements will be met through the treasury bills market, which remains open.

In 2020, the debt strategy will be influenced by two major factors: The reduction of the budget deficit, well below the regional target of 3%, consistent with the IMF’s forecast – which anticipates an average deficit of 2.2% over 2019-2022; and the impact of the debt reprofiling, which has pushed back large amounts of repayments into later years.

To meet residual financing needs, Benin will pursue its diversification strategy: the international market may be an option, if the conditions are met – the main ones being low volatility and competitive pricing. But Benin can also maximize the use of concessional resources, structure banking transactions through credit enhancement mechanisms or access the regional market. Indeed, we now have access to a wide range of financing sources, which we can rely on in a complementary manner depending on the respective market conditions.

As member of the WAEMU, Benin has access to the UMOA-Titres regional market, which is one of our main funding sources. The liquidity and depth of this market has been improving in recent years and is becoming an increasingly reliable funding source. As President of the WAEMU Council of Ministers, I have been trying to pursue this effort.

Bonds & Loans: What are some of the flagship initiatives being undertaken by the Ministry currently? Where are the Ministry’s major focus areas?

Romuald Wadagni: We will continue to implement the Government Action Program as we have been doing since 2016. In particular, we are focusing on: Improving the business environment and attracting more FDIs to increase private investment; developing new infrastructure – for instance, Project Asphaltage; and to continue to improve revenue mobilization.

Overall, we want to continue improving the business environment, and to try to remove all the unnecessary red tape and accelerate the creation of business for the private sector and create the conditions for the next generation to flourish.

Policy Africa
2219 IFC Treasurer: “Global debt markets are undergoing rapid transformation” Bond markets are not particularly well-known for being cutting edge. The vast majority of trading still takes place over the phone, and the settlement process more often than not still takes days rather than hours or minutes. But in emerging markets, where funding innovation is helping borrowers overcome capital bottlenecks and Fintech is enabling new pockets of growth, that perception is changing – and rightly so. We speak with John Gandolfo, the Treasurer of IFC, the private sector-focused arm of the World Bank, about the headwinds facing the global economy, the growing importance of sustainability, and what the rise of Fintech and Regtech means for emerging market debt. What are the key focus areas for the investment arm of the World Bank? 10 Sep 2019 Global Market Insights 55 Tue, 10 Sep 2019 05:10:39 GMT Bonds & Loans: A range of social and economic forces seem to be weighing unevenly on emerging markets, whether it’s rising populism, slowing regional growth in the Americas and Asia, or the weaponization of trade policy. How do you see emerging markets performing through the remainder of 2019 and 2020 against that backdrop? What do you see as some of the major risks or potential tailwinds on the horizon?

John Gandolfo: Emerging-market activity continues to moderate as a result of slowing global growth. However, a consequence of slowing global growth is accommodative monetary policies by developed-economy central banks and reflationary efforts by China, which on balance may be positive for emerging markets.

Trade uncertainty has begun to weigh on global manufacturing, and ongoing trade tensions between major economies remain a downside risk. Monetary and fiscal policy will play an important role in bolstering global growth. Domestic demand in major emerging-market economies continues to be sluggish, with negative implications for risk assets in emerging markets. In the short term, we are likely to see continued market volatility until there’s convincing evidence the global economy is turning the corner.

Bonds & Loans: We’ve seen a rise in attention being paid to ESG among financial decision-makers, and investors in particular. But what do you think needs to happen in order for ESG-linked borrowing structures to become more prevalent – particularly in emerging markets?

John Gandolfo: We integrate ESG into all our investment decisions. Other investors are increasingly doing the same. This has led to stronger corporate governance and deeper awareness of ESG-related factors in companies, with an increasing number of companies incorporating sustainability standards into their business operations.

In addition, the market for impact investing has grown exponentially in recent years. We see growth of impact investing continuing to be robust. Trillions of dollars in financing are needed to achieve the UN Sustainable Development Goals. At IFC, we see a strong pipeline of projects coming out of emerging markets that will represent attractive opportunities for investors.

A growing number of fixed-income investors are turning to thematic bonds, including in emerging markets. IFC is working on green-bond initiatives that are helping to catalyze investment in environmentally friendly projects in EMs, including the Emerging Green One fund with Amundi and the Real Economy Green Investment Opportunity fund with HSBC.

Several factors would boost ESG-linked borrowing in emerging markets, such as helping issuers debut in the market; encouraging issuances from beyond the market-linked investments universe, such as in the corporate and sovereign sectors; enabling established issuers to issue in EM currencies; and depending on an investor’s risk appetite, allowing investors to gain direct exposure to green-bond projects.

In the EM space, governance can be a perceived risk to investors, and this is where frameworks such as the Green, Social and Sustainability Bond Principles; the Green Loan Principles; and the Sustainability Linked Loan Principles have been incredibly important in providing guidance for ESG issuers, borrowers and investors. Standards like these give the market confidence in the integrity of ESG securities, and issuers and borrowers that align with these principles gain credibility.

IFC is an active participant in developing the market, above and beyond our issuance activities. We are on the Executive Committee of the Green Bond Principles, and we chair the Social Bond Working Group. We contributed to the development of the Green Loan Principles. Transparency on the use of proceeds and reporting is fundamental to boosting the growth of the market. As such, IFC publishes its Green Bond Impact Report and Social Bond Impact Report for investors on an annual basis.

As more investors unite around new platforms to facilitate investor participation, IFC is exploring tools to bring in new types of investors. In July, IFC launched its Social Impact Notes, which allow retail investors to participate for the first time in IFC-issued bonds. IFC will provide annual impact reporting to investors on projects financed using the proceeds of the bonds.

IFC has been a global leader in ESG since we launched our Environmental & Social Performance Standards 20 years ago. Our experience has demonstrated that ESG isn’t just good for society and the planet—it’s good business.

In April, IFC launched its Operating Principles for Impact Management to provide a common discipline and market consensus for the management of investments to ensure that investments labeled “impact” deliver the social and environmental benefits they claim to. Sixty-three institutions have signed up to the principles, including BNP Paribas Asset Management, Credit Suisse, and UBS Group.

Bonds & Loans: CFOs and Treasurers are hearing more about ‘blended finance’ and related structured financing techniques that help more effectively match risk appetites of liquidity providers with borrowers in need of financing. But could the viability of some of these techniques come under threat when interest rates begin to rise from nearly a decade of historical lows? If so, how can borrowers and liquidity providers mitigate against that risk?

John Gandolfo: Blended finance is generally understood within the development community as the “blending” of financial resources provided by non-profit donors with more traditional commercial sources of private finance to bring to fruition projects with major developmental impact. By de-risking investments, blended financing enables projects to proceed that wouldn’t be completed on a purely commercial basis. This can happen in several ways, including insurance or guarantees that mitigate credit and or market risks.

There are many different ways to structure a project, but at IFC we strive to do so in a way that allows clients and projects to withstand various stress scenarios. One of the stressors could be currency risk that a project will need to take if the financing is in USD, but revenues are in local currencies. In nascent markets, traditional currency hedging solutions such as currency swaps are generally not available. To address such market failure, IFC could provide a local currency loan to the client and hedge the currency risk through a donor facility, while keeping the credit risk of the project on its own balance sheet.

Bonds & Loans: Fintech appears to be quite promising in certain contexts. What role do you see fintech playing in mobilising capital for emerging market borrowers? Where do you see fintech potentially being extremely disruptive for incumbents?

Debt markets are undergoing a rapid transformation. Digital technologies--including process automation, advanced analytics, blockchain and smart contracts—will improve information flow and allow the automation of deal processing. With the right regulatory environment and transparency, new technologies could also help regulators and improve secondary market trading. Thanks to the spread of technology, we expect transaction costs to fall over time, making primary markets accessible to a wider set of issuers.

“Regtech” is helping regulators improve monitoring of transactions, and adoption by EM banks can mitigate the negative effects of de-risking on financial inclusion and provide a potential cost-effective solution for fulfilling their anti-money laundering obligations and ensuring they are able to continue serving their clients.

Bonds & Loans: Infrastructure development is a huge potential driver of growth in emerging markets – but it can suffer from chronic under-investment in some regions. How is IFC working with banks, asset managers and insurers to funnel more private sector capital into emerging market infrastructure projects?

John Gandolfo: The annual investment needed for global infrastructure is estimated to be on the order of USD3.7tn per year, and the gap is particularly significant in emerging markets. Through its syndications business, IFC has attracted banks and asset managers to provide more than USD16bn in loans to EM infrastructure over the last 5 years. 

IFC’s Managed Co-Lending Portfolio Program (MCPP) is giving institutional investors a way to allocate some of their capital to EM loans. MCPP uses a portfolio approach: investors receive priority access to IFC’s proprietary pipeline, and benefit from IFC’s unique diversification across countries and sectors. IFC is the lender of record, reducing transaction costs for borrowers and providing valuable long-tenor debt financing from third parties on the same terms as IFC’s own lending.

 Over time, IFC builds diversified portfolios for investors that mimic IFC’s own portfolio. To date, of the USD8bn raised by MCPP, IFC has raised USD2bn exclusively for EM infrastructure.

Macro Global Sustainable Finance