Citi's Valentino Gallo finds that there is an array of credit agencies developing countries can approach for finance, but without the right expertise, gaining access is never straightforward
Emerging markets have endured some challenging times of late. The slowdown in China's economy, which was a principal component of emerging markets' development over the past decade, has taken its toll: growth will be just 4.1% this year - lower than during most of the post-crisis period.1 Meanwhile, extreme volatility in commodity prices has created significant headwinds for many developing countries. With many metals, oil and soft commodities reaching multi-year lows in the past 12 months, commodity exporters are collecting less revenue and tax, and development of some countries' natural resources has become less economically viable.
The macro-economic forces of rapid population growth, increasing urbanisation and the need to improve the general welfare of citizens, will likely require major infrastructure investments in the coming years. And, both state-owned and private sector companies in the emerging markets will need access to funding sources to continue to grow and enhance their competitiveness.
Funding development projects
Financing infrastructure and development projects in emerging markets can be challenging. Many developing countries do not have the tax revenues necessary to fund such projects. Similarly, local banks and domestic debt capital markets seldom have the capacity to fully finance major infrastructure projects and, if they do, the availability of funds for other local borrowers is likely to be curtailed as a consequence - to the detriment of other segments of the economy.
Economic and political instability in some emerging markets have reinforced the challenges of accessing funding. International bank or bond markets are often wary of the risks involved in long-term lending to countries with a turbulent history. Recent changes to bank regulation, such as Basel III, have impacted banks' ability to lend to developing countries.
Aid from developed countries can be an important source of funding for infrastructure and development projects. According to the OECD Development Assistance Committee, aid totaled US$131.6bn in 2015 - a rise of 6.9% from 2014 in real terms. Even excluding the impact of the doubling of spending on refugees, aid was still up 1.7% in real terms.2 Official development assistance is up an impressive 83% since 2000, when the U.N. Millennium Development Goals were agreed.
But while increases in aid are welcome, it may only ever play a limited role in overall development spending. The OECD says that to meet the challenges associated with adoption of the 2030 Agenda for Sustainable Development and its 17 Sustainable Development Goals, the global community needs to move "well beyond" the (approximately) US$135bn of official development assistance provided annually.3
Bridging the gap
Export credit agencies (ECAs), multilateral agencies (MLAs) and development finance institutions (DFIs) help bridge the financing gap faced by developing countries for infrastructure and other projects. Most developed and many leading emerging market countries have established such agencies. While their programs differ, most offer guarantees and insurance to cover commercial banks' credit and political risks as well as provide other types of support and funding.
Agencies generally have a greater risk appetite than private markets because they aim to fill market gaps, are mission-driven and can leverage government-to-government relationships. Agencies can lay the groundwork for private investment and supplement capital available from the private markets through the use of guarantee and co-lending programs. By reducing risk, they encourage banks to lend at a lower cost and for longer tenors than would otherwise be possible.
Accessing finance provided by Export Credit Agencies (ECAs) (such as the Export-Import Bank of the United States, which is known as Exim), MLAs (like the World Bank) and DFIs (such as the US's Overseas Private Investment Corporation (OPIC)) are critical to developing countries' future economic success. Many agencies have specific programs aimed at improving infrastructure (such as the World Bank's Global Infrastructure Facility) or energy provision (the US government's Power Africa initiative) that can potentially transform countries.
However, the plethora of institutions, with their differing objectives and lending criteria, can make it challenging to gain access to funds. To find the right lender for a project, prospective borrowers need a knowledgeable guide.
Delivering real benefits
Citi has experience helping public sector entities, government ministries and other borrowers to gain access to crucial support across multiple sectors, agencies and countries around the world. Citi's global footprint across more than 100 countries facilitates deep relationships that span decades with more than 60 agencies worldwide. By understanding agencies' requirements, Citi can help identify suitable agency programs for borrowers and can assist in structuring solutions that help deals progress smoothly.
In June this year, Citi closed a US$81m dual-term loan facility for Zambia's Ministry of Finance to fund the supply and installation of 144 modular steel bridges across the country. The financing, which was supported by US Exim, will meet an essential development need by helping to connect under-served and under-developed areas
in landlocked Zambia.
Also in June, Citi partnered with a DFI under a co-lending arrangement to close an US$87m loan facility for Transportadora de Energia de Guatemala, to fund the construction of 850km
of power transmission lines in Guatemala.
The transmission project will help give Guatemala a more efficient, reliable and affordable electricity sector. Once completed, more than 30 power plants will be connected to the national grid, enhancing the resilience of the country's energy supply and helping to reduce tariffs by an estimated 25% - benefiting consumers and businesses and boosting the economy.
Another infrastructure project supported by Citi financed automatic water meter reading systems and an integrated management information system in Barbados, which will help to reduce chronic water scarcity: the project will be funded by a US$67.9m, 12-year term loan with a 95% cover from Export Development Canada.
New areas of cooperation
Historically, agencies have been almost exclusively focused on syndicated loan markets, and their volumes have been concentrated in a few sectors such as transportation and energy. Currently, agencies are expanding their offerings to include additional sources of "untied" financing and to non-traditional instruments, such as swaps, which may result in more opportunities for Citi's clients
to leverage agency solutions.
Citi has many years' experience working with the agencies to develop new products that address market and client needs. For example, Citi executed a 9-year cross-currency swap for the government of Senegal in order to convert the repayments under its US$ Eurobond into euros, which was made possible by a partial guarantee from the World Bank's political risk insurance arm, the Multilateral Investment Guarantee Agency (MIGA), of potential losses associated with the early unwind of the swap. And Citi worked with MIGA to develop a new Non-Honoring of Obligations of Sovereign-Owned Enterprises program that enabled Türk Eximbank to increase the availability of reasonably priced medium- and long-term funding to small and medium-sized enterprises in Turkey.
Citi's added value
Official agencies are a critical element of the capital formation for the emerging markets. Regardless of the type of funding required or the agencies targeted, Citi can help public sector entities, government ministries and other borrowers from the emerging markets. The economic effect of these needed investments can become cumulative. They have the potential to spur broader economic growth in those economies, expanding opportunity, increasing employment, and adjusting their current account balance of payments while strengthening their tax base.
Valentino Gallo, global head export and agency finance, treasury and trade solutions, Citi
These materials are provided for educational and illustrative purposes only and although the information contained herein is believed to be reliable, it does not constitute legal, investment or accounting advice
www.imf.org/external/pubs/ft/weo/2016/update/02/, accessed August 16, 2016
www.oecd.org/dac/development-aid-rises-again-in-2015-spending-on-refugee..., accessed August 16, 2016
Development Co-operation Report 2016: The Sustainable Development Goals as Business Opportunities, OECD, July 2016