World Bank prepares first bonds for poorest countries
Significant expansion of financing role aims to tap investor demand for yield
The World Bank plans to expand its bond issuance, raising up to $8bn in the next three years on behalf of the world’s poorest countries for the first time, in what could become a significant increase in its financing role.
The sale will tap into investors’ growing demand for debt issued by supranational organisations, which benefit from credit ratings that are higher than many sovereigns while also paying a better yield than some of the biggest government issuers.
Annual supranational bond issuance has more than doubled in the past decade, to $265bn in 2016, according to figures from data provider Dealogic.
The International Bank for Reconstruction and Development, a World Bank subsidiary, was the third-largest supranational bond issuer in the decade to 2016, raising $361bn in syndicated debt, Dealogic’s data show.
Now the International Development Association, another World Bank Group subsidiary, is to follow the IBRD by entering the capital markets for the first time.
It was set up in 1960 to issue long-dated loans and grants to countries that could not afford to pay market rates of interest on their borrowings.
Since then IDA has accumulated $160bn of equity and nearly $30bn of cash through donations from member countries; it plans to use this capital to back its new programme of bond issuance.
The World Bank began issuing bonds and lending at interest to richer countries through the IBRD in 1947. It will now roll this approach out more widely, through the IDA; the initial bond issue is expected next year.
The IDA will issue the first $6bn-$8bn of bonds over the next three years, financing the interest payments on them by charging interest on some of the loans it makes to lower-income countries.
The IDA has already received triple-A ratings from credit rating agencies Moody’s and Standard & Poor’s.
Arunma Oteh, World Bank Group treasurer, said the IDA “needs to make more intensive use” of its accumulated capital “in order to scale up the volume of financial assistance needed” for countries to meet global development goals.
Moving into the capital markets will allow the IDA to increase its annual lending by 50 per cent, the World Bank estimates.
A growing number of emerging-market countries are “transitioning to the point that they are nearly ready to graduate to borrowing from IBRD instead” and therefore “we need to make sure that we offer them a continuum of finance and payment options”, Ms Oteh said.
The World Bank has faced criticism in recent years for its approach to lending, which has seen it issue bonds in 59 currencies globally, and develop a series of new products including green, catastrophe and pandemic bonds.
It sees its role as being to foster the development of capital markets in emerging economies.
However, the bank is facing a backlash in Washington. Allan Meltzer, the US economist and longstanding World Bank critic, has argued that the bank should scale back its activities to focus only on the poorest countries and abandon its role as a lender and adviser to middle-income economies.
The naming of Adam Lerrick, Mr Meltzer’s former adviser, as Donald Trump’s assistant secretary for international finance at the US Treasury department has raised fears among some working for big supranational organisations that Washington may take a more sceptical view of their role in the global economy.