By Gregory Kronsten
Development Finance Institutions (DFIs) do not get the best press. When the markets are in good shape, they tend to be taken for granted and their efforts are reported in the shadow of hedge funds and Wall Street investment banks. When those markets tank under the pressure of shocks such as COVID-19, they come into their own because they do not cut and run. Being policy vehicles of governments in advanced economies, their mandate is to maintain their programmes and presence wherever possible.
This was one of our observations after listening on Wednesday (29 July) to a webinar on ‘Development Finance Institutions: Regenerating Resilient Finance post-COVID’. It was one of a very useful series put together by a prominent London-based business platform for the continent.
Franziska Hollman, Director for Africa at Germany’s DEG, said that her company provided grants for 25 consultancies at a total cost of €7m to support their clients in the early days of COVID-19 and carried out 200 quick assessments for the same on restructuring needs in the face of COVID, if any. The DFIs have become active in what the industry terms “non-technical support”.
At the outset, there were some challenges for regional DFIs. Micheal Awori, chief operating officer at TDB (Trade and Development Bank, formerly the PTA Bank), noted that some global correspondent banks pulled back from financing Africa trade. His company had to make alternative arrangements to plug the gap.
Mohan Vivekanandan, a senior executive at the Development Bank of Southern Africa (DBSA), recalled how he had been told in March that a large increase in non-payments and a tightening of liquidity in the rand market were coming. The bank was able to tap liquidity available at KfW, the German state-owned development bank and parent company of DEG, and its French counterpart. We should note that the DBSA is not a small operation since it disburses about US$1bn annually for long-term infrastructure projects in southern Africa, of which about 40 per cent is outside South Africa itself.
The cause of digital, and IT generally, has been advanced by COVID-19. Awori said that trade finance, which he described as “very paper heavy”, had been slowed because of the many restrictions imposed by governments. In his view, regulators needed to be prodded to allow a greater digital input into trade finance. He noted that TDB had been the first bank in Africa to use blockchain to execute trade finance in 2019, and that its use had greatly increased due to COVID-19.
Sanjeev Gupta, executive director at the Lagos-based Africa Finance Corporation (AFC), lamented the dearth of domestic savings in most African markets and the resulting dependence on global capital. As an example, he cited the corporation’s recent highly successful Eurobond issue, which raised US$700m in June with a coupon of 3.125%. The issue was three times oversubscribed, demonstrating appetite for emerging-market issues with a strong rating (A) if not a fat return.
Gupta highlighted a broader issue highlighted by COVID-19, namely the folly of depending on a single supply chain. Devotees of smartphones will have heard that the launch of a new Apple product has been delayed as a result of such dependence. There are numerous other examples of this short-sightedness on the part of multinationals. Africa could benefit from new, more diverse supply chains. The industrial parks of Ethiopia and Rwanda would be strong contenders but we could cite many strong alternatives such as Vietnam, Bangladesh and the Philippines. We are not convinced that most African governments have built adequate infrastructure and are flexible and rapid enough in their decision-taking to see much of this new action.
Gregory Kronsten, Head Macroeconomic and Fixed Income Research, FBNQuest