How Ajay Banga can ‘stretch’ the World Bank’s balance sheet

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When the UN held its general assembly last week, the attention of the media — and the protesters — was mostly focused on the politicians. But in its shadow, another event was taking place which investors would do well to note: a recently formed “private sector investment lab” for the World Bank held its inaugural meeting to discuss how to turbocharge the Bank’s operations.

This 15-strong body — which features chief executive officers such as Axa’s Thomas Buberl, BlackRock’s Larry Fink and Ping An’s Jessica Tan — did not issue any public report; nor did its co-chairs, Mark Carney, the former central banker, and Shriti Vadera, chair of Prudential.

However, I am told that these chief executives are brainstorming a swath of proposals for the Bank. And what they decide to do could be critical in determining whether the institution can make itself more relevant and credible under its new president, Ajay Banga.

After all, Banga (himself the former CEO of Mastercard) was appointed with an implicit mandate for reform after his predecessor, David Malpass, was pushed out for his caution on climate finance.

Banga is already trying to deliver. This week he told New York’s Council on Foreign Relations that he will ask the Bank’s shareholders to change its official mission statement when they meet in Marrakech next month for its annual meeting.

Most notably, he wants to widen the Bank’s current mandate, which is based around “poverty alleviation” and “shared prosperity”, to tackle wider problems such as climate, food insecurity and pandemics. “The twin goals have to change to being the elimination of poverty, but on a liveable planet,” he explained.

Banga also revealed that he hopes to raise the Bank’s new lending capacity by $100bn-$125bn over the next decade (compared to its total new commitments, including loans, grants and guarantees of $145bn in 2023) That target is achievable partly because countries such as the US, Germany and Japan are extending more funds via the so-called “capital adequacy” framework. However, Banga says he also intends to “stretch my balance sheet” with “all the financial engineering I can do” — even while maintaining the Bank’s AAA rating.

That sounds impressive. But there is a catch: even if that $100bn of new lending materialises, the pot is tiny given that additional spending of some $3tn per year is needed by 2030 to fight climate change and poverty, according to a recent Independent Expert Group report commissioned for the G20. It is also modest, given that the group called for some $500bn of new development finance each year until 2030, $260bn of it channelled through multilateral development banks (of which the World Bank is the largest.)

Hence the importance of that 15-strong CEO committee: the only way that Banga has any hope of mobilising the funds he needs is to persuade western asset managers to divert some of their investments into backing the Bank’s goals. The existing pot of philanthropic capital, public money and multilateral development bank loans cannot plug the gap. Or as Banga says: “[Our capital] is like a pimple on a dimple on an ant’s left cheek, compared to what we need in the world”.

Can this happen? It is still unclear. Western funds have hitherto shied away from investing in emerging market climate projects on any scale because of concerns about political and foreign exchange risks. The projects also tend to be so small-scale and opaque that they are difficult to price or trade.

However, the chief executives’ committee is mulling over solutions to these problems. One idea would be to attempt to de-risk projects by using MDB or philanthropic funds to absorb the first wave of losses in projects; experiments are already emerging in this direction.

A second would seek to securitise development loans — again, to spread risks. A third would entail the World Bank running carbon markets, to put them on a more credible and transparent footing; this could channel funds from the developed country companies and investors (which typically buy carbon credits) into poorer regions (which supply them).

A fourth proposal is for the Bank to use its political muscle to force developing countries to create more regulatory certainty for investors. A fifth is for accountants to tweak carbon reporting rules to enable lenders to provide transition finance to wind down activities with large emissions without being penalised (as they currently are).

These are all eminently sensible ideas that could — and should — be adopted as soon as possible. Indeed, it is tragic is that they were not implemented a few years ago, when money was so cheap that western asset managers were eager to embrace risk. Now the credit cycle has turned.

But, as the proverb says, better late than never — and the fact that Banga has even created a CEO council (which is the first of its type) suggests that momentum for change is building. It will not be easy; the idea of using MDB capital to de-risk private sector projects is controversial. 

However, the global financial community has every reason to hope that at least some of these ideas will fly, as do the millions of people around the world who are suffering the effects of poverty and climate change. All eyes on Marrakech.

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