Sustainability-linked bonds are pushing far deeper into emerging markets than previously with the World Bank helping Development Bank of Rwanda establish a pioneering local currency programme.
The supranational calls the facility, which is set for launch in September, “a first for a development bank globally and a model that could be scaled up in Rwanda and elsewhere in the region”.
A pivotal part of the programme is its use of credit enhancement from the World Bank’s International Development Association. With Triple A ratings from Moody’s and S&P, IDA offers grants and zero to low-interest loans to the world’s poorest countries.
IDA’s credit enhancement will total US$20m, according to Brice Gakombe, a senior financial sector specialist at the World Bank.
That forms part of a larger US$100m package of IDA support for Rwanda. The package, largely delivered via the World Bank’s Access to Finance for Recovery and Resilience project in the country, is to increase local businesses’ financing and help them recover from the effects of Covid-19.
It also follows Rwanda in October becoming the first country to agree a package under the International Monetary Fund’s Resilience and Sustainability Trust. The RST provides longer-than-usual 20-year loans with 10.5-year grace periods to address longer-term structural challenges like climate change and pandemic preparedness. Rwanda’s package totals US$310m.
The SLB programme will feature a “sound” sustainability-linked financing framework and “relevant, measurable, and externally verifiable” key performance indicators that are closely aligned to DBR’s activities, the World Bank said in a statement. It expects this “to act as an important signal for the wider use of debt markets, promote this form of financing among other potential issuers [and] contribute to domestic capital market development".
The programme should also strengthen DBR, the World Bank argued. It will “diversify its funding sources via capital markets while nurturing its role and commitments to achieving key performance indicators aligned with Rwanda’s sustainable economic development", according to the supranational.
It should also position Rwanda as a regional leader in sustainable finance while providing what the World Bank called “a template for broader sustainability development in the financial sector”.
IDA country
The emergence of an SLB in an IDA country is striking. Outside Latin America, where Chile printed new sovereign SLBs in US dollars on Tuesday and euros on Wednesday, the product is almost unknown. Most of what little activity there has been has come in middle-income countries like Thailand and Ukraine.
Moreover, no high-yielding sovereign issuer has managed to issue a local currency labelled bond since Uzbekistan offered a som-denominated sustainable development bond in 2021, said Viktor Szabo, an investment director on the emerging markets debt team at abrdn.
In addition, with financing having become more expensive in the higher global rate environment, many riskier EM issuers have lost market access. “With external markets effectively closed and significant funding needs across the African continent, the move by multilateral partners to support ESG and sustainability-linked issuance is a welcome development,” said Thys Louw, emerging markets fixed-income portfolio manager at Ninety One Asset Management.
“Against this backdrop financial innovation and credit-enhancement solutions could ensure continued flow of financing, while also aligning the countries with environmental, social and sustainable development goals,” Szabo added.
Louw called the programme’s local market focus “innovative”. “The development of local markets will be crucial to help finance future development across the African continent which doesn’t introduce the negative externalities which can occur with external borrowing,” he said, anticipating that countries will look to reduce their reliance on US dollar funding.
Ninety One expects sustainability-linked structures to become more common in the region, especially as the IMF and World Bank scale up their support through the RST. Louw also pointed to the IMF’s US$650bn “rechannelling” of its special drawing rights hard currency basket, which is to have a climate focus.
Technical support
Senegal is already preparing a sovereign sustainable finance framework with World Bank support that includes potential SLB issuance. Ghana too added SLB language to its framework, though it has not issued in the subsequent 20 months.
Abrdn could buy the potential DBR SLB “in theory”, but would need to consider credit, liquidity and currency risks of what Szabo said would be a highly illiquid bond.
A senior ESG banker praised the supranational’s catalytic role in the transaction. “The World Bank is doing some phenomenal work in trying to bring SLBs to their client base or portfolio base – more and more smaller SSAs across Africa and Latin America.”
The banker also noted that the World Bank chairs the sovereign SLB taskforce under the International Capital Market Association’s SLB working group. “They've given more clarity as to how we help develop ambition or materiality for sovereigns. I've learned a lot from listening to them within the group.”