The direction of travel for the AIIB and the NDB has diverged since their founding, with the former emerging as a potential challenger to the hegemony of the World Bank, while the latter has struggled. By Jonathan Rogers.
In the near decade since their founding, both the Asian Infrastructure Development Bank and New Development Bank have found themselves in the crosshairs of a geopolitical tsunami thanks to their share ownership by undemocratic countries: China, which controls 26.5% of the AIIB by voting rights and 19.42% of the NDB; and Russia, which also owns 19.42% of the NDB and has a 6% voting right in the AIIB.
The relative calm of 2015 when China could grumble about the non-reform of the Bretton Woods post-war order through which the US and Europe control the World Bank and the International Monetary fund via their presidencies and voting rights and push for a viable counterweight seem like ancient history in the fast-shifting world order where war, either real – Ukraine – or forecast – the US versus China, or Europe versus Russia – is the dynamic input.
Still, in the construction of a multilateral development bank which can reflect the stratospheric rise of China as an economic power over the past 25 years, the AIIB has fared better than the NDB, although the latter’s melding to the goals of the “Global South” may yet see it outpace its peer after a somewhat shaky start.
The US and Japan declined to join the AIIB and perhaps with good reason given China’s voting dominance – 26.5% versus 15.2% for the US in the World Bank and 16.75% in the IMF (Europe controls 21% of IMF voting rights) and 8.13% and 6.47% in those institutions respectively for Japan. Maybe a more modest ambition from China for voting rights in the AIIB might have encouraged the US and Japan into the tent, but one suspects distrust would have trumped the numbers.
Meanwhile, back in the halcyon days of 2001, Goldman Sachs' former chief economist Jim O’Neil coined the acronym BRIC to refer to the fast-growing economies of Brazil, Russia, India and China and for use as a marketing tool to encourage the bank’s clients to invest in those countries. South Africa joined the group in 2010 and the BRICS Bank was founded five years later, subsequently renamed as the New Development Bank.
NDB had US$25bn of assets in 2022, less than 10% of the World Bank’s total. But its modesty in relative terms belies the pulsating ambition of its member countries, and it is cast as an engine-in-waiting to power the goals of the Global South, which include challenging the US dollar’s global dominance and the influence wielded by the Bretton Woods multilateral development banks and in Asia, the Asian Development Bank which is controlled by Japan
The ambition is not misplaced: in 2020 the BRICS countries overtook the Group of Seven in terms of total economic size, using purchasing-power parities as a measure for comparison. And its membership has grown exponentially: Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates joined in January and Uruguay is in the process of being admitted.
NDB’s assets have grown to US$37.5bn over the past two years, but that does not fully capture the direction of travel for the expanding BRICS grouping: BRICS foreign ministers are developing a "partner country model" to accommodate 17 nations who have not been accepted as full members, as well as a framework to allow local currencies to be used to settle inter-BRICS trade. A BRICS currency has been proposed, with the NDB to act as its clearing centre.
That latter development may prompt sleepless nights for US financial officials, particularly given the presence of major oil producers within the BRICS grouping and the "petrodollar" incarnation of the US unit as a settlement currency for international oil trade – the underpinning of the dollar’s ubiquitous strength – seemingly being chipped away at.
"When Jim O’Neil first coined the acronym it lacked South Africa and perhaps you could argue that radical shifts in the geopolitical and economic landscape since then have made it into an incongruous country grouping. Still, there is some sense to it. China has good trade relations with the other members but the others have mixed relations with each other," said Daniel Bradlow, professor at the Centre for Advancement of Scholarship at the University of Pretoria.
"But what they do all share is a dissatisfaction with the current arrangements for global governance. The Global South may not be a great term, given the inclusion of countries which sit in the north. But the commonality is that dissatisfaction, and for many the idea of colonisation having excluded them from the existing global governance arrangements. It is a useful term to describe where the common dividing lines in the world lie and how reform can move."
The NDB’s stated aim of providing funding to BRICs members in local currency appears to be a manifestation of discontent with the dollar’s hegemony – although it ameliorates foreign exchange risk in debt servicing – but the reality is that the bank, for now at least, must rely on the depth and liquidity afforded by US dollar capital markets for the bulk of its funding in meaningful size.
That was starkly illustrated by two of the bank’s recent funding exercises: two South African rand bonds issued last August and December, respectively – at three and five-year tenors – may help develop the South African domestic bond market and assist local issuers by providing a useful highly rated benchmark as a term funding pricing reference.
But the combined US$150m raised via the deals is a drop in the ocean compared with the US$2bn the NDB raised via the syndicated loan market in January, upsized from a planned US$1.25bn thanks to strong demand in general syndication, with eight banks participating.
That is a stellar result for a debut international syndicated loan but it would be fair to say that an offshore dollar bond would have been the funding vehicle of choice, given the NDB’s need to establish a well-populated yield curve and diversify its international investor base.
Sanction situation
And therein lies the impediment the NDB faces thanks to Russia’s 19.42% share ownership in the bank – its access to the international debt capital markets at competitive rates has been impeded by Russia’s status as an internationally sanctioned country thanks to its invasion of Ukraine.
"The concentrated shareholder structure among BRICS countries exposes the bank's operations and business model to geopolitical tensions involving one of its founding members, as evidenced by the impact of the Russia-Ukraine conflict on the bank in 2022," said Khamro Ruziev, director of sovereigns at Fitch Ratings in London.
In July 2022, Fitch downgraded NDB’s long-term issuer default rating to AA/negative from AA+, owing to the deterioration in the bank's access to US capital markets as a result of its Russian ownership and the challenges that this represents to the bank’s business model and strategy in the medium term, according to Ruziev.
"2022 was a very challenging year for the bank, when in February one of our shareholders was sanctioned which led to a significant change in the overarching risk of the bank," said Leslie Maasdorp, chief financial officer at NDB.
Still, the bank’s market access was restored in April last year with a US$1.25bn three-year green bond – albeit after a painstaking six months on the road as it stressed that proceeds would not be lent to projects in Russia and at a somewhat eye-watering 125bp over SOFR mid-swaps, well north of like-rated MDB comparables.
"In May 2023, Fitch revised the outlook on NDB’s rating to stable, principally due to a number of steps taken by the bank's management to adjust its strategy and reduce its Russian nexus and ultimately enable the bank to restore its capital market access in April 2023," said Ruziev.
"But a failure to demonstrate continued access to the long-term US dollar market at improving rates compatible with its business model would put pressure on our assessment of NDB’s liquidity and the bank’s rating."
As geopolitical tensions mount, the war in Ukraine rages on and the US presidential election looms with its inherent credit and rates market risk, the ability of the NDB to tap international debt capital markets at anything other than punitive rates will be tested.
“Russia’s a big problem for the NDB. You only have eight members and one of them is under sanctions. But the upside is that it has forced the NDB to become more creative in seeking out funding, and that involves the use of more local currency debt, which has the upside of reducing US dollar-based foreign exchange risk for member countries borrowing from the NDB," said the University of Pretoria’s Bradlow.
The bank’s foray in the Panda bond market in February via a Rmb6bn (US$830m) five-year – the largest five-year in that format issued in the interbank market – followed the local currency rubric and indicates that the NDB might have more luck in filling annual borrowing targets outside the US dollar arena via local Chinese investors, who pushed books to a 1.23 times cover, with foreign investors also participating.
"The oversubscription of the bond … [indicates] the strong demand and market confidence in NDB’s mission and mandate of mobilising resources for financing infrastructure and sustainable development projects," said the NDB in a post-deal press release.
While the NDB has had to overcome – at a price – the impediment of its Russian share ownership, the AIIB last June faced its own controversy centred on the resignation of its corporate communications head. Bob Pickard, a Canadian national, alleged Chinese Communist Party influence in the lending practices of the bank.
The AIIB subsequently conducted an internal review into Pickard’s allegations and concluded that the allegations were "incorrect and unsubstantiated [lacking] concrete evidence". Canada has since frozen its activities within the AIIB, with Chrystia Freeland, the country’s finance minister stating that Canada would conduct an analysis of AIIB investments and its governance and management framework.
Whatever the substance if the controversy, there can be little doubt that the AIIB has fitted relatively seamlessly into the global MDB landscape since its inception. Co-financing with the World Bank and the Asian Development Bank are a regular feature of its lending activities and the banks are actively seeking to release capital for lending purposes via the use of guarantees.
For example, the AIIB and the World Bank this year collaborated to utilise AIIB’s capital surplus to issue US$1bn of guarantees against sovereign bank loans made by the World Bank Group’s International Bank for Reconstruction and Development. The guarantees provided relief against capital constraints, in the process enabling the IBRD to free up fresh lending capital while also diversifying and enhancing AIIB’s portfolio and allowing it to increase lending to its low-income member countries.
At the same time, the bank places ESG criteria front and centre of its lending activities in line with its internal environmental and social framework, under which projects must be financially sustainable and meet the lender’s development goals in terms of their contribution to climate change.
Since inception, of the US$25.25bn of regular financing provided by the AIIB, some US$11.75bn was for climate financing and the bank hit its target for half of its lending portfolio to be devoted to climate finance by 2025 early; in 2022 some 56% of its project approvals were aimed at climate mitigation and adaptation. Last September, the bank unveiled its Climate Action Plan, outlining its climate-related plans from this year to 2030.
“If the project does not align with our environmental and social framework, it does not pass the test and AIIB does not proceed. It is in every project we do, every project we've done and every project we are going to do,” said Andrew Cross, the AIIB’s CFO.
"We practise what we preach. AIIB’s ESG strategy is not a token initiative but rather guidelines that help us become good ESG practitioners. … AIIB also shares methodologies with other multilateral development banks aligned with the Paris goals, including adaptation and climate-resilient operations, engagement and policy development support, reporting, and alignment of internal activities, among others."
The AIIB has impressed with its capital markets funding exercises, and if the pricing of its primary paper at ultra-tight levels versus its like-rated MDB comparables is a measure of the bank’s success in building itself into a pack leader among its peer group, then that box has already been ticked.
That was evident in the AIIB’s €1bn seven-year sustainable development bond which priced last month, garnering 5.5 times cover and burnishing the issuer’s credentials in the demand stakes in the process; books were more than double the issuer achieved via its debut euro foray last year.
The market’s growing acceptance of the AIIB as a big-league MDB was evident in the pricing dynamic – not only did the market accept a 4bp tightening from guidance for a mid-swaps plus 17bp print but the paper came just 4.5bp back of the World Bank’s seven-year curve.
"Secondary market liquidity and trading absolutely represent a tightening of AIIB’s curve compared to MDB comps. The tightening started to see the largest moves back in September 2023 at the three-year US dollar point and in 2024 we’ve now seen it at five and 10-years,” said AIIB treasurer Domenico Nardelli.
“In US dollars, we are now very healthy across the curve, with levels close to or even through some peer issuers. We have been monitoring liquidity across all of our lines and so we know the tight levels are on the back of regular flows and have been consistent all year.
“After the success in dollars, we came to the euro market wanting to see a similar improvement, and that is exactly the result we got. We see our euro levels as tight to peers as where we have been in dollars.”
Issuing innovation
As well as earning pricing chops with the euro deal and the tightening of its secondary dollar curve, the AIIB is also impressing with its willingness to innovate. For example, the bank is about to issue in digitally native format through Euroclear’s Digital Financial Market Infrastructure platform. A US dollar 2.5-year Reg S note is the expected outcome, with pricing expected by the end of this month.
The AIIB also demonstrated innovative flair as well as enhancing its ESG credentials when it issued its debut climate adaptation bond in May last year. The A$500m (US$330m) five-year Kangaroo was well bid in Australia and across Asia, with proceeds targeted to finance projects that have an estimated climate adaptation finance portion of 20% or greater of the total bond financing.
"The Kangaroo format for our inaugural climate adaptation bond had two advantages. First, the Kangaroo market is composed of a high mix of ESG-minded investors and it’s a market where you can see a variety of thematic bonds having success. Second, the size lined up well with the amount of climate adaptation assets we had to finance at the time," said Nardelli.
"We anticipate issuing more climate adaptation bonds – always under our sustainable development bond framework – as the size of qualifying assets grows. Issuing themed bonds in the Asian local currency markets could also very well create advantages for us as an issuer alongside advantages for our borrowers and investors."
"AIIB is committed to fund infrastructure investments that promote climate adaptation. This can be seen in our growing pipeline of climate adaptation projects, currently estimated to be approximately US$1.5bn. This bond contributes to AIIB’s targets of increasing financing for adaptation from capital markets, delivers on our commitment made at COP27 to promote climate-resilient solutions through issuance of bonds, and shows our strong focus of making all our infrastructure investments climate resilient," said Danny Alexander, AIIB vice-president for strategy and policy, after the bond priced.
In conclusion, it might be the case that MDBs are quintessentially political, which seems to contradict their multilateral essence. For those Pollyannas who dream of an ideal world, there may yet be hope in the admission of new members to the AIIB and the NDB.
This may be a false hope – it’s unlikely that China will allow the dilution of its 26.5% stake in the AIIB and the NDB’s Articles of Association stipulate that the founding BRICS countries’ holdings must not drop below 55%. Perhaps the appointment of Indian born – but naturalised American – Ajay Banga to helm the World Bank last year represents a symbolic step in the right direction. And perhaps when his term expires in January 2026, Jin Liqun, president of the AIIB, will be replaced by an individual from another of the bank’s member states.
At least the installation last year of former Brazilian president Dilma Rousseff as president of the NDB makes the right noises for gender diversity and the Global South.
Whatever, perhaps the best way to judge the performance of the AIIB and NDB is via the anodyne filter of metrics. On these, the AIIB wins hands down. But it’s early days yet and there’s a long way to go.
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