The African Development Bank has received approval from its Board of Directors for a significant exposure exchange of $1 billion with the Asian Development Bank. This was disclosed via a statement on the bank’s website.
The bank noted that the main aim of the transaction is to provide support in unlocking additional sovereign lending headroom while reinforcing the African Development Bank’s capital adequacy metrics.
It marks the second exposure exchange agreement executed by the African Development Bank with the first being with the Inter-American Development Bank and the World Bank group’s international bank for reconstruction and development.
The statement reads,
- “This new exposure exchange agreement is the second transaction that the African Development Bank has executed following the success of the first agreement finalized in 2015 with the Inter-American Development Bank and the World Bank Group’s International Bank for Reconstruction and Development.”
- “Exposure exchanges between multilateral development banks involve a synthetic exchange of sovereign exposures in a risk-neutral manner to help address single obligor constraints and portfolio concentration.”
What the currency exposure means for African countries
Commenting on the benefit of the currency exchange agreement and what it means for countries on the continent. The bank said,
- “Exposure exchanges between multilateral development banks involve a synthetic exchange of sovereign exposures in a risk-neutral manner to help address single obligor constraints and portfolio concentration.”
- “This new exposure exchange allows the African Development Bank to continue supporting its regional member countries, particularly following the Covid-19 pandemic, combined with the spillover effects of the Russian–Ukraine war, which affected most African countries.”
The bank’s Director for Syndications, Co-financing and Client Solutions, Max Ndiaye said of the exchange exposure deal.
- “This operation demonstrates the relevance of the African Development Bank and its peer institutions in adhering to the G20 called on the multilateral development bank community to collaborate in adopting innovative approaches and initiatives. This includes risk transfers to maximize capital for increased development lending.”
What you need to know
Despite the African Development Bank’s current prudential ratios adhering to their statutory limits and S&P Global Ratings confirming their credit rating at AAA, the second exposure exchange is expected to provide African countries with additional financing.
This will be particularly beneficial for those countries requiring increased countercyclical lending, while still adhering to internal single obligor limits and concentration ratios.
African countries have come under intense fiscal pressure since the Russia-Ukraine war began. Notable among them is Ghana which has defaulted on its loans in recent times. According to the AfDB, about 21 countries are in or at risk of debt distress.
The exposure agreement signifies the bank’s commitment to continue to provide funding for development projects in Africa in times of global financial turbulence.
