ADB and AfDB strike a US$1bn sovereign risk swap deal

The Asian Development Bank (ADB) and the African Development Bank (AfDB) have entered into a US$1bn sovereign exposure exchange agreement to bolster their respective financial positions and lending capabilities.

Sovereign exposure exchanges, a strategy where banks trade or swap risk from loans to various countries, allow development banks to diversify their lending portfolios. Essentially, this practice lets lenders balance their financial risk across a broader range of countries. By reducing the capital needed to cushion against concentrated risk, it supports the banks’ overall credit ratings and can notably enhance their ability to offer more loans.

The ADB has triple-A credit ratings from Moody's, Standard & Poor's, and Fitch. These major rating agencies have also assigned a triple-A rating to AfDB's long-term senior debt and a double A-plus for its subordinated debt.

Much like the ADB, the AfDB is a multilateral development finance institution headquartered in Abidjan, Côte d'Ivoire. It provides loans and equity investments to African governments and private enterprises to promote socio-economic progress in its regional member countries. The bank focuses on five key development priorities: light up and power Africa; feed Africa; industrialise Africa; integrate Africa; and improve the quality of life for the people of Africa. 

This marks the third such agreement the ADB has entered into with another multilateral development bank. The initial two were with the Inter-American Development Bank, finalised in 2020 and 2022, and totalled US$2.5bn. Despite being well-capitalised, the ADB highlighted in a statement that the risk of overexposure to a small number of borrowing countries could constrain its lending capacity. The risk exchange is essentially a behind-the-scenes agreement, and the relationship between the banks and the countries they lend to remains unchanged.

The AfDB has aimed to fortify the bonds between Asia and Africa. Japan, India, South Korea and China are among the top shareholders in the trust fund that helps finance AfDB. The bank has previously held its official annual meetings in countries like South Korea and India, and it maintains an external office in Tokyo.

AfDB actively courts Asian investors. The Bank’s African Economic Outlook report has forecast African GDP to grow by 4.1% on average in 2023 and 2024, surpassing the global rate by 2.9% and Europe's by 1.1%.

References

‘ADB approves policy framework for exposure exchanges with multilateral development banks', Asian Development Bank, 10 November 2020

‘African Economic Outlook 2023: Opportunities abound for Asian investors in Africa, experts', African Development Bank Group, 13 July 2023

‘ADB, African Development Bank sign $1 billion sovereign exposure exchange agreement', Asian Development Bank, 20 July 2023

‘African Development Bank enters new $1 billion exposure exchange with the Asian Development Bank to increase development lending capacity', African Development Bank Group, 21 July 2023

‘Asian Development Bank', Wikipedia, Accessed 24 August 2023

‘Frequently asked questions', African Development Bank Group, Accessed 24 August 2023

‘Ratings’, African Development Bank Group, Accessed 24 August 2023

‘Credit fundamentals’, Asian Development Bank, Accessed 24 August 2023