In investment, one does not only look at numbers, but also at the management of the entity. So far so good, the African development Bank had been doing well in three important areas of its banking business. These areas relates to the prudent management of three of its principal sources of credit risk: namely; sovereign credit risk on its public sector portfolio; non-sovereign credit risk on its portfolio of private sector, and non-sovereign and enclave projects; and finally, counter party credit risk on its portfolio of treasury investments and derivative transactions. These risks are managed within an integrated framework of credit policies, guidelines and processes, which are briefly described below.
Sovereign bond is a term, which usually refers to bonds issued in foreign currencies, while bonds issued by national governments in the country’s own currency are referred to as government bonds. The total amount owed to the holders of the sovereign bonds is called sovereign debt. Nations with very high or unpredictable inflation like Zimbabwe, or with unstable exchange, often find it uneconomic to issue bonds in their own currencies and so are forced to issue bonds denominated in more stable foreign currencies. This raises the issue of sovereign default if the nation cannot afford to repurchase the necessary foreign currency when the repayment is due. As a result, investors require the bonds to be issued with a higher interest rate or yield. This makes the debt more expensive to service, thus increasing the risk of default even more.
When the Bank lends to public sector borrowers, it generally requires a full sovereign guarantee or the equivalent from the borrowing member state. In extending credits to sovereign entities, the bank is exposed to country risk, which includes potential losses arising from a country’s inability or unwillingness to service its obligations to the Bank. The Bank manages country credit risk through financial policies and lending strategies, including individual country exposure limits and overall creditworthiness assessments. These include the assessment of the country’s macroeconomic performance as well as its socio-political conditions and future growth prospects.
With regards to the Non- Sovereign Guaranteed Loans (NSGLs), the Bank only lends, with limited exceptions, to a public sector enterprise if a sovereign country will guarantee the loan. The Bank however shifts towards the NSGL programmes due to relatively little borrowing on the part of its Middle Income Countries (MICs). As a result, the MICs have also changed their approach to borrowing to adapt to changing needs and preferences by putting in place prudent borrowing policies and proactive debt management strategies. So, some MICs now rarely guarantee the borrowings of state-owned enterprises, which is a bold step in managing sovereign debts.
The benefits of these managerial steps by the bank and their results will be dilated on in the next issue.
Media Blackberry
