Home Banking Why Saudi Arabia’s Imminent Membership Is Crucial for the BRICS’ New Development Bank

Why Saudi Arabia’s Imminent Membership Is Crucial for the BRICS’ New Development Bank

by internationalbanker

By Nicholas Larsen, International Banker


On May 30, the New Development Bank (NDB) kicked off its eighth annual meeting in Shanghai under the theme “Shaping a New Era for Global Development”. Given the recent economic progress made by its constituent members of BRICS nations (Brazil, Russia, India, China and South Africa), this latest gathering was possibly the most important of the bank’s history as it continues to position itself as the preferred lending institution for emerging economies and the developing world. But with the war in Ukraine raising investors’ concerns over the bank’s creditworthiness and ability to lend at competitive rates, the highly anticipated addition of Saudi Arabia to the bank’s expanding bloc of members could go a long way towards alleviating those fears.  

According to the readout from the NDB website, this year’s annual meeting focused on exploring “how NDB could further contribute to shaping a new era for global development”, with discussions centred on topics including the NDB’s mission and its mandate of mobilising resources for infrastructure and sustainable-development projects in BRICS and other emerging economies and developing countries, as well as priority areas for the bank, including supporting projects that contribute to digital connectivity as well as combat climate change and poverty.

The bank’s distinct focus on environmental sustainability as a core pillar of its financing policy was reiterated at its annual meeting by the NDB’s president, Dilma Rousseff. “We support the national strategies of the Bank’s member countries to reduce greenhouse gas emissions by financing renewable energy, green and resilient infrastructure, aiming at low-carbon growth,” Rousseff, who is also a former president of Brazil, remarked. “The Bank is committed to helping member countries achieve the Sustainable Development Goals—foremost among which are the eradication of poverty and of hunger—as well as the Nationally Determined Contributions (NDCs) made under the Paris Agreement by each signatory country.”

The NDB was established by the five BRICS nations in 2014 before formally opening for business the following year. Since then, Bangladesh, the United Arab Emirates (UAE) and most recently Egypt (in March 2023) have joined as NDB members, having acquired equity positions within the bank, whilst it is understood that Uruguay is on the verge of joining the NDB. As of July, the bank has issued an estimated $33 billion in financing across at least 96 development projects located mainly within the borders of the five BRICS founding nations.

But it is the expected inclusion of Saudi Arabia as an NDB member that could well turbocharge the bank’s ability to lend to developing countries at more attractive prices than its competitors—such as the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB)—particularly at a time when it is clearly lagging those institutions in terms of its ability to lend competitively. “In the Middle East, we attach great importance to the Kingdom of Saudi Arabia and are currently engaged in a qualified dialogue with them,” an NDB statement recently acknowledged.

At present, this is proving challenging given that Russia holds an almost 20-percent equity position in the bank, whilst Moscow has been inundated with a barrage of Western economic sanctions in response to its invasion of Ukraine in February 2022. Investor concerns over whether the NDB was complying with the sanctions soon began to drain liquidity from the bank’s lending instruments, despite its insistence that it was a low-risk option, its announcement just days after the invasion that it would cease all funding activities of new projects in Russia and its decision to freeze its $1.7-billion existing exposure to Russia (6.7 percent of its total assets).

But by July 2022, Fitch Ratings had downgraded the NDB’s credit rating from AA+ to AA. “NDB’s business model is reliant on its ability to access the long-term US dollar bond market at low rates and to pass on its low funding cost to its borrowers,” the rating agency noted at the time. “Fitch believes that, despite actions taken by the bank to break the Russian nexus, NDB could face challenges to issue a long-term bond on US capital markets, including working with US financial institutions to arrange and underwrite issuance, given [the] reputational risk associated with a bank with large Russian ownership.” The bank also continued to fulfil its existing obligations to Russia, which, in turn, continued to fulfil its own payment obligations to the bank. “Russia plays a significant role in the decision-making process, and given its special role as a founding member, NDB intends to think about fulfilling its obligations vis-à-vis, in compliance with applicable restrictions introduced on financial capital,” Vladimir Kazbekov, the NDB’s chief operating officer, confirmed at this year’s NDB annual meeting. 

Fundraising options are “the most important thing at the moment”, Ashwani Muthoo, director general of the NDB’s independent evaluation office, told the Financial Times in late May, adding that the board is examining alternative instruments and currencies to raise funds, including China’s renminbi and South Africa’s rand. “We are struggling to mobilise resources…. We will have to analyse the Russia situation, the war…these are the kinds of things we’ll have to look at.”

Against this challenging backdrop, it is no surprise that a country with as strong a balance sheet as Saudi Arabia’s will be a welcome addition to improving the NDB’s overall credit profile, funding rates and financial strength. As Matteo Giovannini, a finance professional at the Industrial and Commercial Bank of China (ICBC) in Beijing and a member of the China Task Force at Italy’s Ministry of Economic Development (MISE) (or Ministry for Business and Made in Italy), recently observed, should the world’s second-largest oil producer join the NDB, it could represent a “serious alternative, alongside the Asian Infrastructure Investment Bank” to the Western-dominated IMF and the World Bank. “The inclusion of Saudi Arabia to the NDB could also secure the bank new avenues of funding at a time when the organization is finding it hard to mobilize its own resources due to the impact of Western sanctions on Russia,” Giovannini added. “In this sense, the participation of the Kingdom could serve as a way to hedge the Russian geopolitical risk by leveraging the growing economic and financial influence of a well-off additional shareholder.”

Indeed, the NDB only recently managed to return to the dollar capital markets when it issued a $1.25-billion three-year green bond in April, its first dollar bond issuance since the outbreak of the Ukraine war. The funds were earmarked for a range of climate-friendly projects, including a solar-power programme as well as the refinancing of existing green projects, and attracted investors from not only the BRICS countries but all around the world.

“This is a major step forward because now we’re starting a new journey,” the bank’s chief financial officer, Leslie Maasdorp, told global development media platform Devex, adding that while none of the funds will be lent to Russia (as confirmed in the bond’s documentation, which included a “use of proceeds” clause), the bank is still being charged a risk premium upon its return to the market. Indeed, the bond’s 5.1-percent yield at the time of issuance was more than 100 basis points higher than similar dollar-denominated bonds this year from comparable institutions, such as the World Bank. “There is clearly a mispricing right now…. We are comfortable with where we are at now,” Maasdorp also stated, however, noting the crucial importance of the bank being able to get back to the markets.

According to Fitch, the NDB’s benchmark green-bond issuance meant that “the bank has demonstrated its ability to issue on the US dollar long-term market at rates slightly above…but close to rated peers”. Fitch has also since revised its outlook on the NDB’s long-term issuer default rating (IDR) to stable from negative and has affirmed the bank’s rating at AA. “The revision of the Outlook principally reflects Fitch’s view that it is more likely the bank will be able to successfully execute its medium-term strategy, including continuing to grow its balance sheet and attract new shareholders, despite the negative impact that the Russia-Ukraine war has had on its operations,” the rating agency stated on May 16. “The agency’s revised assessment follows 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.”

While this return to the market is undoubtedly a positive achievement, there is still a considerable way to go before the NDB becomes the preferred lender for the developing world. As such, Saudi Arabia’s impending addition will surely give the bank the vital injection of creditworthiness it so sorely needs right now to ultimately achieve its lofty ambitions.


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