Capital Markets and Credit Rating Agencies as Constraints on Multilateral Development Bank Financial Capacity

One of the unique features of multilateral development banks compared to other types of aid organizations is their reliance on international debt markets for much of their resources. Backed by capital contributions from shareholders and their own business track record, MDBs issue bonds at generally very good financial terms, and then on-lend those resources to borrowers for development projects. This means that MDBs don't require large budgetary allocations from member governments--one of the key reasons for their enduring popularity as a type of international organization. Nothing, however, is for free. MDBs may be less dependent on government hand-outs compared to, say, the United Nations, but they have traded that for another kind of dependence: the perceptions of global capital markets. And international investors have minimal interest in the developmental role of MDBs--they simply want their bonds to be repaid. Does this particular kind of resource dependence impact the ability of MDBs to pursue their development mandate, and if so, how? This paper examines the question with specific reference to how MDBs are assessed by credit rating agencies (CRAs). The three main CRAS--Standard and Poor's, Moody's and Fitch--all evaluate the main MDBs with their own proprietary methodology. Until recently, these methodologies were highly opaque, but in the wake of the global financial crisis and subsequent pressure on CRAs, new methodologies have been drawn up and published for numerous asset classes, including MDBs. This paper provides evidence from CRA methodologies, MDB financial indicators and interviews with both CRA and MDB officials in favor of the hypothesis that the market-oriented criteria of CRAs places pressure on the ability of MDBs to pursue their development mandate. In particular, the methodology of S&P--developed in an effort to be more transparent and comparable--places excessive strain on MDB operations and severely limits their development effectiveness. This is apparent particularly in three major areas: i) risks posed by portfolio concentration, ii) benefit given for preferred creditor status, and iii) evaluation of callable shareholder capital.