Friday, 19 July 2019

Asian Development Bank: Under the spotlight

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This year’s Asian Development Bank annual meeting takes place on the European side of the Caspian Sea in Baku, Azerbaijan. While that may seem an odd choice for the Manila-based institution, it does provide an excellent backdrop for many of the talking points troubling the more Eastern parts of Asia.

For one, Azerbaijan is extremely exposed to falls in oil prices. As it relies on oil and gas for 95% of export revenues, last year’s plunge in crude prices forced policymakers into a reality check. The Azeri government is redoubling its efforts to diversify the economy and dipping into sovereign savings – both essential buffers to the oil-price shock.

There are lessons there for others in Asia. While few are so dependent on hydrocarbon exports, the slump in commodity prices from coal to iron ore has been felt throughout the region. China’s growth is slowing and policymakers in the region can no longer rely on a single offtaker for their goods. A diverse, flexible workforce and a fiscal safety net are crucial for economic stability.

Azerbaijan’s experience in the currency markets is also an extreme example of the pressures facing many Asian central banks. Strong currencies have their benefits, but Azerbaijan’s dramatic devaluation shows how quickly a peg can become too expensive to defend.

There may be more chapters to write, but, so far, Azerbaijan’s prudent foreign borrowing policies (arguably a by-product of its immense oil wealth) have saved it from a much worse fate. Other governments could learn a thing or two there, too.

Just as oil is putting Azerbaijan’s reforms under the spotlight, the Asian Development Bank is facing pressures of its own.

China has enjoyed a remarkable diplomatic success in luring 57 governments to join the Asian Infrastructure Investment Bank as founding members, and the new development bank is sure to dominate discussions on the sidelines of the ADB’s Baku meetings.

The ADB says it is not afraid of the competition and welcomes any support for Asian infrastructure development. However, the bank also needs to be prepared for additional scrutiny from inevitable comparisons with its own operations.

ADB stakeholders can be reassured that reforms are already under way at the bank’s Manila headquarters. Departments have been merged and procedures streamlined, and the pending combination of the bank’s capital bases will give it substantially more firepower.

The ADB also has close to 50 years of experience in financing Asian development projects and it will take time for the upstart AIIB to operate on anything like the same scale – even if it succeeds in drafting a charter by June.

There is certainly room for the two to work together, but the ADB needs to continue its drive for greater efficiency if it is to remain relevant in the region.

Many questions around the AIIB remain unanswered, but it has already pushed Asian development issues higher on the global agenda. That is certainly a welcome result.

Just to underline the point that Asia’s development is a subject worthy of global debate, next year’s ADB annual meetings will take place even further from its Philippines base – in Frankfurt, Germany.

Inside this report:

  • Ringing the changes

    ADB president Takehiko Nakao looks forward to collaborating with China’s new development bank and a stronger, streamlined ADB

  • Green is good

    Green bonds and other socially responsible investments are beginning to take off in Asia, but the region’s investors lag far behind their European counterparts. 

  • Riding the next cycle

    A looming hike in US interest rates in raising new questions for Asia, after a surge in dollar borrowing has increased the region’s exposure to global capital flows. 

  • Fuel for thought

    Lower oil prices have given many Asian economies a welcome lift, but policymakers can do more to capitalise on the opportunity.

  • Project runway

    Ambitions to bring Asian infrastructure financing into the capital markets have taken a giant step with the refinancing of Delhi International Airport. Are project bonds finally taking off?

  • Samurai saviours

    Efforts to connect emerging Asian investors with conservative Japanese investors have proven frustrating, but Abenomics is giving the yen a bigger role in funding Asian growth.

  • Slick operator

    Azerbaijan, the host of this year’s ADB annual meeting, is suffering from lower oil prices, but its prudent fiscal policy offers some lessons for other Asian governments

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