Introduction To Supranationals Special Edition 2024

October 22, 2024

Key Takeaways                                                                                       PRIMARY CREDIT ANALYST

- Multilateral lending institutions' (MLIs) focus on capital optimization continues as the          Alexis Smith-juvelis
   sector works to address recommendations from the G20 following its review of MLIs'               Englewood
   capital adequacy frameworks.                                                                     + 1 (212) 438 0639
                                                                                                    alexis.smith-juvelis
- The sector's capital optimization transactions, which vary in terms of types of                   @spglobal.com
   instruments and as a share of the overall balance sheet, underpin a nascent broader
   shift toward an originate-to-share business model.                                               SECONDARY CONTACT

- Blended finance will continue to be an important financing mechanism that will support            Alexander Ekbom
   private-sector mobilization efforts, although we believe concessional blended sources            Stockholm
   are required to unlock additional financing in difficult markets.                                + 46 84 40 5911
                                                                                                    alexander.ekbom
- MLI capital assessments remain robust as the sector continues to carefully manage its             @spglobal.com
   capital ratios.
                                                                                                    RESEARCH CONTRIBUTOR

                                                                                                    Yatish V Udywar
                                                                                                    CRISIL Global Analytical Center, an
                                                                                                    S&P affiliate, Mumbai

S&P Global Ratings is publishing its yearly report on multilateral lending institutions (MLIs) and
other nonbank supranational institutions, a publication that first started in 1986.

Spotlight Remains On The G20 Capital Adequacy Initiative

Over the past few years, the MLI sector has been working to address recommendations from the
G20 following its review of MLIs' capital adequacy frameworks. Some MLIs are more
advanced--with meaningful implications for balance sheets--than others.
The 2022 G20 report on capital adequacy frameworks calls upon improving capital resources to
support additional lending capacity from the multilateral sector. We have closely followed the
sector's developments as it relates to the five recommendations laid out in the capital adequacy
frameworks report (see "A Closer Look At The G-20 Expert Panel Review Of MLIs' Capital Adequacy
Frameworks," Oct. 11, 2022, and "Abridged Supranationals Interim Edition 2024: Multilateral
Lending Institutions Sector Updates," July 12, 2024).

Recommendation 1: Redefine the approach to risk appetite in capital
adequacy frameworks

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Introduction To Supranationals Special Edition 2024

Some MLIs have calibrated limits and adjusted internal models on the margins, such as the
International Bank for Reconstruction and Development (IBRD) adjusting its minimum
equity-to-loans ratio, which has unlocked some additional lending capacity in the sector.
However, the sector overall maintains a conservative risk tolerance, and we do not expect there to
be any fundamental changes that affect our assessment of capital and risk management.

Recommendation 2: Incorporate uplift from callable capital into multilateral
development banks' capital adequacy frameworks

While we have not seen MLIs begin to rely more extensively on callable capital, the sector has
engaged with shareholders and broader stakeholders to clarify callable capital processes and
usage (see "Will Callable Capital Be A Game Changer For The MLI Asset Class?," July 22, 2024).
The IBRD just recently announced that it will introduce a new enhanced callable capital
instrument that can be called on earlier if the rating on the bank is under pressure, and it can be
leveraged like equity.

Recommendation 3: Implement innovations to strengthen multilateral
development banks' capital adequacy and lending headroom

Here, the sector has taken meaningful strides and introduced or scaled various balance sheet
transactions, and we expect this to intensify (see table 1).

Recommendation 4: Assess CRA methodologies and engagement

We are constantly evaluating the needs, and we update our methodologies to capture changes in
the sector. For example, in 2022, we updated our hybrid criteria to include MLIs. While the MLI
landscape has evolved, we believe that we are able to capture innovations around capital
optimization in our capital measure. That said, we engage frequently with constituencies on our
approach.

Recommendation 5: Improve the enabling environment for capital adequacy
governance

Increasing data transparency has been a focus for the sector, and the emphasis has been on its
aggregated credit risk database (Global Emerging Markets Risk Database or GEMS). Releases on
recoveries and prior default statistics have pointed to strong performance on an aggregate level
for the sector globally. However, in our view, the data in the report is insufficient to allow for the
type of in-depth analysis that forms part of our credit rating process (see "GEMs' Enhanced
Recovery Statistics Are Yet To Provide Sufficient Transparency And Quality For Detailed Analysis,"
June 4, 2024). We are currently looking into the additional release of data that occurred on Oct. 15.

Capital Optimization Snapshot

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Introduction To Supranationals Special Edition 2024

Table 1

MLIs' capital optimization transactions*

Type of instrument          MLI adoption                                             RAC treatment

Exposure exchange           Asian Development Bank (AsDB): $3.5 billion              Exposure exchange agreements represent synthetic risk transfers of
agreements                  representing 2.3% of outstanding loans as of             sovereign exposure with the purpose of introducing more diversification
                            December 2023.                                           and reducing concentration on MLI balance sheets. The magnitude of
                            African Development Bank (AfDB): UA4.2 billion,          improvement in the risk-adjusted capital (RAC) ratio, with a reduction
                            representing 18% of loans outstanding as of              in total risk-weighted assets, depends on the overall concentration of
                            December 2023.                                           the MLI and the sovereigns that are included in each transaction.
                            Inter-American Development Bank (IADB): $7.4 billion
                            representing 6.4% of outstanding loans as of
                            December 2023.
                            IBRD: $3.6 billion (including with MIGA) representing
                            1.4% of loans outstanding as of June 2024.
                            The OPEC Fund: Exposure exchange agreements
                            approved with IADB in April 2024 for $210 million.

Hybrid capital instruments  AfDB: Approved and issued a $750 million commercial      Hybrid instruments are incorporated within total adjusted capital
                            hybrid instrument in 2024, with a 'AA-' long-term        depending on whether they receive equity content. The full amount is
                            issue rating.                                            incorporated until certain thresholds related to overall hybrid volumes
                            IBRD: Approved a shareholder hybrid (not rated),         to equity are reached, then they will be adjusted depending on the
                            although the full amount subscribed by shareholders      equity value of the instruments outstanding. Like capital, they create a
                            is ongoing.                                              possibility to extend more loans for development.

Guarantees from highly      AfDB: Received insurance cover from African Trade        If the guarantees meet the conditions laid out in our "Guarantee
rated shareholders or       Insurance Agency for non-sovereign loans (UA27.6         Criteria," we apply credit substitution for the amount, which is reflected
development partners for    million as of June 2024); Private Sector Enhancement     in the RAC. Typically, the sovereign exposure is reduced and replaced
specific countries and      Facility (AfDB trust fund), created mainly from donor    by the sovereign or development partner providing the guarantee. The
programs                    grants to absorb risk on select non-sovereign loans      benefit to the RAC stems from a reduction in risk-weighted assets given
                            (UA216.5 million as of June 2024).                       an improved risk charge to the highly rated shareholder or development
                            European Investment Bank (EIB): $3.5 billion in EU       partner.
                            comprehensive guarantees and EU political risk
                            guarantees on Ukraine, Belarus, Israel, and Palestine
                            exposures as of December 2023.
                            European Bank for Reconstruction and Development
                            (EBRD): Shareholders have provided 1.75 billion,
                            until May 2024, for lending to Ukraine. About 70% of
                            these resources are guarantees and 30% are outright
                            grants.
                            IBRD: $10.9 billion guarantees received by
                            shareholders and other MLIs, of which $8.1 billion is
                            for Ukraine as of June 2024.
                            IADB: $320 million in guarantees from the Swedish
                            International Development Cooperation Agency,
                            allocated mainly to Brazil as of December 2023.

Credit risk mitigation      AfDB: Credit insurance on Egypt for UA53.2 million       Assuming insurance contracts are structured similar to a financial
purchased from insurance    and on Cote d'Ivoire for UA157.9 million as of June      guarantee and meet the conditions in our "Guarantee Criteria," we
companies                   2024.                                                    would assume credit-risk substitution in our RAC and assign the
                            International Finance Corp. (IFC): $5.274 billion as of  counterparty exposure as a corporate. The overall benefit in the RAC
                            June 2024 ($4.466 billion as of June 2023 and $2.998     depends on the insurer and its jurisdiction, which determines the
                            billion as of June 2022).                                economic risk score and corresponding risk weight vis--vis the
                            IADB: 14 insurers combined have provided $300            exposure that receives the credit enhancement.
                            million in protection to Brazil as of December 2023.
                            IDB Invest: $1.23 billion as of June 2024.

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Introduction To Supranationals Special Edition 2024

Table 1

MLIs' capital optimization transactions* (cont.)

Type of instrument               MLI adoption                                               RAC treatment

First-loss and portfolio         AfDB: UA1.5 billion in credit protection on 11             Depending on the portfolio/MLI balance sheet that receives a first-loss
guarantees (MLI receiving)       sovereign exposures with first-loss in form of             portfolio-wide guarantee, we apply analytical judgement to best
                                 insurance policy and second-loss portion as a              capture the risk reduction. This can be, for instance, through a
                                 guarantee from the UK FCDO (R2R III).                      weak-link approach or a portfolio pro-rata approach, depending on the
                                 AsDB: Launched an Innovative Finance Facility for          characteristics of the underlying assets and the details of the
                                 Climate (IF-CAP) funded through sovereign                  structure, among other factors.
                                 guarantees and grant partners to provide first-loss
                                 guarantees on its sovereign exposure.
                                 EIB: Benefits from several first-loss guarantees
                                 issued under the EFSI, Invest EU, and ELM mandates.
                                 European Investment Fund (EIF): A large part of its
                                 operations is carried out under EU mandates
                                 benefiting from guarantees, often with a first -loss
                                 structure from the member states.
                                 International Finance Facility for Education (IFFED):
                                 While no guarantee has been issued, it's expected to
                                 provide portfolio support to IADB, AsDB, IBRD, and
                                 AfDB.

Synthetic securitization         AfDB: Incorporated a synthetic securitization in 2018      We estimate the likely total losses emanating from the underlying pool
and other ad hoc structures      for $1 billion of the private-sector portfolio, which was  of assets based on our RAC framework or CDO evaluator. We
                                 subsequently terminated in June 2024 (R2R I).              subsequently infer a ratings estimate for tranche that would, in turn,
                                                                                            determine the risk weights applied. The overall size of the benefit
                                                                                            depends on the underlying assets, the tranche detachment points, and
                                                                                            the funded or unfunded nature and credit quality of the counterparties.

*This is a non-exhaustive list.

Capital optimization transactions as a share of the overall balance sheet varies widely across the
sector. The European Investment Bank (EIB) and European Investment Fund (EIF) stand out, with
over half of their portfolios containing some form of credit enhancement given their engagement
with the EU comprehensive guarantee and EU political risk guarantee programs, among other
measures. The use of guarantees and credit risk insurance has increased markedly this year, and
we expect that many MLIs will implement some form of first-loss portfolio-wide guarantees over
the next 12 months.

These optimization structures underpin an initial broader shift in the sector toward an
originate-to-share business model. While this model largely represents what private
sector-focused MLIs have done for decades through their A/B loan and syndicate structures, it is
extending to a broader share of stakeholders and investors while offloading or reducing risk from
their balance sheets.

Generally, we believe that the originate-to-share model is well suited for the private sector. We
don't think, at these volumes, that it will affect sovereign lending and, specifically, the relationship
with borrowers and the preferred creditor treatment afforded to MLIs.

Furthermore, as more transactions are introduced, we will monitor the interaction of these capital
optimizations, particularly through the possible overlap of portfolio guarantees and specific
guarantees and other credit enhancements.

www.spglobal.com/ratingsdirect                                                                             October 22, 2024 4
Introduction To Supranationals Special Edition 2024

Mobilization: Guarantees And Blended Finance Are The Way Forward

For years, private-sector capital mobilization has been encouraged to support development
efforts in the sector. But mobilized capital in low- and middle-income countries still stagnates,
especially compared with high-income countries (see "Shareholders Are Calling On Multilateral
Lending Institutions To Increase Private-Sector Capital Mobilization For Climate And
Development," May 28, 2024).

Blended finance will continue to be an important financing mechanism that will support
mobilization efforts (see "Factors To Consider In The Growing Blended Finance Market," Aug. 15,
2024). The traditional instruments that MLIs offer--and that we expect they will scale--include
guarantees, partial credit guarantees, and liquidity facilities that encourage private-sector actors
into projects.

A few MLIs are also exploring concessional blended structures that we believe will be crucial to
supporting projects in low-income countries. These structures combine financing from donors or
third parties, alongside MLIs' own account lending to notably reduce the risk of projects. We
believe that scaling concessional sources and blending these into projects will allow MLIs to
augment the loss-absorbing qualities that are required to unlock additional financing in difficult
markets.

Capital Positions Are Robust, Lending Is Picking Up

MLI capital assessments remain stable year over year as the sector continues to carefully manage
its capital ratios. Around 73% of multilaterals that we rate have the highest capital adequacy
assessments, up from 67% last year. The increase was due to the incorporation of International
Finance Facility for Education (IFFEd) that is in a start-up phase and Black Sea Trade and
Development Bank (BSTDB) as it improved its capital position following its divestments in key
markets as a result of the Russia-Ukraine war.

 Chart 1

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Introduction To Supranationals Special Edition 2024

While capital assessments remained stable, we saw mixed results in terms of changes in RAC
ratios (see chart 2). Many institutions saw improved profitably that supported capital
generation--driven by higher rates and an easing of risk in their lending books as ratings have
stabilized. Other MLIs ran down their already signficant buffers, as expected, which supported
larger lending volumes.
Capital optimization transactions continue to support capital ratios for many entities. Although,
the overall benefit varies depending on when the transaction was implemented and the type and
size of risk that was covered.

 Chart 2

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Introduction To Supranationals Special Edition 2024

Lending grew meaningfully in 2023 compared with the past two years but remains below the 2020
peak. In terms of new loans disbursed, MLIs paid out $210 billion in 2023, up from $193 billion in
2022 and significantly higher than before the pandemic (see chart 3). Notably, International
Development Assn. (IDA) disbursements hit a record $27.7 billion, compared with $21.2 billion the
year prior, and the International Finance Corp. (IFC) disbursements grew to 18.7 billion from $13.2
billion, driving the increase in disbursements in the sector as a whole.

Lending across regions remains relatively stable. Although, the share of lending from EIB
decreased slightly to 26% of all new disbursements in 2023, from 28% in 2022, and the share of
lending from the World Bank Group increased to 34% of all new disbursements, from 32% the year
prior. Disbursements by region in 2023 were Europe (35%), Asia-Pacific (30%), Latin America and
the Caribbean (18%), and Africa (17%).

 Chart 3

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Introduction To Supranationals Special Edition 2024

Supranationals Special Edition 2024 Features Summary Analyses And
Compares Financial Data On The 37 Supranational Institutions We Rate

The 37 rated supranationals had a total combined balance sheet of $3.0 trillion at year-end 2023,
compared with $2.8 trillion the prior year.
Credit quality among the 37 supranationals remains high. We rate 38% of them 'AAA' and most
'AA-' or higher (see chart 4).

 Chart 4

The average rating on supranational debt is 'AA' but ranges from 'BBB' to 'AAA'. On a
debt-weighted basis, the average creditworthiness of this asset class has been stable since 2011,
and 'AAA' rated MLI debt represented 70% of all supranational debt, based on year-end 2023 data
and excluding debt from the EU (see chart 5).

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Introduction To Supranationals Special Edition 2024
 Chart 5

Over the past year, we took various rating actions (see table 2), including assigning a new rating to
IFFEd and suspending the rating on Eurasian Development Bank (EDB) for business reasons. Our
'AA+' rating and stable outlook on IFFEd indicate our view of its important and niche policy
mandate as it provides portfolio guarantees to support MLIs' capital optimization efforts as
eligible education loans are approved. However, IFFEd does have a limited track record.

Table 2

Rating actions since October 2023

            Rating to*     Rating from

BSTDB       BBB/Stable/A-2 BBB+/Watch Neg/A-2
EDB
EFSF        NR/--/NR       BBB-/Negative/A-3
EUROFIMA
FONPLATA    AA-/Stable/A-1+ AA/Negative/A-1+
ICIEC
IDB Invest  AA/Stable/A-1+ AA/Negative/A-1+
IFFEd
IFFIm       A/Stable/A-1   A/Negative/A-1
OFID
            AA-/Stable/--  NR/--/NR

            AA+/Positive/A-1+ AA+/Stable/A-1+

            AA+/Stable/A-1+ NR/--/NR

            AA/Stable/A-1+ AA/Negative/A-1+

            AA+/Stable/A-1+ AA/Positive/A-1+

*Ratings as of Oct. 11, 2024. Source: S&P Global Ratings.

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Introduction To Supranationals Special Edition 2024

As of October 2024, 95% of our supranational ratings have stable outlooks (see chart 6) and 5%
(BADEA and IDB Invest) have positive outlooks. We revised our outlook on Arab Bank For Economic
Development in Africa (BADEA) to positive on Sept. 20, 2023, to reflect our expectation that it will
continue expanding lending in sub-Saharan Africa, backed by broad shareholder support,
indicative of a stronger overall role and relevance. We revised our outlook on IDB Invest to positive
on June 26, 2024, given the recent capital increase, which could augment its policy relevance in
private-sector multilateral lending, consistent with a larger role within the broader global
development agenda.

We resolved all negative outlooks (accounting for 17% of ratings as of October 2023) over the past
year. We downgraded BSTDB to 'BBB', and the outlook is stable, because of its weaker public
policy role following the unwinding activity in response to the Russia-Ukraine war. We downgraded
European Financial Stability Facility (ESFS) to 'AA-' after a similar action on France, its
second-largest guarantor, and the outlook is stable.

We revised our outlook on EUROFIMA to stable from negative because of the institution's steps to
diversify its concentrated loan book, combined with stronger equity generation leading to an
improved capital position. We revised our outlook on FONPLATA to stable from negative after
Argentina's intention to withdraw from the institution--a decision made under the previous
administration--was reversed.

 Chart 6

www.spglobal.com/ratingsdirect                                                                         October 22, 2024 10
Introduction To Supranationals Special Edition 2024

Supranational Debt Totaled $2.0 Trillion At The End Of 2023

Supranationals' outstanding debt increased to $2.0 trillion at the end of 2023, from $1.8 trillion
the year prior, reflecting significantly larger issuance volumes from the EU given the Next
Generation EU program. Total outstanding debt at year-end 2008 was less than $800 billion. The
$2.0 trillion represents close to 1.9% of the world's GDP at year-end 2023.

 Chart 7

The pace of rated supranationals' debt growth has peaked three times, in 2009 at 16%, in 2012 at
24%, and in 2021 at 20%. This reflects their countercyclical role.

Most MLIs increased lending after the 2008 financial crisis to support investments in their
countries of operation. In 2012, the EFSF began operating and its outstanding debt surged to $208
billion from $23 billion in 2011. Many MLIs also benefited from a capital increase during the crisis
and could then increase their borrowings accordingly. The 2021 increase in debt outstanding
followed the sustained higher disbursement volumes from the pandemic.

  This report does not constitute a rating action.

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Introduction To Supranationals Special Edition 2024

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