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Low interest rates hinder investment: ADB President

03/05/2013 | Anthony Rowley

Updated interview with the Asian Development Bank's new president Takehiko Nakao on the challenges the bank faces

The Asian Development Bank will need to find additional sources of funds if it is to maintain recent annual lending levels of around $10 billion from its Ordinary Capital Resources – despite a tripling of the bank’s capital base to $165 billion agreed five years ago, ADB president Takehiko Nakao told Emerging Markets.

The Manila-based ADB recognizes, however, that it “cannot be too ambitious about doing everything by itself”, and that it must maximize its efforts to tap public- and private-sector sources of co-financing, the newly installed head of the institution said.

In a wide-ranging discussion conducted at the Ministry of Finance in Tokyo after he was confirmed as new president by the ADB’s executive board, the former vice finance minister for international affairs of Japan talked about how he sees the future role of the ADB in infrastructure and other areas, and about the bank’s relations with China among other issues.

Under former president Haruhiko Kuroda (now governor of the Bank of Japan) the ADB achieved a record tripling of its Ordinary Capital Resources in order to help cope with the aftermath of the global financial crisis and to confront the huge developmental challenges facing one of the world’s fastest-growing and dynamic regions.

But “because the investment income of the ADB is smaller than expected at the time of the capital increase,” largely because of low interest rates, the bank needs to find ways of “meeting the challenge of sustaining lending of around $10 billion a year” to finance infrastructure and other projects, says Nakao.

It is “unrealistic” to expect the ADB’s 48 shareholder countries in and beyond Asia to agree to a further capital increase “after such a short interval”, but possible funding shortages must be examined very closely, he says, adding that he “cannot preempt any solution at this moment”. The topic is expected to loom large in discussions at the annual meeting.

Co-financing between the ADB and public-sector institutions such as the Japan Bank for International Cooperation and similar institutions in Korea and elsewhere, along with stepped-up efforts to tap sources of private co-financing, are among possible options, says Nakao, who has specialized in monetary and financial affairs during a 35-year career at the Japanese Ministry of Finance.

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“Public-private partnerships are very important, and many Japanese banks and trading companies are starting to invest in infrastructure projects,” Nakao notes.

“Infrastructure bonds are one possibility because it provides an opportunity for long-term investors like pension funds and life assurance companies. But we need a stronger legal and institutional framework for mobilizing money to projects.” 

RESOURCES GAP

The ADB has estimated that Asia faces a “resources gap” of some $50 billion a year overall in order to maintain development that would enable the region to meet its Millennium Development Goals. The ADB approved $21.57 billion in financing operations including co-financing last year, according to its 2012 Annual Report, released ahead of the Delhi annual meeting.

“I think this is a really important job,” the 57-year-old Nakao told Emerging Markets a few days before taking up his presidential duties on April 28.

“Asia is becoming a bigger player in the global economy, and the dynamics of Asia have been [driving] the growth of the world as a whole, especially after the Lehman crisis. There are many things we need to do, including building good infrastructure, poverty reduction, disaster management, climate change, promoting gender issues, post-conflict development and so on. But of course the ADB cannot be too ambitious about trying to do everything by itself.” 

The emergence of China as the world’s second-largest economy behind the US (ahead of Japan, which is now third), and as a dominant economic power in Asia, has provoked speculation that Beijing might push for the presidency of the ADB in recognition of its growing regional and global status.

Had Kuroda served out his full term as president, those pressures might have grown stronger, but his early resignation to take over the helm of the Bank of Japan meant that China was unprepared to field a candidate at short notice. This has helped catapult Nakao into a position that has often gone in the past to Japanese vice finance ministers.

Even so, Nakao went out of his way to make a presentation to executive directors of the ADB as though competing with others for the presidency, although he was the sole candidate. “The Japanese government did not want to give the impression that [selection of a Japanese national] is taken for granted,” he told Emerging Markets. “But at the same time, in the process of selection, I noticed that many members of the ADB understand the important contribution that Japan has been making.”

Japan has provided 35% of cumulative donations to the ADB’s soft-loans agency, the Asian Development Fund (ADF), and 15% of the bank’s Ordinary Capital Resources, and this fact has been noted, he says.

Nakao had the advantage, in his presidential confirmation process, of being well regarded by China in the light of cooperation between the two countries while he was with Japan’s finance ministry. “I have tried to promote Japanese financial relations with China,” he says, noting in particular that this has now extended to include direct transactions between renminbi and the yen and also the mutual buying of government bonds.

China approved direct trading of its yuan currency against the yen last year at the end of May, making Japan the first country apart from the US to benefit from direct transactions of its currency with the Chinese currency. Yen-yuan trading, however, was hit by a drop in Chinese imports of Japanese goods after a dispute over territory.

“I think we achieved a certain amount [in boosting financial relations with China],” says Nakao, but because of “certain difficult issues between our two countries”, progress has not been as fast as it might have been. His reference was to recent, and ongoing, tensions between China and Japan over territorial and other issues.

CHINESE PRESIDENCY?

Asked whether China might assume the ADB presidency at some point, Nakao says: “I cannot predict the future.”

But a senior ADB source told Emerging Markets that “if China makes a major financial contribution to the ADF and if its candidates are good, and China is at that moment well received as an objective and fair player in the international economy, then there could be a chance” of a Chinese president being elected.

A further speculation has been that China might opt to promote the launch of an Asian regional infrastructure bank as a conduit for deploying part of its huge foreign exchange reserves in long-term investments beyond US Treasury securities and other foreign government bonds. China’s foreign exchange reserves are $3.44 trillion, an amount almost as big as the total German gross domestic product.

“There are many ideas about how to strengthen infrastructure financing in Asia,” Nakao says. “The [ADB’s] Asian Infrastructure Fund is one which has already started, and there is the idea of a Brics [Brazil, Russia, India, China and South Africa] bank. There can be other banks to increase infrastructure funding, but the ADB should play an important role because it includes many shareholders from advanced economies like the US. These are countries with a lot of resources and lending capacity. Of course, a country like China which has its own savings can promote its own channel to direct more money to infrastructure in Asia.”

The idea of a separate North-east Asian Development Bank (NEADB) has also been considered from time to time and was the subject of a feasibility study at one time by a UN agency. Again, Nakao declines to comment on this idea, but ADB sources suggest that as and when North Korea launches political reforms and democratization, a deal of money will be needed to support it. “But this is not the time for that,” one senior official said.

Before moving into the president’s seat at the ADB, Nakao was at pains to cement good relations between the bank and other multilateral financial institutions. He had meetings in Washington with the heads of the World Bank, Inter-American Development Bank and IMF.

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Tagged as: interest rates investment Asia ADB Takehiko Nakao quantitative easing Asian Development Bank

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