Multilateral development bank policy-based guarantees (PBGs) have long been an instrument in search of demand. First introduced in 1999 at the International Bank for Reconstruction and Development to help governments access market borrowing at attractive rates, their track-record has been uneven, and their uptake limited. The multilateral development bank (MDB) business model tends to favor direct lending over non-lending products. And MDBs have experienced high-profile bumpy patches with PBGs—including a 2015 PBG for Ghana which sparked significant controversy around whether it generated an actual financial benefit for the country – that may have deterred countries from using the instrument. Moreover, the benign global interest rate environment that has prevailed since the Global Financial Crisis has generally helped governments access external commercial financing at historically low rates, making PBGs less directly relevant.
But PBGs have also had their successes, especially during times of stressed market conditions. PBGs have proven useful in insulating issuers from external market turmoil and helped governments secure better terms – reducing funding costs by an average of 330 basis points compared to what governments would have achieved had they pursued unenhanced issuances. They have helped new issuers establish market access and grow their investor base. They have helped countries reprofile expensive commercial debt on more favorable terms. They have helped governments secure private sector participation in restructuring exercises. And some governments are starting to use PBGs to raise funds for environmental, social, and governance (ESG) programs and projects, raising the possibility of a new generation of ESG PBGs.
PBGs have also proven more catalytic than direct lending, with $1 PBG mobilizing on average $1.8 in commercial finance.
PBGs could become freshly relevant as the world grapples with multiple crises, increased capital market volatility, heightened risk aversion, and tightening monetary conditions. Indeed, many of their strengths are well-tailored to the challenges governments in emerging and frontier markets will increasingly face in the coming years. Going forward, PBGs could be particularly useful debt management tools to help governments maintain market access on more favorable terms and reprofile or restructure debt while mobilizing more private finance for ESG programs.
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