Eight years ago, the world saw the emergence of a new financial titan – the New Development Bank (NDB). Founded by the BRICS nations (Brazil, Russia, India, China, and South Africa), its mission was clear-cut: create an alternative to the U.S. dollar-dominant financial institutions like the International Monetary Fund. The irony, however, lies in the current state of affairs. The same institution designed to decouple global lending from the U.S. dollar, now finds itself knee-deep in dollar debt.
The Shanghai-based NDB, despite initial ambitious lending practices, appears to be scaling back. This cessation has been triggered by a tight squeeze in the dollar liquidity necessary to service its existing debt.
Between 2017 and 2022, the NDB displayed an aggressive lending approach, bolstering committed loans from a mere $1 billion to a whopping $30 billion. The rationale was simple – to provide capital to developing economies. But here’s the twist. Even though the NDB aimed to displace the U.S. dollar’s influence, nearly two-thirds of its own borrowings were dollar-denominated, borrowed from Wall Street and Chinese lenders.
The bank’s situation began to worsen post-Russia’s invasion of Ukraine last year. Wall Street financiers, traditionally providing a lifeline to the NDB, became hesitant to back a bank with nearly 20% ownership by Moscow. This was further complicated by the appointment of Dilma Rousseff as the bank’s new head – a controversial choice considering her past impeachment as Brazil’s president.
The current challenge for the NDB is not just the scarcity of its usual dollar support, but also the increased borrowing costs. With the war in Ukraine escalating, the bank’s first bond was reportedly five times more expensive than prior loans, costing a hefty $1.25 billion. It seems that for the NDB, the road to de-dollarization has taken a rather costly detour.
Looking for an alternative, the bank is now knocking on the doors of Argentina, Saudi Arabia, and Honduras, hoping they might join as members and infuse more capital.
However, the NDB’s struggle to secure dollar support didn’t go unnoticed by rating agencies. Fitch Ratings downgraded the bank’s credit rating last July. Moreover, the bank now faces the prospect of a quadrupled interest rate on any new loans, and the premium it charges its members for borrowing has also doubled. This has led to loan disbursements slowing to a trickle.
Complicating the picture is China’s current economic slowdown. Given its own financial constraints, Beijing’s potential to bolster the NDB seems rather unlikely.
In response to these predicaments, the NDB stated that there remains “a considerable interest in bonds issued” through the bank, while its loan origination and liquidity are still robust. This optimistic view, however, is yet to bear fruit as the bank navigates its dollar debacle.
In essence, the unfolding drama of the NDB serves as a potent reminder of the complexities and ironies of the global financial system. As for the entrepreneurs and investors out there, it’s always wise to keep a keen eye on these crosscurrents in global finance. After all, every ripple in this financial ocean might bring about waves of change in your investments.