Partnering with exchanges to tackle global fragility

This is a reproduction of the key note speech that Arunma Oteh, Vice President & Treasurer, World Bank gave when she opened the 56th WFE General Assembly & Annual Meeting in Cartagena, Colombia, 2-4 November 2016.

“It is an honor and privilege to deliver this keynote at the 56th annual meeting of the World Federation of Exchanges. I am therefore grateful to the WFE and particularly, to the CEO, Nandini Sukumar for this opportunity to address this distinguished audience.

“Let me also commend Colombia for hosting the WFE Annual Meeting at this unique moment in its history. Colombia offers so many examples worthy of emulation, notably, the recent peace agreement which marked the end of the longest war in the western hemisphere, the Nobel peace prize awarded to President Santos, the referendum which illustrates the complexity of post conflict situations and at the same time the maturity of Colombia’s democracy. Also important are the successes Colombia has achieved including the prudent management of its economy and financial markets in the face of conflict, devaluation, low commodity prices, climate change effects notably El Ninio and La Ninia, to name a few challenges that this great country has overcome. From our experience at the World Bank, post conflict situations are extremely fragile. We are therefore proud of these achievements and are committed to working with Colombia to deepen and sustain them.

“In a sense, Colombia’s story is the story of the global economy. We have made significant gains such that we have lifted 1.1 billion people out of poverty since 1990. However, much still needs to be done. The current macroeconomic environment is still not conducive for inclusive growth because it remains characterized by slow economic growth, low inflation, and low interest rates along with demographic headwinds and balance sheet deleveraging. The weak global economic environment is compounded by the unique challenges of our time, notably extreme poverty, inequalities, climate change pressures, fragility, conflict, violence, forced displacement and threat of pandemics.

• 800 million people still live in extreme poverty or on less than USD 1.90 per day, while 62 people have the same wealth as 50% of the world’s population, and fueling political uncertainties and security challenges.
• Almost 700 million people lack access to safe drinking water (according to WHO).
• 1 billion lack access to all-weather roads, cutting them off from access to basic health, education, trade, and employment opportunities.
• 1.2 billion people still don’t have access to electricity, (according to the IEA).
• 2.5 billion people lack adequate sanitation.
• 4 billion people (60% of the world’s population) still do not have access to the internet.

“To maintain GDP growth at current levels, total infrastructure needs of the world amount to USD 3.3 trillion per year. The world is also facing an enormous bill to address the potentially apocalyptic issue of climate change. Climate change could push an additional 100 million people into poverty by 2030, if no action is taken to end extreme poverty, improve access to basic services and build resilience. Also, the first eight months of 2016 were the hottest since record keeping began in 1880. Millions of people around the world are being forced to live with extreme weather events such as droughts, and floods putting food and water security at risk. At 65 million, the number of forced displaced persons, is the highest since record keeping started after World War II.

“I know you care about the world but I am also sharing these facts with you because I know that as leaders of exchanges and financial market infrastructure, you can do something about these difficult global challenges. They could even represent opportunities for your businesses and for you to ‘do good and do well’.

“Why?

“Exchanges are vital for the creation and maintenance of robust, liquid and transparent capital markets. Capital markets enable capital formation and savings mobilization which in turn catalyze wealth creation and wealth distribution. Exchanges foster job creation and are indeed agents of positive social change. You have a track record of leveraging technology and can embrace emerging technologies such as block chain and distributed ledger to enhance efficiency. This can contribute to rebuilding the trust that was destroyed following the 2008 global financial crisis. With 45,000 listed companies, exchanges can play an important role in the urgent need to transition to a low carbon global economy. We also see an alignment of your mission and our twin goals of eradicating extreme poverty and boosting shared prosperity.

“We already support the development of capital markets globally, through the work we do to support governments, capital market regulators and exchanges around the world. During my time as the Head of SEC Nigeria, the World Bank Group helped Nigeria strengthen its corporate bond markets and prepare a road map for the demutualization of the Nigerian Stock Exchange. IFC, our private sector arm, issued Naija bonds, bringing best practice and global visibility to the Nigerian capital markets. The World Bank Treasury currently issues bond transactions totaling over USD 60 billion per year in more than 20 currencies, for IBRD, the flagship member of the World Bank Group that supports client countries. We will in the near future introduce IDA, our fund for the poorest, to the capital markets, as it recently obtained AAA ratings from Moody’s and Standard & Poor’s. We manage USD 170 billion of assets including pension assets some of which are invested in public equities. I have shared these examples to highlight ways in which you can partner with the World Bank Group.

“We are also ready to broaden our partnership with you in order to tackle these global challenges with the requisite sense of urgency. Two new areas that come to mind relate to financing climate change and emerging market infrastructure.

“In our new climate action plan, we have committed to increasing climate finance by 33% by 2020, including through mobilization of private sector resources. Our targets include helping client countries add 30 gigawatts of renewable energy – enough to power 150 million homes. We also believe that expanding the green bond market which we pioneered in 2008 will be crucial to climate finance. Since its first green bond in 2008, the World Bank has issued 125 bond transactions totaling USD 9.1 billion and in 18 currencies, to retail and institutional investors. IFC, has issued bonds totaling USD 5.6 billion.

“The proceeds raised from these issues support disbursements on a portfolio of World Bank projects that meet specific criteria for lowering global carbon emissions. For example, one of the projects is in Colombia, where the World Bank and the Colombian Government are working together to develop a bus rapid transit system in five Colombian cities, including Cartagena.

“More broadly, the World Bank has been a strong advocate for the green bond market, working with both investors and other potential issuers to increase awareness about its potential. I know that many exchanges are similarly doing their part to develop the green bond market. In recent meetings with both the London and Luxembourg Stock Exchanges, I was delighted to learn about their platforms for listing green bonds, and I understand many other exchanges around the world have also launched special sections dedicated to green bonds. I celebrate and applaud your leadership in this area.

“Seeing emerging market stock exchanges enter this area is particularly gratifying to me as a former securities market regulator in an emerging market country. It also makes obvious sense, given that in 2016, over 40% of all green bonds issued have been from emerging market issuers. I encourage all of you today to keep helping in our goal of reducing greenhouse gas emission.

“Let’s work with those 45,000 companies listed on your exchanges to contribute to addressing global warming objectives.

“Another area of synergy between the work the World Bank is doing to mobilize private capital for development and the role of exchanges is in the area of securities indices. As you know, indices play a crucially important role in the investment world, allowing investors to benchmark their performance as well as facilitating well-diversified investment strategies. At the World Bank, we frequently use equity indices as a reference for our structured note issuance program. For example, over the last year, we have issued a series of green bonds for a total principal amount of about USD 550 million linked to the Ethical Europe Equity Index. This ‘doubly ethical’ combination, of a green bond linked to an ethical stock index, was a first for the capital markets as well as the first structured note we have been able to sell to both retail and institutional investors in Europe, Asia and the United States.

“We are now looking at ways to harness the power of indices to drive liquidity to emerging market infrastructure, given the need for greater private sector investment. While a number of pension funds, insurance companies and other institutional investors have begun to dip their toes into infrastructure, most of their investment to date has been concentrated in the developed markets. There remains tremendous untapped potential for investment in emerging market infrastructure, where the needs are estimated at roughly USD 1.5 trillion per year over the next decade.

“In fact, studies have shown that emerging market infrastructure is less risky than many investors commonly perceive. According to Moody’s, for example, while default rates on project finance loans are slightly higher in emerging markets than in the OECD countries, the recovery rates are almost identical. Therefore, the risk adjusted returns on emerging market infrastructure are actually quite compelling, even when compared with developed market infrastructure assets.

“In order to spur such investment, we recently partnered with Morningstar, to develop a fully investible emerging market infrastructure bond index. The Emerging Markets Infrastructure Debt Index will serve as a benchmark for investors, as well as the basis for a variety of investment products, such as exchange-traded funds or mutual funds.

“Back-testing of the proposed index shows that, over a five-year period, it has delivered returns well in excess of 400 bps with almost the same standard deviation as the Barclays Global Aggregate Total Return Index. A debt index like this has the potential to promote liquidity and allow institutional and retail investors insight and access into the EM infrastructure space.

“Additionally, many of you are already seeking to adopt the information technology trends that some have called the ‘fourth industrial revolution’ and that are already starting to shape the future of markets. One example I want to highlight today is Blockchain. As you know, Blockchain is a decentralized public ledger of transactions that no single entity owns or controls and every transfer of funds from one account to another is recorded in a secure and verifiable form by using mathematical techniques borrowed from cryptography. By using this technology, individuals can sell real estate, event tickets, stocks, and almost any other kind of property or right without a broker. According to some estimates, by 2022, Blockchain technology could save banks more than USD 20 billion annually in costs. Some 50 big-name banks as well as IBM, Google and Microsoft have announced Blockchain initiatives. But perhaps the most important potential benefit of this technology is to help rebuild the trust which evaporated after the global financial crisis.

“In closing, I want to reiterate that the World Bank is committed to innovative approaches to mobilizing the capital markets to meet global development challenges. Tackling all of these challenges with our balance sheet alone would be impossible. We absolutely need the power of the capital markets to achieve our goals, and I believe that exchanges are extremely valuable partners in this effort. Through promoting transparency, liquidity and best practice, exchanges are critical pillars of the capital markets infrastructure.

“Let us together finally tackle the inequalities that the world faces today so that we do not continue “the immeasurable violence and pain…that are the result of age-old inequities.” These are not my own words but those of Gabriel Garcia Marquez, the celebrated Colombian Nobel laureate for literature.

“He also showcased Latin America as a “source of insatiable creativity”. These are also his own words. As exchanges have always been champions of innovation, I hope that this beautiful city, Cartagena will inspire you to come up with innovative solutions to tackle the world’s most difficult challenges.”