AfDB raises MAD 1 bn in its first MAD-denominated bond

The AfDB goes local in Morocco: The African Development Bank (AfDB) has raised MAD 1 bn (c. USD 100 mn) in its first-ever MAD-denominated bond via private placement with qualified investors. The coupon floats against the Moroccan Overnight Index Average (MONIA), which Bank Al-Maghrib put at 2.195%. The proceeds from the seven-year maturity bonds will be used to lend in MAD.

Why it matters: Moroccan companies and public bodies that earn in MAD but borrow in EUR or USD usually carry the currency risk themselves unless backed by a guarantor, and every slide in the MAD raises their debt-service bill. MAD-denominated loans remove that risk, though borrowers still face shifts in domestic interest rates.

SOUND SMART- For development and multilateral financial institutions, lending in local currency requires existing exposure to said currency. This can be done via existing cashflows, currency swaps, or issuing local currency-denominated bonds, then using their proceeds for local lending.

Morocco could very well be the largest recipient of local currency financing from multilateral development banks (MDBs) in our region. The IFC’s 2005 Atlas bond in Morocco was the first by an international institution. MAD lending also accounted for some 5% of the EBRD’s overall portfolio since it started lending in local currencies in 1994. Turkey (4%) comes after, followed by Jordan (1.9%), then Egypt (0.9%), and finally Tunisia (0.4%). The EBRD’s local currency portfolio is concentrated in Eastern Europe and Central Asia.

The bigger picture

Only 4% of multilateral development banks’ (MDB) loans are in borrowers’ local currencies, against 74.6% in USD and 19.2% in EUR, according to a study by a consortium of UK-based economists sponsored by Leeds University. When a local currency slides, as the Ghanaian currency did ahead of Accra’s 2022 external default, foreign-currency debt service becomes unmanageable.

Calls to increase local currency lending have been mounting: The G20 under Brazil’s 2024 presidency and the World Bank’s Private Sector Investment Lab have both pressed MDBs to shift more lending into local currencies, and the UN’s 2024 Financing for Sustainable Development Report made the same call. The currency mismatch between debt repayment and income is described as a structural problem in infrastructure finance by economists critical of USD and EUR lending. “The narrative is that the currency risk is the developing country’s fault. It’s not. It’s a problem of the way the monetary system is structured. It’s there because the USD is dominant,” Bruno Bonizzi, a co-author of the Leeds study, says.

What’s next

There could be more to come: The AfDB is considering more of the same in Morocco, including a dedicated MAD portfolio funded partly by converting some of its foreign-currency liquidity. It also plans to work with Moroccan authorities on hedging instruments and liquidity in the derivatives market. The AfDB said Morocco is the pilot, with plans to use the “lessons” it would accumulate in the market to launch similar local currency programs elsewhere in Africa.