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ALM Seminar Consultation on the Seventh Replenishment of IFAD’s Resources– 3 rd Session Rome, 5 July 2005. Content. 1. Asset Liability Management (ALM) in IFAD Current and proposed definition of committable resources 2 . Track Record of Flows

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  1. ALM SeminarConsultation on the Seventh Replenishment of IFAD’s Resources– 3rd Session Rome, 5 July 2005

  2. Content • 1.Asset Liability Management (ALM) in IFAD • Current and proposed definition of committable resources • 2.Track Record of Flows • Contributions, loan reflows, investment income, disbursements • 3.Financial Scenarios • Cash inflows and outflows • Liquidity projections • Stress testing and financial soundness indicators • 4.Comparing IFAD to IFIs • Financial soundness comparison • Liquidity policies • Use of future loan reflows and resource structure • 5.Conclusions July 2005 – Third session of the Consultation on the 7th replenishment of IFAD’s resources

  3. Section 1. Asset Liability Management (ALM) in IFAD • Content of this section: • Role of ALM in IFAD • Current and proposed definition of committable resources • Proposed definition from legal perspective

  4. Section 1. Asset Liability Management (ALM) in IFAD • IFAD’s mission isto “Enable the Rural Poor to Overcome Poverty” IFAD aims to efficiently maximize resources available to its borrowing Member States while maintaining IFAD’s financial soundness This goal can be better achieved throughdynamic management of IFAD’s committable resourceswithin the context of Asset Liability Management

  5. Proposed Current Instruments of contribution receivables Instruments of contribution receivables Promissory notes Promissory notes Total assets Total assets Loans Outstanding Loans Outstanding Cash & Investments Cash & Investments 7th Replenishment up to 5 years of future loan reflows ACA maximum 3 years of future loan reflows Section 1. Asset Liability Management (ALM) in IFAD Definition of committable resources:

  6. Proposed definition (but only 95% of principal, interest and net of HIPC foregone reflows) Current ACA definition Future reflow year 1 3 2 4 5 Section 1. Asset Liability Management (ALM) in IFAD • Use of future loan reflows for commitments:

  7. Sources Uses USD 800 M Contributions 7th (Cash and promissory notes) USD (2 003) M Programme of Work (loans/grants) Contributions 6th USD 32 M Internal resources 2007-2009 (Inv. income, loan reflows) USD 1 088 M USD 320 M USD (137) M HIPC Loan reflows 2010-2012 (ACA)* USD (290) M PDFF, Oper. exp. Shortfall Total: USD 2 240 M USD (2 430) M USD (190) M Section 1. Asset Liability Management (ALM) in IFAD Current definition: Projected 7th Repl. (2007-2009) FX rate USD/SDR 1.45 *USD 320 M is based on USD 743 M (3 years future loan reflows 2010-2012) less USD 423 M (projected 6th Repl. ACA carry over)

  8. Sources Uses Contributions 7th (Cash and promissory notes, Instr. of Contribution receivables) USD 800 M USD (2 003) M Programme of Work (loans/grants) USD 32 M Contributions 6th Internal resources 2007-2009 (Inv. income, loan reflows) USD 1 088 M USD (137) M HIPC Future loan reflows* 2010-2014 PDFF, Oper. exp. USD 1100 M USD (290) M USD (423) M Net resource position end 6th Repl Surplus Total: USD (2 853) M USD 3 020 M USD 167 M * USD 1 100 is 5 years future loan reflows at 95% of principal, interest and net of HIPC Section 1. Asset Liability Management (ALM) in IFAD Proposed definition: Projected 7th Repl (2007-2009) FX rate USD/SDR 1.45

  9. disbursements liquidity Section 1. Asset Liability Management (ALM) in IFAD • Impact of a change in definition of committable resources: More committable resources More loans and grants approvals More disbursements Reallocation of assets from investments to loans outstanding Lower liquidity (more reflows in the future) Strategic liquidity management

  10. Section 1. Asset Liability Management (ALM) in IFAD • April’s questions on legal opinion on proposed • committable resources definition: • Can IOC receivables and future reflows be legally included as committable resources? • Can also qualified IOCs be included in committable resources? IFAD is allowed to commit against IOC receivables and future reflows on basis of the “Agreement Establishing IFAD” (Article 4, Section 1): “ the resources of the Fund shall consist of funds derived or to be derived from operations or otherwise accruing to the Fund” • Qualified IOCs could be included in committable resources when unqualified i.e. when Members’ appropriations have been obtained and other legislative requirements have been met

  11. Section 2. Track Record of Flows • April’s questions on IFAD’s financial flows: • Have Members fulfilled their obligations against IOCs? • What is the actual track record of loan arrears? • Content of this section: • Overview of cash flows • Track record of flows: • Contributions • Loan reflows and arrears • Investment income • Disbursements

  12. Section 2. Track Record of Flows Overview of cash flows: Cash inflows Cash outflows Contributions Loan and grant disbursements Loan reflows (principal,interest/service charges) Operating expenses and PDFF HIPC foregone reflows Investment income

  13. Encashment % compared to deposited IOCs (1st to 6th Repl.) 1 100 97% of IOCs 900 Ongoing payments & encashments! 700 98% of IOCs 99% of IOCs 500 98% of IOCs 73% of IOCs 21% of IOCs USD M 300 100 1st 3rd 2nd 4th 5th 6th Deposited IOCs Encashed payments Section 2. Track Record of Flows Track record of contributions (as at Dec 2004): Track record of encashments compared to deposited IOCs is almost 100%!

  14. Annual loan reflows in 1981-2004 250 22 % 200 150 78 % USD M 100 50 0 2002 2003 2004 1985 1986 1987 1988 1989 1990 1992 1994 2000 2001 1984 1991 1993 1995 1999 1981 1982 1983 1998 1996 1997 Interest and service charges Principal Section 2. Track Record of Flows Track record of loan reflows: • In 2004, loan reflows reached the level of USD 220 M (of which 78% principal repayment and 22% interest/service charges) Loan reflows have represented a stable and growing cash inflow

  15. Total amount in arrears versus total billed 100 7.0% 6.0% 80 5.0% 60 4.0% USD M 3.0% % 40 2.0% 20 1.0% 0 0.0% 1990 1991 1993 1995 1996 1992 1994 1997 1998 1999 2004 1989 2003 2000 2002 1987 1988 2001 Arrear % on total billed Arrear amount (USD M) Section 2. Track Record of Flows Track record of loan arrears (of 75 days or more): • At Dec 2004, total arrears amount USD 81 M a), representing 3.1% of total amounts billed • 83% of arrears is concentrated in only five countries Total loan arrears are very low (3.1 % of total billed) and are concentrated in only few countries a) USD 12 M is covered by HIPC debt relief

  16. Annual loan and grant disbursements since 1978 350 300 250 200 150 USD M 100 50 0 2004 1978 1981 1984 1987 1990 1993 1996 1999 2002 Grant disbursements Loandisbursements Section 2. Track Record of Flows • Track record of investment income: • Stable expected return of 3.5% with current investment policy • Track record of disbursements: • Total loan and grant disbursements reached USD 332 M in 2004

  17. Section 2. Track Record of Flows • Summary of IFAD’s track record of flows: • The proposal to include IOCs receivables and a portion of loan reflows in the committable resources is supported by: • Excellent track record (almost 100%) of encashments compared to deposited IOCs • Stable and growing loan reflows • Very low loan arrears (at 3.1% of total billed) concentrated in only few countries

  18. Section 3. Financial Scenarios • April’s questions on financial scenarios: • What are the annual, projected cash inflows and outflows for the 7th Replenishment and beyond? • What is meant by an acceptable limit of risk for liquidity? Can it be quantified? • What are the financial indicators of the scenarios? • Content of this section: • Projections of cash inflows and outflows • Liquidity projections • Stress testing • Financial soundness indicators

  19. Section 3. Financial Scenarios • Assumptions applied in a “Base scenario”: • After 7th Repl. Period: neutral assumptions have been made on Replenishment and Programme of Work levels for scenario purposes only

  20. Section 3. Financial Scenarios • “Base scenario” compared to information in April 2005: • USD/SDR rate updated to 1.45 to reflect recent trends • (Previous “Base” assumption: 1.5498 as at 31 Dec 2004) • Estimates of HIPC debt relief updated to most recent figures (Estimates subject to change. HIPC contributions per Dec 2004. Previous “Base” assumption: HIPC debt relief estimates per March 2005) • After 7th Repl. period, a “neutral” assumption about Replenishment and POW levels for scenario purposes: annual growth at inflation rate (POW growth is assumed until 2015) • (April’s additional scenario information showed two possible trends for 8th Replenishment: annual POW growth of 10% or 8% in 2010-2012 and 8th Replenishment level of USD 1 100 M or USD 1 000 M respectively) • More conservative approach in liquidity projections by applying a 3% annual reduction on all future loan reflows

  21. 800 600 400 USD M 200 - 2004 2005 2006 2007 2008 2009 2010 2014 2015 2011 2012 2013 219 160 223 236 203 252 306 231 295 325 246 313 Contributions 109 88 80 79 77 74 73 70 67 66 62 58 Inv. Income 220 184 193 202 211 223 236 247 260 269 280 290 Loan Reflows Section 3. Financial Scenarios • Projected cash inflows in assumed “Base scenario” *: • Annual loan reflows projected to increase some 30% by 2015 and could double in 20 years (figures gross of HIPC foregone flows, which are shown as expense outflows) • Investment income decreasing due to gradual reallocation from investments to loans outstanding * “Base scenario” assumptions per page 19

  22. - (200) (400) USD M (600) (800) 2004 2005 2006 2007 2008 2009 2010 2015 2011 2012 2013 2014 Disbursements (332) (420) (413) (417) (423) (438) (462) (489) (515) (540) (565) (589) (57) (63) (69) (71) (74) (83) (84) (86) (88) (89) (91) (93) Operating Exp. (27) (30) (30) (31) (34) (38) (40) (41) (42) (42) (43) (44) PDFF - - (11) (42) ( 48) (48) (44) (38) (34) (28) (22) (20) HIPC Section 3. Financial Scenarios Projected cash outflows in assumed “Base scenario” *: • Annual disbursements projected to increase significantly in 10 years and could double in 20 years * “Base scenario” assumptions per page 19

  23. 3 000 700 2 400 (USD M) 500 1 800 Net flows 300 1 200 100 Liquidity 600 (100) (USD M) (300) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 b) a) 203 (257) (28) (44) (88) (58) (15) (105) (84) (132) (56) (40) Net flows 1869 1737 1652 2560 2303 2275 2232 2143 2085 2070 1965 1909 Liquidity 2004: includes USD 91 M of movement on foreign exchange and USD -20 M of adjustments 2005: includes USD -176 M of movement on foreign exchange • Liquidity shows a gradual yet sustainable decrease (USD 1.6 B in 2015) • After 2015, the “Base scenario” could reach a minimum liquidity in 2023 (USD 1.0 B), thereafter recovering due to larger loan reflows Section 3. Financial Scenarios Projected liquidity (cash, investments) and net flows in assumed “Base scenario”*: * “Base scenario” assumptions per page 19

  24. Section 3. Financial Scenarios • Stress testing: • What? Scenarios showing the projected future impact from changes in assumptions or from shocks • Why?To check adequacy of long-term liquidity • How?By simulating the impact of stress scenarios relating to IFAD’s major financial flows: • Disbursements • Encashment of contributions • Loan reflow arrears • Movement on foreign exchange (overall impact)

  25. Section 3. Financial Scenarios Stress scenarios: • Acceleration of loan/grant disbursements (approvals from 2005): • Loans: last 18% accelerated to disburse within 8 years • Grants: last 25% accelerated to disburse within 3 years • Delayed encashment of contributions (7th Repl. onwards): • Encashment over 8 years from 1st year of replenishment period (“Base” assumption: 6 years) • Increase in annual loan arrears (2005 onwards): • From 2005, annual loan arrears at 8% (“Base” assumption: 3%) • 5% decrease in USD/SDR rate (8th Repl. onwards): • USD/SDR rate at 1.38 i.e. average rate since Jan 2001 (“Base” assumption: 1.45) • Note: HIPC debt relief of 100% could represent an additional, • future scenario

  26. 2 800 2 400 2 000 1 600 USD M 1 200 800 • Decrease USD/SDR rate (d) • “Base • scenario” • Increased • arrears (c) • Delayed encash.(b) • Accel. • disb. (a) 400 - • Liquidity in 2015 (USD M) • 1 652 • 1 490 • 1 486 • 1 214 • 959 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 • Gap to “Base” (USD M) • - • 162 • 166 • 438 • 693 Section 3. Financial Scenarios • Impact on liquidity of stress scenarios: • All stress scenarios show lower yet sustainable liquidity compared to the “Base scenario” (2015: a gap of up to approx. USD 700 M) • After 2015, all stress scenarios reach minimum liquidity • levels around 2024 and then recover

  27. Summary of the “Base scenario” and stress scenarios: The assumed “Base scenario” (with 7th Repl of USD 800 M) shows a gradually decreasing yet sustainable liquidity with the proposed definition of committable resources (which used more future reflows for commitments) Four stress scenarios show lower yet sustainable liquidity levels; an estimated liquidity reduction of up to approx. USD 700 M by 2015 compared to “Base scenario” Actual materialization of stress events would call for cautious and timely adjustments in resources and/or operations New scenario simulations are required when there are: changes in actual situation (“Base scenario”) risks of new stress events and/or multiple events Section 3. Financial Scenarios

  28. Section 3. Financial Scenarios • Projection: end 7th Repl (2009) • Projection: • 10 years (2015) • Actual: • Dec 2004 • Indicators of financial soundness for IFAD: Liquidity vs Total assets 1. Loans outstanding vs Total assets Liquidity vs Annual disbursements (incl. operating exp. and PDFF) 2. Liquidity vs Total undisbursed balance Note: Liquidity takes investments (receivables and payables) into account With proposed definition of committable resources, liquidity: 1. decreases in favour of higher level of loans outstanding (more in line with IFAD’s mission) 2. continues to adequately cover annual disbursements

  29. Section 4. Comparing IFAD to IFIs • April’s questions on comparison to International Financial • Institutions (IFIs): • How many years of future reflows do IFIs include as resources? • Which proportion (85%? 100%?) of annual, future loan reflows (principal and interest) do IFIs include as resources? • Does IFAD have any resource transfer from a Bank, like IFIs? • Content of this section: • Financial soundness indicators • Liquidity policies • Use of future loan reflows • Breakdown of total resources

  30. Section 4. Comparing IFAD to IFIs IFAD • Financial soundness indicators: In 10 years (2015) End 7th Repl (2009) IDA 2004 FSO 2004 AsDF 2004 AfDF 2004 Dec 2004 Liquidity vs Total assets Loans outstanding vs Total assets Liquidity vs Annual disburs. (incl. oper. exp, PDFF) Liquidity vs Total undisbursed Note: Liquidity takes investments (receivables and payables) into account With the proposed definition of committable resources, IFAD is still more conservative but moves closer to IFIs by the 7th Repl

  31. Section 4. Comparing IFAD to IFIs • How do IFIs define their liquidity policies (minimum liquidity)? IDA “Percentage (set each year) of moving average of previous, current, and following year’s disbursements” FSO “USD 500 M” AsDF “No specific target, but minimum liquidity generated by Expanded ACA model must be no less than 20% of next year’s disbursements” AfDF “Operational liquiditymust be 50% to 75% of 3-year moving average of net disbursements” IFIs: generally,minimum liquidity is set as a proportion of annual disbursements. Also long-term projections are considered IFAD: no specific liquidity target

  32. Section 4. Comparing IFAD to IFIs Proportion of future loan reflows included as resources: IFAD: more conservative IFAD: in line IFAD: more conservative IFAD’s proposed use of future loan reflows is in general more conservative than IFIs’ practice * mostly earmarked for specific expenses

  33. 40.0% 60.0% 73.9% Section 4. Comparing IFAD to IFIs Sample comparison of total resources to commitment level: IFAD 7th Repl. Proposal (Commitments USD 2.0 B) IDA 14th Repl. (Commitments SDR 23.7 B) 42.2% Incl. bank transfer 57.8% Contributions Transfers from parent Bank Internal resources (reflows, inv. income) IDA: • higher proportion of contributions • transfer from parent bank (IFAD has no parent bank) • future compensation for foregone reflows due to grants • access to HIPC Trust Fund with the World Bank IFAD is depending more on internal resources

  34. Section 5. Conclusions Conclusions: An expanded definition of committable resources is proposed as a result of financial analyses. This proposed definition requires future strategic liquidity management.

  35. Section 5. Conclusions Conclusions (cont’d): • Expansion of committable resources: It is proposed to include IOC receivables and up to 5 years of future loan reflows (95% of principal and interest and net of HIPC foregone reflows). Proposal supported by: • Excellent track record of encashments compared to deposited IOCs and stable, growing loan reflows with very low arrears • Long-term financial scenarios and stress scenarios project a lower yet sustainable liquidity, which would cover the gradually increasing disbursements • Financial soundness indicators would remain with a margin of prudence and would become closer to IFIs indicators • More strategic matching of inflows and outflows by using the tools of the ALM framework (liquidity scenarios, stress testing, financial soundness indicators)

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