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Mikio Kashiwagi, treasurer of the Asian Development Bank, is pushing for dramatic changes in the way Asian countries use their new-found liquidity.
Abe De Ramos, CFO Asia
August 24, 2006
Mikio Kashiwagi joined the Asian Development Bank (ADB), the Manila-based multilateral lending institution, in 2003 to heed a calling. Having spent 32 years in commercial banking—the last two as deputy president of UBS Global Asset Management in Japan—the soft-spoken 55-year-old surrendered his stock options for a chance to support the bank's mandate of poverty alleviation. As treasurer of the US$50 bn agency, Kashiwagi oversees the funding, investment, risk management, and treasury services of the ADB, ensuring that it is financially strong to respond to the needs of its developing member countries. He brings his personal philosophy to bear at a time when the ADB is seeing its net income rise, while Asian countries are accumulating vast reserves. Against this backdrop, Kashiwagi is pushing for dramatic changes in the way the 40-year-old ADB operates, and in the way Asian countries are using their newfound liquidity.
Why did you leave investment banking for a development organization?
I always wanted to work in Asia for Asia. I belong to the old generation, where we tend to see higher values in serving the public. I worked for 30 years with Industrial Bank of Japan, which used to be a development bank that had been privatized even before I joined. All that time, although I had been doing well in investment banking and asset management, I always felt in my heart that it was not what I wanted to do, so it was a great opportunity for me to join the ADB. The treasury work is basically the same; the ADB is playing on the same level as the rest of the market. But I can make full use of my accumulated expertise knowing that I'm serving a cause other than the stock price of my bank.
How have the ADB's sources of funds changed over the years?
We have two distinct windows of operations. One is what we call ordinary capital resources (OCR), which is the balance sheet operation of the bank. We have equity from shareholders that we leverage from market borrowings. Every year, we issue bonds in the international market—this year we're issuing around US$5 bn—which we then lend to our developing member countries at Libor plus 40 basis points (bp). The ADB is a triple-A rated entity. The other window, the Asian Development Fund (ADF), is where we receive contributions from donor countries, which we put in trust funds and administer. This is more concessionary; we lend at 1 percent per annum for 30 years. The OCR operation, on a very long-term perspective, has been growing at a compound rate of 5 percent every year, but the ADF has expanded more because of increased concern on poverty worldwide. (Loans from OCR make up about 80 percent of total.)
What's the most difficult aspect of your job?
It's actually the daily financial management that is most challenging. I focus very much on three things. First is the cost of funds for our borrowers. Our cost of funding has a direct impact on that of our borrowers. Every six months, we review what has been our real cost of funding, and if it happened to be Libor less 30 bp, then we give a 30 bp rebate to our borrowers. This is a very transparent performance indicator, so I want to make sure that we have the best borrowings.
The second is our net income. The ADB is not a profit-maximizing organization; our mandate is to eradicate poverty. But net income is very important for us. While passing on the benefits of our cost-efficient borrowings to our members, we'd also like to increase our own investments. The easiest way for us to increase our income is to increase the volume of our investments, and to do that, we need to borrow more from the market. That could impact our overall cost of funds, so we really have to balance the two.
The third is how to keep transparency in the balance sheet. I've been trying very hard since I took over this job to create and enforce a mechanism of transparency. We do everything in committees, and we proactively disclose our judgment to the board and to the management on a regular basis.
Where do you invest your funds, and how much of them are invested?
We invest in fixed income. In principle, our investment authorization says we should invest in instruments rated double-A or better. We allocate some amount to external asset managers who invest in specialty products such as mortgage-backed and asset-backed securities and corporate bonds. Altogether, we manage about US$20 bn—about US$13 bn from OCR and US$7 bn from ADF.
What would you consider then as the biggest risks to your operations?
The definite challenge is the transformation of Asia. Poverty is here, but its meaning has changed. There are countries that have huge foreign reserves on one hand, and huge poverty on the other. So there is a dynamic process of change, and we need to also change what you would call our "business model." Last year, we introduced local-currency financing. Before, we had to channel money from outside—dollars from the U.S. or yen from Japan—and bring it into the region. That remains valid, but our new business model will help recycle the huge foreign reserves and national savings available here. The idea is to mobilize the accumulation of liquidity and use them for projects within the region. Last year, we raised bonds in Chinese yuan, Philippine pesos, and Thai baht.
Also last year, we set a very big objective of changing the currency framework of the ADF. Donors give in their national currencies. Because this is a trust fund, we keep the original currencies. We didn't do anything on the financial management side. We just passed on the funds, which was a huge inconvenience for the borrowers. We thought this needed to be changed. The idea is to use one single currency. This involved discussions with all the donor countries. Now, once we receive a contribution, we are given the authority to convert it.
What other improvements are you planning?
This year, our work program is to review all the financial policies of the bank. We have a charter, the establishing agreement of the ADB, which talks about the high-level spirit of regional development. And then we have liquidity policy, investment guidelines, and investment authority. In between, there is a huge vacuum. We wanted to link the philosophy with the technicalities, in light of the developments of the market, of the sophistication of our own operations. So we are now proposing to the board to adopt an asset/liability management policy statement.
What exactly would this statement do?
The ADB is not a profit-maximization organization. We do financial management, but whom do we work for? In the context of the ADB, what are the main purposes and goals of financial management? Income per se doesn't say much; it finances partly the future growth of the bank, but beyond that, we need to make certain transfers on the ground. In 2005, we made the largest-ever grant to the Asian tsunami effort—US$600m from the ADB's own pockets. That was possible because we have a very strong financial position. How should we determine our adequate level of income? It's an interesting philosophical issue that will allow us to review all the financial policies, and make (financial management) more transparent.
The ADB's total lending in 2005 grew only 6 percent, but lending to the private sector without guarantees grew 83 percent. Is this the start of a trend?
We very much hope so. The private sector has always been one of the pillars of the ADB agenda, and I feel that it's the beginning of a more pronounced growth. Where we have a natural niche is partnerships between public and private. There are already enough pure private-sector players, so why should we be there? Where there is partnership needed between the two—most large-scale infrastructure projects, for example—is where we have the best chances, and also where we hear most demand from borrower countries.
Your equity investments jumped 32 percent in 2005. Is the ADB more willing to take on equity risk?
We have a charter limit of 10 percent of our equity base for equity investment. We're not there yet, so we have room to expand. These are not financial investments. We want to be an anchor investor, bringing in not just money but also our philosophy of corporate governance.
You have also started lending to quasi-sovereigns and state-owned enterprises. How do their risk profiles differ to their governments?
That's in response to what's happening in some countries adopting devolution of financial-management authorities. In every country, there is a trend to either centralize debt management, or delegate more to states and municipalities. We're seeing more preference for the latter and for the privatization of state companies. We're willing to go along with this if that's the strategy of the borrower country. It involves additional credit risk for us, and we expect credit risk to be of potential significance for the bank. For that, we created an independent risk-management unit last August.
The ADB has been playing a catalyst's role in creating domestic bond markets in Asia. But these markets never took off. Why?
The time was not ripe yet. Ten years ago, I don't think there was a consensus about the merits of promoting local-currency or regional bond markets. Nowadays, it's simply more accepted as something that is obvious. There is now liquidity in the region, which is just waiting to be created a market for.
Still, Asian corporations are not borrowing. This makes me wonder about the future of domestic bond markets in Asia.
As a supranational, we were given approval by the countries to issue these bonds as a precursor to a more diversified borrower base. We basically prepared the ground, the infrastructure, and the regulatory framework for corporations to do it more easily. But yes, unless bond markets in each country in the region become more attractive for borrowers, they can always rely on the banks. I hope it's in the mind of policy makers. In some countries, bond pricing happens once a month. When you submit an application for a bond issuance, and you write down the terms and conditions, it would be approved as and when (authorities see fit). Given this situation, you would prefer bank loans. If we want to see more corporate bonds, this has to change. In China, we started pricing our bonds through book-building. We gave an indicative reference starting point, and then we called investors, built the books, and set the pricing. That was accepted, and we hope that would set a precedent to borrowers.
It sounds like the ADB is undergoing big changes in its 40-year history.
It's all in line with the present statement of 3 R's—responsive, relevant, and result-oriented. Asia is no longer the Asia of ten or 20 years ago. It's changing, and we need to change with it. We simply want to keep up with what's happening.