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Uncovering the True Credit Risk in Emerging Markets

For too long, the debate on debt investing in emerging and frontier markets has been framed by country risk ratings and conservative loss assumptions. The Global Emerging Markets (GEMs) database is gradually shifting that narrative. By shining light on actual credit performance of the EMFM debt portfolios of development banks, GEMs demonstrates what those of us active in these markets have long known: when structured properly, and when borrowers are supported through temporary distress, credit risk is far more robust than commonly assumed.

The reports published in 2024 are therefore a critical step. They allow investors and auditors alike to recalibrate expectations and challenge outdated assumptions. In our own practice, we are already using this data in discussions with auditors, investors, and rating systems for initiatives such as AGRI3, GuarantCo and ILX. It is not a theoretical exercise, this evidence is being deployed in real investment decisions today.

Where the Debate Needs to Go Next

1. First-loss structures

One of the most urgent applications of GEMs data is to calibrate the appropriate level of first-loss protection in blended finance for debt investing. Evidence shows that the conventional assumption of the need for a 20% first loss cushion to achieve low investment grade on the remaining 80% senior tranche is unnecessarily high, 5-10% is sufficient to bring portfolios to investment grade in many cases. Overcompensating distorts the market and allows investors to benefit from artificially high margins without taking real risks. We need donor institutions to put this evidence to work and avoid creating complacency in markets meant to be competitive.

2. Usage of GEMs’ data in the calculation of risk and capital adequacy models of debt investors

The GEMs data should be widely adopted as a basis for the internal risk and capital adequacy models for debt investors, allowing for more efficient capitalisation and lower yield hurdles. More work is needed to convincingly argue for the relevance of GEMs data as a broader benchmark, also applicable for regular debt investors that do not have the Special Creditor Status that the MDBs have.

3. Transparency and access

 The next major step must be to open the (de-personalised) database more widely. Investors need to be able to “look under the hood,” and academia and ratings agencies should engage directly with the data. Only then can GEMs move from being a promising tool to becoming the reference standard for risk assessment in developing markets.

4. Expanding the data set

While the credit risk data is invaluable, the absence of return data is a major gap. At present, investors are left piecing together anecdotal evidence from public accounts and bilateral conversations. This is not good enough. Even anonymised, aggregated return data would vastly improve the usefulness of the GEMs dataset. Without it, the picture remains incomplete.

The Limits We Must Acknowledge

Even with full disclosure, GEMs will not replicate the statistical depth available in developed markets. The dataset (around 8,000 borrowers) simply does not permit the same extreme risk modelling (such as 99.9% VaR analysis). We must be realistic about what GEMs can deliver. Still, it remains the best global dataset available for private credit in emerging markets.

There is also the uncomfortable truth about private equity performance by development banks. Evidence suggests weak results, but disclosure is limited. Until there is a genuine incentive to confront poor performance, this part of the market will remain opaque.

The Path Forward

The GEMs initiative has already changed the debate. But to truly unlock commercial capital at scale for emerging markets, we need:

1. Broader visibility and promotion of existing GEMs disclosures. Too few investors even know the reports exist.

2. Wider access to the database for direct engagement.

3. Inclusion of return data as soon as possible.

4. A disciplined, evidence-based approach to first-loss provisioning.

Only then will the discussion shift fully from perception to evidence, from risk aversion to risk-informed investing.

About the Author

Joost Zuidberg is the CEO of Cardano Development, an incubator and manager of innovative financial solutions that strengthen frontier and emerging markets. He has been involved since the organisation’s inception, initially as CEO of TCX Investment Management Company, founded in 2007. Since 2015, he has overseen the supervision and project management of all Cardano Development initiatives in their early phases.

Before leading TCX, Joost served as Director for Africa at FMO, the Dutch Entrepreneurial Development Bank (2000–2007), and as Senior Vice President for Project Finance at ABN AMRO (1994–2000). In addition to his role at Cardano Development, he is Chairman of the Boards of Frontclear Management, GuarantCo Management, and BIX Capital, and he holds external board and investment committee positions across several specialised funds.

Joost holds an MSc in Mining Engineering from Delft University of Technology and an MBA from Rotterdam School of Management, Erasmus University.

February 2025.  Frontclear arranged, structured and executed a USD 31 million synthetic local currency cross-border repurchase transaction with State Bank JSC (State Bank) in Mongolia, hedged by The Currency Exchange Fund N.V. (TCX).

Credit risk, legal and operational risks plus wrong-way risk concerns continue to make it difficult for Mongolian banks to be connected to global money markets.  The transaction made it possible for State Bank to competitively access local currency funding from global markets.  It also once again underscored that Frontclear deal arranging and structuring can be tailored to overcome certain legal and operational issues related to Mongolia. 

“Frontclear has closed more than 10 repo and swap transactions in Mongolia since 2018. We are proud of our catalytic role we have played in originating the first of its kind local currency repo where Frontclear directly provided synthetic MNT currency to State Bank against Eurobond collateral using offshore sources for both funding and hedging.  The transaction provides a template to exercise cross-border repos between Mongolian banks and global banks and hedge providers using both local and offshore collateral.  It sets a benchmark for the development of Mongolia’s money market going forward.” – Andrei Shinkevich, SVP Frontclear

“We are delighted to successfully execute this inaugural synthetic local currency cross-border repo transaction with Frontclear. Since our initial collaboration in 2018, our partnership has continued to strengthen, playing a key role in the growth of Mongolia’s financial market through the adoption of international best practices. This innovative transaction has enabled State Bank to access competitive local currency funding from global markets, greatly enhancing our liquidity management capabilities. We believe this mechanism creates opportunities to reach the international money market, contributing significantly to the development of the domestic capital market. – Gantur Ulzii, Chief Executive Officer, “State Bank” JSC of Mongolia

“This transaction showcases TCX’s contribution to market development in Mongolia and its additionality. The historically successful onshore hedging facility provided by Bank of Mongolia is downscaling, which allows other hedge providers to take up a more significant role in supporting the market. Consequently, TCX’s ability to facilitate hedging transactions for a range of use cases, tenors and currencies, combined with conducive pricing has resulted in a large pick up in the MNT business through its partners such as Frontclear and other impact investors. We are glad to see the increasing awareness of currency risk and to be part of this impact story.” – Xander Goudriaan, Head of Trading, TCX

In this transaction, Frontclear has sourced USD liquidity from the European Bank of Reconstruction and Development (EBRD) and simultaneously executed a MNT/USD hedge with TCX, therefore being able to provide synthetic MNT repo funding to State Bank. This repurchase transaction is documented under an International Swap and Derivatives Association (ISDA) agreement, whereby Frontclear customized the swap confirmation to account for legal issues in the Mongolian market. The transaction documentation introduced best practice operational and legal concepts including for local currency denominated repo. TCX and Frontclear are part of the Cardano Development group.

About Frontclear

Frontclear is a development finance institution that aims to support stable and inclusive money markets in emerging and developing countries. Frontclear provides credit guarantees and technical assistance to facilitate access and liquidity in the interbank markets, especially for local financial institutions. Frontclear’s global technical assistance program works in partnership with central banks to develop the financial infrastructure, legal environment and the skills and capacity of the domestic market participants. Frontclear is funded by European development finance institutions and global development agencies. Frontclear is rated A- by Fitch and Baa1 by Moody’s and is furthermore counter-guaranteed by KfW, a AAA- rated German development Bank. For more information, visit www.frontclear.com

For media inquiries, contact:

Andrei Shinkevich, Frontclear | [email protected]

About TCX

The Currency Exchange Fund (TCX) is a development finance initiative that offers currency derivatives in emerging and frontier markets where such hedging solutions are not provided by commercial banks or are hard to access for the parties who need them. TCX’s shareholders consist of development finance institutions and impact investors; therefore the Fund’s principle objective is to eliminate currency risk and contribute the development of capital markets by fostering local currency financing. TCX provides cross-currency swaps and FX forwards with no tenor limits, covering more than 100 currencies worldwide. The Fund is based in Amsterdam and rates A by S&P and A1 by Moody’s. For more information, please visit https://www.tcxfund.com/

About State Bank

The State Bank is a publicly listed joint-stock company with state ownership. Since its establishment in 2009, the Bank has been significantly contributing to the national banking system by meeting the financial needs of both retail and corporate customers through reliable and timely services, supported by its skilled workforce and advanced technology. As one of Mongolia’s five systematically important banks, the State Bank has the strongest retail banking presence in the country, with over 500 branches nationwide. The bank is rated B2 by Moody’s. For more information, visit our website at www.statebank.mn

• Investors back Dhamana Guarantee Company’s work to transform East Africa’s financial landscape.
• Tackling climate change given another boost in Kenya as, for second time in a week, a UK-Government backed investor in green finance solutions puts pen to paper.

Dhamana Guarantee Company Ltd (Dhamana) has reached a major milestone, marked at an event in Nairobi today.

Investors in the new company put pen to paper at a signing ceremony, which will allow the company to kick-start operations.

Dhamana aims to mobilise private sector finance to support the development of sustainable businesses. It will do so by issuing guarantees to commercially viable projects, businesses, and institutions that tackle the climate crisis and make progress towards the Sustainable Development Goals (SDGs).

The design and creation of the company was supported by the UK-Government backed investor the Private Infrastructure Development Group (PIDG) through InfraCo Africa. With its anchor investment, PIDG kick-started Dhamana, attracting further equity investment from the African Development Bank (AfDB) and CPF Group, with support provided by Cardano Development and FSD Africa.

Dhamana is a new limited liability company based in Kenya with a mandate to deliver for the East African region – including Kenya, Tanzania, Uganda and Rwanda. It will provide credit guarantees on debt capital market instruments, to boost the credit rating of such instruments and crowd in investment from pension funds, insurance companies and sovereign wealth funds to support sustainable infrastructure and business development in East Africa.

Dhamana will target businesses that add value to people’s lives, improving the day-to-day life of Kenyans and of people across the region. The increase in affordable finance for Kenyan businesses will mean projects will require less capital to get off the ground, make money, and generate growth. Dhamana will also enable investors to diversify their portfolios, acting as a catalyst to transform East Africa’s financing landscape.

This is the second time in a week that an investor in climate solutions backed by the UK Government has achieved a milestone. Last week, MOBILIST signed a partnership with the Nairobi Securities Exchange which aims to drive the listing of new investment products in the Kenyan market and increase the amount of private sector capital available for development and climate projects in Kenya and drive growth.

Dhamana CEO, Christopher Olobo, said, “With the support of our investors and supporters, we have worked to develop Dhamana as an important catalyst for long-term sustainable finance in the region. Dhamana’s local currency guarantees will connect pools of untapped capital with East Africa’s real economy, making a tangible difference to people’s lives and offering local investors the opportunity to invest in Paris-aligned initiatives.”

Deputy High Commissioner and Development Director, British High Commission Nairobi, Leigh Stubblefield, said, “For the second time in a week I am proud to say that the UK has supported a climate finance solution in Kenya – an example of our long-term commitment to long-term investment and growth. This is a great pan-Africa partnership that will improve the lives of East Africans for the better, and as the saying goes, we go far when we go together.”

Representing PIDG, InfraCo Africa CEO, Gilles Vaes, added, “Building on the success of other PIDG-supported credit enhancement facilities in Nigeria and Pakistan, Dhamana will demonstrate the value of such a facility in the East African market, opening up opportunities for investors and clients alike. Crucially, Dhamana will engage new partners and investors in our efforts to urgently address the climate crisis and accelerate delivery of the UN sustainable development goals.”

In his remarks at the launch event, Solomon Quaynor, African Development Bank Vice President for Private Sector, Infrastructure & Industrialisation, said, “The African Development Bank’s equity investment in Dhamana reinforces the catalytic role and potential of credit enhancement companies in leveraging opportunities for infrastructure financing in local currency and supporting debt capital markets deepening in our regional member countries. We intend to replicate this business model in appropriate markets across Africa with partners such as the Private Infrastructure Development Group (PIDG) and others. The first example of this type of credit enhancement company was InfraCredit in Nigeria which has had demonstrated success, and now Dhamana in East Africa. The investment in Dhamana aligns with the Bank’s priority to mobilise financing through innovative vehicles from Africaninstitutional funds including pension funds, sovereign wealth funds and insurance companies for infrastructure development in Africa.”

On his part, Dr. Hosea Kili, OGW – CPF Group Managing Director/CEO – said, “We are proud to be part of this transformative initiative through Dhamana Guarantee Company. We believe in the power of innovative financial solutions to drive sustainable growth. By leveraging local currency guarantees, Dhamana will unlock critical capital for critical infrastructure projects, advancing economic development. This partnership aligns with our commitment to investing in initiatives that improve the lives of people’s lives and our economy while contributing to a more sustainable future.”

Joost Zuidberg, CEO of Cardano Development concluded – “Dhamana’s true strength lies in its capacity to attract significant investments from East Africa’s institutional capital, laying a strong foundation for future scaling up according to its sizeable potential and thus meaningfully contribute to sustained economic growth in the region. Part of our core work is to incubate guarantee solutions for emerging and frontier markets, and we are thrilled to formalise this partnership today, as we collectively provide Dhamana with the crucial support and capital needed to fulfil this vital objective.”

NOTES FOR EDITORS

The UK-Kenya Strategic Partnership
The UK-Kenya strategic partnership joint statement can be found here.

About Dhamana
Dhamana Guarantee Company (Dhamana): Dhamana is working to catalyse the development of domestic capital markets in East Africa. It does this by connecting significant under-utilised sources of domestic institutional capital with the real economy, such as new green infrastructure, and providers of credit to businesses. This increases access and the affordability of local capital, providing new low-risk opportunities for local investors. Dhamana will also serve to provide a portfolio of businesses with access to the local currency capital needed to deliver bankable projects, meeting the high demand for new affordable housing, transportation, water, and energy infrastructure, and promoting long term economic development. www.dhamana.com

About PIDG
The Private Infrastructure Development Group (PIDG) is an innovative infrastructure project developer and investor which mobilises private investment in sustainable and inclusive infrastructure in sub-Saharan Africa and south and south-east Asia. PIDG investments promote socio-economic development within a just transition to net zero emissions, combat poverty and contribute to the Sustainable Development Goals (SDGs). PIDG delivers its ambition in line with its values of pioneering, partnership, safety, inclusivity, and urgency. PIDG offers Technical Assistance for upstream, early-stage activities and concessional capital;its project development arm – which includes InfraCo Africa and InfraCo Asia – invests in early-stage project development and project and corporate equity. PIDG credit solutions include EAIF (the Emerging Africa Infrastructure Fund), one of the first and more successful blended debt funds in low-income markets; GuarantCo, its guarantee arm that provides credit enhancement and local currency solutions to de-risk projects; and a growing portfolio of local credit enhancement facilities, which unlocks domestic institutional capital for infrastructure financing. Since 2002, PIDG has supported 233 infrastructure projects to financial close, which provided an estimated 228 million people with access to new or improved infrastructure. PIDG is funded by the governments of the United Kingdom, the Netherlands, Switzerland, Australia, Sweden, Global Affairs Canada, Germany, and the IFC. www.pidg.org

About the African Development Bank (AfDB)
The African Development Bank (AfDB) is Africa’s premier development finance institution. It comprises three distinct entities: the African Development Bank (AfDB), the African Development Fund (ADF) and Nigeria Trust Fund (NTF). On the ground in 34 African countries with an external office in Japan, the AfDB contributes to the economic development and the social progress of its 54 regional member states. www.afdb.org

About the CPF Group
The CPF Group offers a comprehensive range of services through its various subsidiaries including CPF Financial Services which administers both private and public pension funds; notably – the Public Service Superannuation Scheme (PSSS); The Local Authorities Pensions Trust (LAPTRUST); the Taifa Pension Fund; the County Pension Fund and CPF Individual Pension Plan. The funds under our administration have a total membership of just over 500,000 members.
Other subsidiaries include Laser Infrastructure & Technology Solutions (LITES); Laser Property Services; Rukisha Advances payment platform; CPF Asset Managers; CPF Capital & Advisory; and Laser Insurance Brokers (LIB). The Group offers a wide range of services in ICT & renewable energy solutions, Property Services, Insurance Brokerage, Smart Money platform, fund management, Transaction Advisory, Trust fund services, training & consultancy, and Corporate Trustee Services. Derived from uncompromised commitment to fulfilling lives, the CPF Group prioritises new models and approaches in engineering turnkey solutions for clients across the region. www.cpfgroup.or.ke

About Cardano Development
Cardano Development (CD), established in 2007, incubates new companies, and creates and manages fund managers. Through careful risk-management analysis in data poor settings, CD identifies scalable solutions that can help to make frontier financial markets more inclusive, investible, and sustainable to unlock lasting economic value. CD creates scalable solutions for currency, credit, and liquidity risks in these markets. With over USD 6 billion assets and USD 3.1 billion capital under management, CD supports scale-up ventures (TCX, GuarantCo, Frontclear, BIX Capital, ILX Fund, AGRI3 Fund), and a number of new start-ups, with ongoing management support services and corporate governance oversight. www.cardanodevelopment.com.