In an article published yesterday in Project Syndicate, Vera Songwe and Mahmoud Mohieldin, Members of the Advisory Board of BwB's Africa Capital Hub, argue that one of the most persistent assumptions in development finance is not just wrong. It is costly.
Newly released data from the Global Emerging Markets Risk Database, which covers more than 15,000 private-sector loans issued by multilateral development banks (MDBs) and development finance institutions (DFIs) between 1994 and 2024, shows that default rates in emerging markets reached just 3.54%, broadly comparable to B-rated corporate bonds in advanced economies. In low-income countries specifically, where sovereign ratings imply a one-in-three probability of default, MDB- and DFI-supported private borrowers defaulted at a rate closer to one in fourteen.
The difference, the authors argue, reflects the risk-mitigation role of MDBs and DFIs — effective project selection, supervision, and governance standards — none of which is captured in sovereign-ceiling pricing, a convention that ties assessments of private borrowers to the host country's sovereign rating, regardless of project structure or MDB involvement.
This is not a call for more concessional finance. It is a call for pricing frameworks that reflect observed outcomes rather than inherited assumptions, starting with a systematic review of how sovereign ratings translate into private-sector credit assessments.
The authors set out what each type of stakeholder — from rating agencies to developing country governments — is being asked to do differently. The full piece and a four-point reform agenda can be found with this link.