Letter from the Management Board
The first half of 2020, the year we celebrate our 50th anniversary, has been dynamic for FMO due to the COVID-19 pandemic that has spread around the world. Despite these developments we continue to support our clients and investees, through regular financing as well as financial and non-financial support tailored to the needs emerging from the COVID-19 pandemic.
Some highlights from the first six months include:
Our first renewable energy investment in Djibouti for the construction and operation of a 60MW windfarm, helping Djibouti meet energy demands and transition towards 100% renewable energy-based electricity production by 2030.
New exciting partnerships under the FMO Ventures Program. For instance, an equity investment made in liwwa (Egypt), improving access to finance for SMEs in emerging markets by supporting technology-enabled business models.
Issuing of a seven-year Sustainability Bond (€500 million).
The scale up of the NASIRA financial guarantee with €25 million to support small COVID-19-affected entrepreneurs in Africa and the European Neighborhood together with the European Commission.
A partnership with COFINA, one of the few homegrown microfinance groups in Africa. Much of the funding will specifically support lending to women and youth-owned businesses, in countries where nearly half the population still lives below the national poverty line.
The issuance, together with our partner TCX, of FMO’s largest ever note in frontier currency, amounting to US$50 million in Uzbekistan Som.
COVID-19-related support provided to several customers in the (M)SME sector. For example, upon request, Banco Promerica de Costa Rica was able to repurpose its financing of green buildings to support SMEs with liquidity, helping them to maintain their workforce.
Our response to COVID-19
With COVID-19 we have come to face a new reality. We are proud of how quickly and effortlessly our colleagues have adapted to working from home. We remained connected, facilitated 700+ home offices and ensured we could quickly shift our attention to our customers. FMO’s markets have been severely impacted by the pandemic. All our markets have reported COVID-19 infections, although some more than others. Economically, emerging markets (EMs) have been vulnerable to the effects of the pandemic. In March and April, more than US$90 billion equity and debt flowed from EMs, creating liquidity issues for governments and corporates. Constrained by high debt ratios and low real interest rates going into the crisis, many governments and central banks have struggled to develop sufficient response packages to shield the private sector and households from the worst impacts.
To respond to these developments, FMO developed a COVID-19 Response Package with financial and non-financial support, covering: Remote Advisory Services (17 projects under implementation), a Platform for Learning and Exchange (to date 18 webinars with approximately 700 attendees) and our Emergency Grant Facility (to date €3.5 million). Furthermore, FMO also granted payment holidays to customers with short term liquidity needs for existing customers who can apply for loans offering additional liquidity. We granted 18 payment deferrals and 3 full restructuring requests. Meanwhile, we carried on business as usual, adapting our processes where possible.
Impact on our business
Although FMO quickly adapted to the outbreak of the COVID-19 pandemic, it has impacted our operations, performance and balance sheet. For the first half of 2020 we report a net loss of €280 million. There are two main reasons for this. First, the impairments for our loan portfolio increased with about €100 million, as the risk that some loans might not be paid back in full increased. Second, the value of our private equity investments (including investments in associates) decreased by €255 million. In IFRS 9, these fair values are reflected in the profit and loss account.
Internal changes
Internally, we have invested significant time and resources into our Know Your Customer (KYC) processes, focusing to a large extent on the prevention of Financial Economic Crime. This resulted in a newly formed KYC department, accompanied by an increasing number of FTEs, and related training sessions to upskill staff.
At our first virtual Annual General Meeting of Shareholders, in April, two Supervisory Board members retired from their roles: Pier Vellinga (Chairman) and Alexandra Schaapveld. We thank them for their contribution during the past years. At the same time, we welcomed three new members: Reintje van Haeringen, Marjolein Demmers and Dugald Agble. Dirk Jan van den Berg and Koos Timmermans have assumed the roles of Chairman and Vice-Chairman, respectively.
In June, Peter van Mierlo announced that he would step down as FMO’s CEO. This decision, the circumstances leading up to his departure and the subsequent media attention affected all of us, deeply. In the weeks that followed we intensified dialogues with our full FMO-team to answer questions and address concerns on leadership style, and to reconnect with one another so as to move forward again.
In July, reflecting on its first period, the Executive Committee (ExCo) concluded that it has not been successful in connecting with the broader leadership group in the organization, and announced its decision to discontinue. The ExCo members stepped down per 1 August and continue in their managerial roles. A new governance structure will be co-created with management and will be designed in the second half of this year. In the interim, decision-making will remain with the Management Board.
Our outlook
It is the first time FMO expects to make a loss since our financial independence from the Dutch government in 1990. And we are well prepared for it. FMO’s buffers exceed the minimum required by the Dutch Central Bank and the higher requirements defined by our own risk appetite. At the end of June, our total capital ratio was 22.8 percent, where a minimum of 14 percent is required.
We enter the second half of the year energized by the opportunities and entrepreneurial spirit we see among our colleagues, customers and partners. Because, despite the weight of the pandemic on global prosperity and on reaching the Sustainable Development Goals (SDGs), we also see how new ways of working and thinking help us move forward. Technology will stimulate further innovation and allow us to connect with colleagues and partners all over the world. Partnerships remain crucial as we actively engage with other European Development Finance Institutions (EDFIs) as well as multilateral banks to jointly support our customers.
Our outlook for the rest of the year will depend on the future path of the pandemic and the related socio-economic impact on our customers. We carefully plan potential – upside as well as worst-case – scenarios, and estimate impacts on our balance sheet and operations, and factor these into our regular (longer-term) business planning. The crisis forces us to fundamentally redefine how we work and interact with each other, providing us with an opportunity to rethink the future of ‘traditional’ development finance. For FMO, this is an exciting place to be.
Responsibility statement
In accordance with Article 5:25d(2)(c) of the Dutch Financial Supervision Act (Wet op het Financieel Toezicht) we state that, to the best of our knowledge:
The 2020 condensed consolidated interim accounts give a true and fair view of the assets, liabilities, financial position and profit of FMO and its consolidated undertakings;
This Interim Report 2020 includes a fair overview of the important events that have occurred during the first six months of the financial year, and their impact on the condensed consolidated interim accounts 2020; and
This Interim Report 2020 includes a description of the principal risks and uncertainties for the remaining six months of the financial year.
The Hague, August 20, 2020
Fatoumata Bouaré, Chief Risk & Finance Officer
Linda Broekhuizen, Chief Investment Officer