In 2020, central banks’ quantitative easing measures and governments’ fiscal stimulus packages addressed financial market dislocations and dampened the economic fallout of COVID-19. Advanced economies have been able to roll out more substantial support packages than emerging markets and developing economies. The outlook for the year ahead remains uncertain. There are positive signs as testing and treatment have improved and vaccination programs are being rolled out. Economic recovery in 2021 is possible but projected to be long and uneven. Much will depend on what governments will do to move their countries out of the recession. The IMF predicts a growth path of 5.1% for low-income countries and 6.3% for emerging market and developing economies in 2021.
Beyond the pandemic, we expect to see high government debt burdens, limited fiscal space, as well as more fragile economic systems and financial markets. The OECD estimates that private finance to developing countries has dropped by US$700 billion in 2020. The World Bank warns that additional financing needs for developing countries will be high in the short to medium term. Private sector financing gaps are, therefore, expected to increase, while access to the capital market by low-income and low-middle-income countries remains uncertain.
To prepare for the increased economic and operational uncertainty in the coming years, FMO has developed several scenarios to assess the potential COVID-19 effects on FMO’s balance sheet, production, costs, and capitalization. The losses incurred in 2020, our internal focus on regulatory compliance and the lingering effects of the COVID-19 pandemic will limit FMO’s capacity in 2021. Nevertheless, we will focus on supporting current customers through the crisis and following recovery period. Our financial projections for this financial year are relatively positive. FMO has a long-term strategy to invest and hold its equity portfolio. We have observed that financial markets stabilized in the second half of 2020. Based on this development, we believe that part of the valuation losses will be recovered in 2021. In the fourth quarter of 2020, ratings of the countries in which FMO operates have improved, but we expect impairment levels for our loan portfolio to be higher due to the enduring financial effects of COVID-19. FMO’s financial capacity beyond 2021 will depend on the severity and duration of the economic recession and its effect on our customers and portfolio quality.
The UK exited the EU on 31 January 2020. On 30 December 2020, the EU and the UK signed the Trade and Cooperation Agreement (TCA). FMO was well-prepared for the Brexit. Legal templates were updated and financial services moved from UK banks to EU entities. However, the TCA does not cover the provision of financial services. For relevant services, such as central clearing of swaps, operational changes may still be required, depending on further agreements in this area between the EU and the UK. The expectation, however, remains that the impact of Brexit on the financial results of FMO is not significant.
- 1 World bank (2020). World Bank Group COVID-19 Crisis Response Approach Paper: Saving Lives, Scaling-up Impact and Getting Bank on Track.
- 2 International Monetary Fund (January 2021). World Economic Outlook Update.
- 3 OECD (2020). Global Outlook on Financing for Sustainable Development 2021: A New Way to Invest for People and Planet.