COVID-19 has affected the people in our markets, our customers and FMO. Companies in emerging markets, particularly micro, small and medium enterprises (MSMEs), have experienced falls in demand, distorted supply chains, and production shutdowns. This, in turn, has led to increasing levels of unemployment and a rise in poverty rates across developing countries. Through these times, FMO has supported its customers where possible, enabling them to support their communities, while managing the uncertainties and the impact of COVID-19 on its own results.
Impact COVID-19 on our portfolio
The COVID-19 pandemic has created a great deal of uncertainty over the past year. Asia and Europe were affected first. In April and May, developing countries also started to feel the effects of the pandemic as commercial investors withdrew capital, resulting in record capital outflows in emerging markets. In our markets, contrary to Asia and Europe, the financial crisis preceded the health crisis.
FMO’s losses in 2020 are primarily attributed to a decrease in valuations in our private equity portfolio. We have not yet incurred material increases in non-performing loans or write-offs. However, FMO did take additional provisions for the performing loan portfolio for the increased credit risk that is caused by the uncertainties around the pandemic. This resulted in higher impairments. Where customers have been affected, this often occurred as a result of an accumulation of non-COVID19-related external factors such as the political crisis in Lebanon, floods and the locust plague in East Africa or rising dollar prices. In addition, with stock markets plummeting at the beginning of the pandemic, the euro-dollar valuation has changed significantly, affecting our private equity portfolio on the currency side.
However, travel restrictions have limited FMO’s ability to fill its pipeline and close new contracts. This has impacted our 2020 results. Effects are expected to be long-term as FMO is unlikely to make up for the lower growth in 2020 and 2021, meaning it will affect income levels for years to come. FMO has, therefore, reviewed its cost base to maintain a healthy cost to income ratio.
The impact on our customers has differed per sector. In the energy sector, project development has come to a standstill, leading to fewer new business opportunities. Some projects were held up due to supply chain disruptions or faced delayed construction that ultimately led to restructuring of loans as their financial position deteriorated. For other operational projects, governments low on funds were unable to pay for the energy provided. Due to the decline in economic activity, demand for electricity has also decreased. Furthermore, FMO is active in the off-grid sector, where small entrepreneurs can no longer afford the facilities and supply chains of materials have been interrupted. Due to local lockdowns, payment for the off-grid systems could not be collected, which also hit the sector hard.
Our Agribusiness, Food & Water portfolio is diversified and is holding up well. In the first months of the pandemic, there were fears that the virus would lead to famine in developing countries as food could not be harvested or transported. On top of that, East Africa was affected by several floods and a locust plague. Fortunately, several months later, the impact was lower than expected.
There seems to be a correlation between the government imposed lockdowns and support packages and the impact on financial institutions. As such, there are notable differences between countries and regions. Lockdowns in Latin America, for example, were stringent and the financial sector suffered considerably. In Africa, where lockdowns were less stringent, market expectations remain relatively positive. FMO has a large microfinance portfolio that cannot count on government support as much as the universal banking sector. However, FMO’s customers are holding up relatively well. Borrowers are repaying their loans as best as possible. Larger financial institutions are aided by moratoria offered by governments. The long-term effects remain to be seen once banks have to pay back this debt. Meanwhile, financial institutions have made good progress in their digitization process.
Our response to COVID-19
The private sector is needed to address the public health, economic and social impact of the COVID-19 crisis and safeguard employment in both the formal and informal sector. Therefore, FMO continues to work closely with its customers to boost their resilience during and post-COVID-19. We are in close contact with them to understand how they expect to be impacted by the pandemic, and what, specifically, they need to overcome the current crisis and support their communities. We are also closely aligning our COVID-19 response with partners.
Together with the DFI and MDB (Multilateral Development Banks) community we are committed to help resolve liquidity and solvency issues. Whilst FMO’s focus is typically on supporting jobs, it is unavoidable that some retrenchment takes place in the current environment. FMO works closely with its customers to protect jobs and to ensure retrenchment happens in a responsible way if necessary.
We have provided our existing customers greater flexibility on previously agreed financing structures, including debt payment deferrals for firms in distress or for firms that offer deferrals to their customers, which is common in the microfinance sector. We have approved 31 payment deferrals and 3 full restructuring requests from existing customers. Demand for emergency liquidity was lower than anticipated. Several agribusiness customers did request replacement liquidity due to the withdrawal of commercial parties from deals as a result of the pandemic.
As small businesses are heavily affected, the European Commission, together with MASSIF and FMO scaled up the NASIRA program. The program is expanded to support COVID-19-affected entrepreneurs, in addition to female, young and migrant entrepreneurs who were already included. With these adjustments, the NASIRA guarantee will help small businesses in Africa and the European Neighborhood stay afloat during and after this pandemic. In response to the need for innovative technological solutions in our markets in Africa and Asia, FMO's NL Business team has supported several transactions by Dutch organizations, active in the health and water sector, based on a COVID-19 carve-out of €1 million from the Development Accelerator facility.
FMO also offers capacity development, which is comprised of three pillars, aimed to equip FMO customers with the critical knowledge, connections, and leadership to weather the social and economic implications of the crisis over the near- and long-term.
Pillar 1 | Remote Advisory Services, helps to ensure FMO customers can achieve sustained impact and business continuity. We provided (and continue to provide) access to advisory services to give our customers and investees the right knowledge for crisis management, business continuity and resilience planning, and to address ESG-related challenges.
Pillar 2 | a Platform for Learning and Exchange, offers a space for FMO customers to learn from each other and to exchange experiences in dealing with the pandemic. Through webinars hosted by FMO staff and in collaboration with external knowledge partners, FMO has put its internal expertise and external network to good use.
Through Pillar 3 | the Emergency Grant Facility, FMO provides its customers with €3.2 million in emergency funding to adapt or scale their business models to provide vital goods and services to employees, workers and communities during the pandemic. In total, 38 FMO customers have been awarded a grant between €30,000 and €100,000. The majority of grants focus on safeguarding the health and safety of affected employees, workers, and communities through provisioning of personal protective equipment (PPE). The other grants focus amongst others on business continuity by means of digitalization, last mile distribution of renewable energy to medical facilities and water and sanitation to communities, as well as education around effective health and safety measures to combat transmission.