Letter from the Management Board
After a hopeful end to 2021 and a positive start to 2022, when many COVID-19 measures were lifted, FMO set out to deliver on ambitious targets for new investments and our development impact. Major geopolitical and economic changes in the first half of the year, however, have changed our positive outlook.
The ongoing war in Ukraine has had a catastrophic effect on the country’s citizens and businesses and has disrupted energy and food supply chains globally. Poverty and inequality levels, already worse due to COVID-19, have deteriorated even further. In Sub-Saharan Africa, 85 percent of the region’s wheat supplies are imported. Higher fuel and fertilizer prices also affect domestic food production. Together, these factors will disproportionately hurt the poor and increase food insecurity. Many countries have felt the impact of these challenges as have our customers.
In light of this, it is imperative we serve our customers better, create more impact and take risks that commercial parties are not ready to take. This is why we are pursuing three strategic priorities, which are to build back our business, adapt to regulatory changes, and accelerate the development of our organization.
Building back business
Last year, the pandemic and the need to focus on internal processes limited our ability to generate new business. We have set ambitious targets and are building our investment pipeline in pursuit of these, in full awareness of the uncertainty that lies ahead. A few of the highlights of the first half of 2022 are:
Through MASSIF, we supported over 50,000 displaced Ukrainians in Georgia and ensured the continuity of Ukrainian SMEs through a technical assistance facility with our Georgian customer Gazelle Finance.
We contributed to food security through a syndicated facility with Moldova’s largest agribusiness group, Trans-Oil Group, for US$43 million. We also renewed support for Babban Gona, a farming service franchise model improving the lives of Nigerian smallholder farmers through a US$15 million facility. In addition, we provided a top-up of US$20 million to Hayel Saeed Anam Group in Yemen to produce and distribute food staples like flour and milk.
As part of our commitment to increase investments in fragile and conflict-affected states, we supported youth and women-run SMEs affected by COVID-19 with a US$10 million NASIRA portfolio guarantee and Capacity Development (CD) Program.
We invested in Egypt’s first green renewables-backed project bond through a direct subscription for US$72.5 million through the Scatec Green Bond, refinancing six power plants across the country.
We mobilized funds – including Proparco – to provide reliable power to the residents of Karachi through a US$100 million syndicated facility to private power company K-Electric. This transaction aims to enhance KE’s transmission and distribution network, an important pillar in FMO’s updated approach for the Energy sector.
Alongside British International Investment (BII) and Old Mutual, we committed US$40 million to the African Infrastructure Investment Fund 4. This will help to bridge the immense financing gap in digital, transport, and logistics infrastructure across Africa and accelerate Africa's energy transition.
We supported on-lending to women and youth-owned agricultural micro, small and medium-sized enterprises (MSMEs) in Uzbekistan with a US$50 million loan to our long-standing customer Ipak Yuli Bank.
We supported the acceleration of the tech start-up scene in Ghana, Tanzania, and Morocco by partnering with AfricArena, the leading African series of tech events, through our Ventures Program.
For the first time in two years we hosted in-person events, including our Future of Energy conference with Solarplaza in the Netherlands, which highlighted how hybrid (wind) applications, energy storage, and distributed energy can increase access to energy. We also hosted our African Cheetahs Roundtable in Kenya, bringing together executives of Africa’s most promising and fast-growing agribusiness companies.
Adapting to changing regulations
We recognize the need for greater transparency and accountability, the main drivers behind stricter regulations for financial institutions. We continue to monitor these developments and are adapting our internal procedures, disclosures, risk management and governance frameworks in line with the expectations of the European Central Bank (ECB) to manage and disclose on climate-related risks, the LIBOR transition and the EU Sustainable Finance regulation.
In 2020, we launched the Financial Economic Crime (FEC) Enhancement program to demonstrate full compliance with the Anti-Money Laundering and Anti-Terrorist Financing Act (in Dutch: Wwft) and the Sanctions Law. We finalized this program by 2021.
FMO received the Dutch Central Bank's (DNB) conclusions and observations. Follow-up on DNB’s recommendations and findings has been initiated. We are determined to continue to improve in the regulatory domain and to ensure that the changes we implement are tailored to the day-to-day realities and complexities of the markets we are active in.
Accelerating organizational development
To help us realize our financial and impact targets and to increase our productivity, we have been recruiting more people. This includes a Director Business Projects, who will focus on our digitalization program and internal efficiency.
We continued to improve our impact management. We launched the Joint Impact Model (JIM) Foundation, which aims to increase transparency on key impact indicators in developing countries in a harmonized way. We are reviewing our Position Statement on Indirect Finance and our Disclosure Policy. Also, we are adjusting our investment process to take the impact of investments on local communities into account even better.
Financial and impact performance
Our net profit for the first half of 2022 amounted to €102 million (HY21: €198 million). The easing of COVID-19 measures was overshadowed by the Russian invasion of Ukraine, where the impact of the war resulted in additional impairments and valuation adjustments on our loan and private equity portfolios respectively. The strengthening of the USD versus the EUR had an upward impact of €118 million on the predominately USD denominated private equity portfolio.
The current crisis is enhancing FMO’s additionality as an investor in emerging markets and developing economies. At the same time, we notice a decline in the share of our investments in least developed countries that started during the pandemic and continues in 2022. We are currently not on track to achieve our Reducing Inequality (RI) target for 2022, however we are striving to bring our RI investments back on track in the second half of the year. In the first half year, we realized €198 million in RI-labelled investments. With €289 million Green-labelled new investments, we are progressing well on our Green target. At the end of the first half year, FMO's outstanding portfolio resulted in an estimated 620,000 jobs supported (FY21: 642,000) and 1,300,000 tCO2e financed avoided GHG emissions (FY21: 1,255,000 tCO2e).
The Private Equity portfolio consisting of investments in Ukraine and investees active in the region has been valuated at approximately €67.6 million less than before the Russian invasion. In addition, FMO took impairments of approximately €96.5 million on loans to customers in Ukraine. Our Common Equity Tier 1 (CET1) ratio remains well above our appetite level.
The war in Ukraine will continue to increase the price of food in emerging markets and developing economies and impact some of the poorest and most vulnerable countries. We have already been supporting customers who supply food to such countries and are increasing commitments in cases where commercial lenders are retrenching. Nonetheless, we are working with the private sector and the Dutch government to see how and where we can do even more to secure food for the people who need it the most.
We will continue to monitor economic developments and mitigate risks when necessary. We believe that global equity markets will remain very volatile in the second half of the year and that the war in the Ukraine could lead to further impairments to our debt and equity portfolios. We are also following, among others, the situation in Sri Lanka, where the country and its people are faced with an economic and political crisis. The current exposure in Sri Lanka amounts to €70.4 million.
We need to and want to continually improve. Lessons learned from the more complex projects help us do that, for example Plantations et Huileries du Congo S.A (PHC) / Feronia, which we exited earlier this year. Another complex project, Agua Zarca, saw new developments in June, related to earlier legal proceedings. More information can be found on our website.
Our experience gained over more than 50 years, continued dialogue with our stakeholders and insights from evaluations we conduct, continue to inform our approach, and our long-term strategy. In September this year, we will launch our updated impact strategy toward 2030, which sets out how we will challenge ourselves and our partners to maximize our impact. In addition, we will be expanding the Management Board (MB) from three to five members, which we agreed with the Supervisory Board last year. We are in the process of hiring two people, who – pending final approvals – will join the MB later this year.
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 2022 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 2022 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 2022; and
This Interim Report 2022 includes a description of the principal risks and uncertainties for the remaining six months of the financial year.
The Hague, August 11, 2022
Fatoumata Bouaré, Chief Risk & Finance Officer
Huib-Jan de Ruijter, Chief Investment Officer
Michael Jongeneel, Chief Executive Officer
- 1 International Monetary Fund (April 2022). Regional Economic Outlook: Sub-Saharan Africa - A New Shock and Little Room to Maneuver.