G20 calls for reform of multilateral development banks

The G20 has issued a clear directive for multilateral development banks (MDBs) to become "better, bigger, and more effective" in addressing global development challenges.

Adopted in November 2024, the G20 reform plan outlines a detailed roadmap featuring 13 recommendations and 44 actions to enhance the impact of MDBs, according to a World Bank blog.

A central focus of the strategy is mobilizing private capital for development while optimizing MDBs’ own financial resources. The World Bank Group and other MDBs are already working toward ambitious targets, including delivering $65 billion in climate finance to low- and middle-income countries by 2030 and connecting 300 million Africans to electricity by the same year, a joint effort with the African Development Bank.

However, persistent barriers—particularly perceived risks—continue to deter private investment in emerging markets. Concerns over currency fluctuations, regulatory instability, and contract enforcement challenges contribute to investor hesitancy. Yet new data suggests these risks may be overstated.

The Global Emerging Markets Risk Database (GEMs) Consortium, a collaboration involving 26 MDBs and development finance institutions, offers the most comprehensive analysis to date. Covering 18,000 projects worth over $500 billion between 1994 and 2023, GEMs reveals that emerging market investments are less risky than commonly assumed.

Analysis by the International Finance Corporation (IFC), the World Bank’s private-sector arm, shows that default rates in emerging markets average just 3.6%, comparable to non-investment-grade firms in advanced economies. For example, S&P’s "B"-rated firms had a default rate of 3.3%, while Moody’s "B3"-rated firms saw a 4% default rate.

Notably, during major global crises—including the 2008 financial meltdown—default rates in emerging markets rose less sharply than in advanced economies, providing diversification benefits when they were most needed.

Additionally, recovery rates in emerging markets outperform global benchmarks, with investors recovering 72% of defaulted loans, compared to 70% for Moody’s global loans, 59% for global bonds, and just 38% for JPMorgan’s emerging market bonds.

One of the most significant findings is the weak correlation between sovereign credit ratings and corporate default rates. While sovereign ratings heavily influence investment decisions, the data shows that in lower-income countries, corporate default rates average 6%—far below the 14% implied by sovereign risk assessments.

This gap narrows in higher-income nations but remains notable, suggesting that private sector performance often exceeds sovereign risk expectations.

MDBs play a crucial role in mitigating investment risks by leveraging local expertise, providing advisory services to improve financial management and governance, and structuring projects to enhance viability. They are also developing new financial instruments to attract private capital at scale.

The evidence underscores a key opportunity: emerging markets not only offer diversification and resilience for global investors but also play a vital role in sustainable development. As the G20 pushes MDBs to scale up private capital mobilization, the data suggests that the risks may be lower—and the rewards higher—than many investors assume.