By Toby McIntosh
Unlocking a massive treasure chest of financial data could fuel more private sector investment in developing countries, according to advocates calling for the key to be turned.
More transparency for the sought-after data appears to be under active consideration by the international financial institutions that created and control the database, called GEMs.
Yes, the database is known by its acronym, which stands for the Global Emerging Markets Risk Database.
What’s locked inside is comprehensive credit risk information that shows the probabilities of loan defaults and expected losses. The data is used by the 24 members of the GEMs consortium, such as the World Bank, to evaluate future lending risks.
Wider access to the data would help the private sector, including commercial credit rating agencies, analyze investment risks, according to advocates for breaking the current confidentiality seal.
Pressure to reveal GEMs data is coming not only from a coalition of major private investment companies, the Investment Leadership Network, but also from public interest groups.
The Investment Leadership Network said in its recommendations that the historic losses of multilateral development banks “are materially lower than those estimated by ratings agencies.” With GEMS data confirming this and providing more detailed information about risks, the argument goes, private investors would feel more comfortable making loans in emerging and developing countries.
More transparency for GEMs has some influential backers. World Bank President David Malpass recently spoke in favor of it. And the US government supports the idea.
A panel of experts supported by the Group of 20 countries, the Capital Adequacy Frameworks Panel, has outlined ways to restructure GEMs and release more data.
EIB Says Discussions ‘Ongoing’
Officials of the European Investment Bank, which administers GEMs, have not spoken publicly about transparency proposals. However, when the EIB’s InfoDesk on March 30 deferred EYE’s request for an interview, it said, perhaps tellingly, that “there are currently ongoing discussions related to the issues that you mention.”
Founded in 2009, GEMs is a consortium of 24 public finance institutions, who submit data from their portfolios and use the combined intelligence — 33 years of data and covering 17,000+ contracts — in making risk assessments. GEMs has a seven-person steering committee, including representatives of the EIB, the World Bank and the Asian Development Bank.
Discussions on GEMs’ future could occur during the upcoming Spring meetings at the World Bank and the International Money Fund, April 10-16.
Interest in GEMs comes at a time when the public lending institutions are under increased pressure to provide more support for developing countries, particularly to help them handle the effects of climate change, and to facilitate more private lending.
A Template for the Key
A design for the key to unlock GEMs was described in the 2022 report by the Capital Adequacy Frameworks Panel.
“Wider access to GEMs would build investor understanding and strengthen risk assessment, expanding investor interest and better risk transfer opportunities for MDB assets, improving capital efficiency and scaling capacity for MDBs,” according to the CAF report.
The CAF report says GEMs should “publish more granular statistics and analysis of the data showing credit performance for sovereign and private sectors by sector, countries or country groups, and regions.”
The report further prescribes that GEMs should “share anonymized statistics with private investors and ratings agencies.” In addition, GEMs should “provide risk analytics, charging fees as needed.”
The CAF report makes suggestions for restructuring GEMs so that it can sign contracts and for ensuring that funds are provided for the new dissemination tasks.
Investment companies and credit rating agencies would get more granular data than the public, such as at the business sector level, explained one panel member, Nancy Lee, a member of the CAF panel member. She is a senior policy fellow and Director for Sustainable Development Finance at the Center for Global Development, a think tank in Washington, D.C. Private companies accessing the data would be bound by confidentiality agreements, Lee told EYE. The public would get less specific data, she said, but it would still allow for better analysis of the performance of the international financial institutions.
Malpass Suggest Several Limits in Advance of Spring Meetings
Malpass recently said that making GEMs available “would be a global public good.”
His March 23 speech on helping capital markets contains several apparent caveats. Malpass said the data should made available “to investors,” that it should be provided “with appropriate safeguards” and that there should be “quality standards.”
Lee wrote March 1 that the World Bank’s Development Committee and the G20 should “task GEMs member institutions to agree on a plan to establish and fund a reorganized GEMs, with commitments by members to regularly supply the organization with data and an agreement on data disclosure standards.”
Lee said that GEMs officials have discussed more transparency for years, but observed, “I am not sure they object in principle to moving forward on this.”
Until recently, GEMs “has been sort of under people’s radar screens,” Lee said, who thinks it’s feasible for the first disaggregated GEMs reports to be out in early 2024.
The authors of a CAF report, pointedly noted that “interaction with GEMs was complex and time consuming.” They continued, “This and the eventual inability to access GEMs data contributed to the Panel’s conclusion on the need to reform GEMs.”
One founder of the GEMs project, Alain Godard, has suggested movement toward more transparency. Goddard is now the Chief Executive Officer of the European Investment Fund, a provider of risk finance to benefit small and medium-sized enterprises in Europe and a part of the EIB Group.
Godard wrote in a 2020 article, “The big step for GEMs institutions will be to make some of this aggregated data available publically to help potential investors to evaluate market opportunities, set return expectations and calibrate risk models in new markets.” Doing so would be “a key step in the path towards recognising data as a strategic asset, in developmental finance….”
Previous Disclosures Limited
GEMs issued a limited amount of aggregated data in two-volume 2020 report, but the material was heavily aggregated, to some people’s frustration.
More detail was needed, said Nadia Nikolova, a portfolio manager at Allianz Global Investors, in an 2021 interview. “What was really missing was the recovery rates: investors can understand that when new projects are built defaults do happen; more information however is needed on how DFIs are better at preserving capital vs public markets,” according to Nikolova.
Lee and other observers have said they have concerns about whether GEMs is ready for wider use.
Lee said that the GEMs data first would need “to be curated to make sure it is accurate and harmonized across institutions.” She commented, “I get the sense that there needs to be more work on the harmonization of the data.” After that, additional work would necessary to anonymize the data for dissemination, she said.
The GEMs website suggests the data is in good shape, stating, “The GEMs methodology and data process, developed over more than 10 years now, ensures data harmonisation and a high level of data quality.”
