World Bank to issue first 'drought' bond

July 18, 2024 (MLN): The World Bank is looking to issue its first drought bond in the next 12-18-months and broaden its offering of catastrophe bonds supporting countries suffering devastation from storms and earthquakes, Reuters reported a senior executive at the lender as saying.

The drought bond would be a new instrument in the multilateral lender's suite of so-called cat bonds - fixed income instruments that pay out to countries in the event of a natural disaster.

"We would love to do something in the drought space, that is something we are working on," said George Richardson, director of the capital markets and investment department at the World Bank Treasury told Reuters, adding this would be most likely focussed on Africa.

The World Bank has arranged and issued cat bonds though its lending arm, the International Bank for Reconstruction and Development (IBRD), to help emerging economies mitigate the fallout from storms and earthquakes for well over a decade. It has made $568 million of insurance payouts on these instruments.

The vast majority of the World Bank's existing cat bonds cover countries in the Pacific and Caribbean regions, with Mexico dominating issuance.

The lender was now in talks with more countries to broaden the geographic scope, Richardson said.

Southern Africa is reeling from its worst drought in years, owing to a combination of naturally occurring El Nino - a warming of waters in the eastern Pacific leading to hotter weather across the world - and higher average temperatures produced by greenhouse gas emissions.

This led to a number of record-breaking weather extremes last year.

Richardson said modelling droughts, wildfires and floods was a little more difficult than earthquakes or storms for a parametric cat bond, an instrument where triggers depend on physical parametres of an event.

"The fundamental challenge is that you need data, and you need to have some history of that so that it can be modelled by various agencies," Richardson said.

The World Bank has also recently offered vulnerable, low income countries the option of introducing clauses into their borrowing from the Washington-based lender that would allow governments to defer repayments for up to two years if they were hit by a severe natural disaster.

So far, seven countries have signed up to the so-called Climate Resilient Debt Clauses (CRDC) - Bahamas, Barbados, Belize, Grenada, St. Lucia, St. Vincent and the Grenadines and Montenegro.

"Some of these are evaluating whether they should activate this clause after hurricane Beryl but so far, no decision has been made from what we know," said Richardson.

Beryl left a trail of devastation across several Caribbean islands earlier this month, destroying as many as 90% of homes in parts of Grenada and St. Vincent and the Grenadines.

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