AFD - 2018 Registration document

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RISK MANAGEMENT

Risk factors

4.1 Risk factors

Because of the nature of its business activity, AFD Group is exposed to the majority of the risks of a credit institution. Its risk management policy is centred around the following key risks, each of which is likely to affect its business activity, results and financial position: P credit risk, which by the nature of AFD’s activity in terms of concentration and counterparty risk, is the main risk to which the Group is exposed; P risk specific to market transactions: exchange rate, counterparty or basis, particularly related to differences between the application of funds and resources in currency terms. AFD holds no instruments for speculative purposes; P global interest rate and liquidity risk related to (i) differences between the application of funds and resources in terms of rates and maturity and (ii) complying with the constraints associated with subsidised financing eligible for Official Development Assistance (ODA); P risks related to the outsourcing of services and other essential operational tasks, P the risk of loss covered by the emergency and business continuation plan which comes into play in the event of a crisis, P non-compliance risk arising from failure to adhere to specific banking and financial regulations, primarily the risk of money laundering and funding terrorism (AML/CFT), P legal risk in connection with all its own activities, its status or its refinancing and arrangement operations, P IT-related risks, P risks to the reputation and image of the Group and its directors. Given its role as a development agency, and notably the subsidiary and/or incentive-providing nature of the Agency’s operations, the acceptable level of credit risk at AFD may sometimes be higher than for traditional banking institutions. For example, AFD must conduct business: P over long maturities. In any case, AFD Group looks for the most creditworthy counterparties in the countries in which it operates according to its development targets. In addition, lending opportunities are evaluated based on current banking criteria. Aside from macroeconomic and social-political risks specific to the countries in which AFD operates, a few regional or international risks are likely to have an indirect impact on AFD’s portfolio of loans and operations. P operational risk, including: P ethical risk, P strategic risks; P in challenging countries; with risky counterparties; P

Three main risks of this type have so far been identified: P financial risks. Italian spreads have narrowed somewhat since their peak in November, but still remain high, weighing on the Italian banking system and potentially on real activity. A disorderly Brexit, in the absence of a deal between the EU and Theresa May’s government, could also have negative effects on the euro area. A bigger-than-expected slowdown in China could adversely affect its trading partners and global commodity prices. Aside from this direct impact, concerns among international investors could materialise in an abrupt withdrawal of capital from emerging markets, as witnessed in 2015-2016 or in the third quarter of 2018; P risks linked to the introduction of protectionist measures. Following the tariff increases introduced in early 2018 on washing machines, photovoltaic cells, steel and aluminium, the United States announced 25% tariffs on $50 billion of Chinese imports. China responded by announcing similar measures on US imports. In September, the US imposed 10% tariffs on an additional $200 billion of Chinese imports, forecasting a rise to 25% by the end of the year. China, for its part, has imposed new tariffs on $60 billion of US imports. The US has not ruled out extending these tariffs to the remainder of Chinese imports ($267 billion) and introducing tariffs for the automotive sector, which would have a significant impact on other countries. IMF simulations show that the impact of protectionist measures in this escalating scenario is limited but still significant: global GDP would fall by more than 0.8% in 2020 and in the long term would be 0.4% below its baseline in the absence of trade tensions. The cost of tariff measures would be borne mainly by China, the US and NAFTA trading partners (a fall in GDP of 1.6%, 0.9% and 1.6% by 2020, relative to the baseline scenario). The IMF suggests that these simulations probably underestimate the impact of rising global trade tensions, particularly channelled through the business climate and investors’ perceptions of the financial markets. Moreover, the impact of tariffs varies from country to country and sector to sector. Mexico, whose manufacturing sector is closely integrated with regional and global value chains, is particularly vulnerable to changes in trade policy, although the successor to NAFTA (USMCA) was finally signed at the end of November 2018. The outcome of the negotiations between China and the US remains highly uncertain at this stage. P Non-economic risks (political and geopolitical, etc.). Continuing tensions in the Middle East in particular continue to weigh on the outlook and remain a stress factor in energy markets (oil and gas). An escalation of local conflicts could result in increased migratory flows to Europe, contributing to deepening political divisions in some countries. Lastly, the risks associated with climate change and extreme weather events are ever present, with the majority of developing countries being the worst affected.

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REGISTRATION DOCUMENT 2018