World Bank eyes first drought bond in next 12-18 months

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

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 focused on Africa.

The World Bank has arranged and issued cat bonds though its lending arm, the International Bank for Reconstruction and Development, 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 is now in talks with more countries to broaden the geographic scope, Mr. 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.

Mr. Richardson said modeling droughts, wildfires and floods is a little more difficult than earthquakes or storms for a parametric cat bond, an instrument where triggers depend on physical parameters 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 modeled by various agencies,” he said.