MIGA Tackles Declining FDI Levels and Growth Prospects in Vulnerable Economies
January 09, 2009—The world economy, mired in a severe financial and credit crisis, is moving into the danger zone, threatening development progress of the last decade in many countries. The World Bank’s Global Economic Prospects report expects developing country growth to decline from 7.9 percent in 2007 to 4.5 percent this year. Investment growth in the developing world is projected to fall from 13 percent in 2007 to 3.5 percent in 2009, due to tighter credit conditions and less appetite for risk.
Dampening Effect on Global FDI
A change in lending behavior and a general reassessment of credit risk has added new uncertainties and risks to the world economy, resulting in a negative impact on foreign direct investment (FDI). Economic growth in developed countries—one of the key drivers of FDI flows in past years—has slowed markedly since the fourth quarter of 2007. As a result, FDI flows in 2008 saw a 10 percent decline from 2007. This was highlighted by the UN Conference on Trade and Development (UNCTAD) in its World Investment Report 2008.
FDI is a very powerful engine of development and growth in emerging and transition economies. However, current international financial market sentiment is contributing to uncertainty in long-term investment decisions.
“We are seeing more and more projects, particularly complex infrastructure projects, being delayed because of problems in putting the financing in place, causing confidence to deteriorate further globally,” said MIGA Chief Operating Officer James Bond.
There is a real risk that market confidence may not recover for some time, which could result in significant net outflows of foreign capital from many economies. “The decline in investment will result in lower growth. Poor and middle-income countries need our assistance to limit the damage and prepare for recovery,” added Bond.
Need for a Fast, Flexible and Coordinated Response
A crisis of this magnitude calls for an energetic and coordinated response from all relevant institutions. The World Bank Group is using all its resources—financing, advice, guarantees, partnerships to mobilize assistance from others, and more—to help countries manage this downturn and minimize its impact.
As the leading international institution promoting FDI in emerging and transition economies, MIGA has a unique capacity to play an important role in helping countries improve their business climate and attract investors so that developmentally beneficial investment may continue.
“Our priority in these turbulent times is clear: to help restore confidence in financial markets and empower the private sector to participate in the development of countries in need,” says Bond.
Indeed MIGA has acted quickly to help countries caught up in the crisis. The agency’s primary instrument—political risk insurance or guarantees—is playing a crucial role to improve credit when the global financial sector is suffering from a severe lack of confidence. Last year it issued several guarantees in support of loans to banks in Ukraine and the Russian Federation.
“We are going the extra mile to support investors,” said James Bond. “We are pleased that we were able to respond quickly to support European banks recapitalizing their subsidiaries in some Eastern European countries.”
In the face of strong tightening of credit standards, credit enhancement with political risk insurance from an institution backed by the triple A-rated World Bank and the governments of 173 member countries offers significant economic benefits to banks, making it much easier for them to recapitalize subsidiaries.
“MIGA has a key role to play in helping to jumpstart paralyzed financial sectors in this manner and disseminate best practices to ensure well-functioning private sectors,” explained Bond. “This is an important contribution to maintaining the stability of financial markets.”
Further Broad-Based Support Planned
MIGA is also looking at new ways to deliver other creative solutions to meet investors’ risk financing needs, especially in the wake of the financial crisis.
“The agency is currently developing a range of new instruments and initiatives that can be deployed to respond rapidly during times of crisis like this,” said Bond.
These initiatives, due to be considered by the MIGA Board during FY09, will allow MIGA to offer investors more flexible services and support the agency’s objective of enabling affected economies to emerge more strongly to resume development.
“MIGA is committed to strengthening its role of providing support to emerging and transition economies battered by the global financial crisis. The initiatives planned by the agency are consistent with its mandate and strategic priorities, focusing on areas where it adds most value and complements the work of other institutions,” said Izumi Kobayashi, Executive Vice President of MIGA.
January 12, 2009