MIGA Gears up for Global Economic Recovery
August 06, 2009—Fiscal year 2009, which concluded on June 30th, was an extremely difficult year characterized by challenges and uncertainty throughout the world. The impact on foreign direct investment (FDI) was significant, and has had far-reaching consequences for MIGA and the member countries we serve. Izumi Kobayashi, MIGA’s Executive Vice President, discusses here the challenges of the last year as well as opportunities going forward.
Q: Izumi, there’s no doubt that this past fiscal year was a difficult one. Now that we’ve had a chance to take stock and review our annual results, what was the impact on MIGA’s business and operations?
A: You are correct. This year was challenging for MIGA due to uncertainty resulting from the global economic crisis and reduced investment flows. You’ll recall that the World Bank projected that FDI flows to developing countries would decline by 30 percent in 2009 to approximately $385 billion. Many large projects we were looking at, especially in infrastructure and extractive industries, never got off the ground due to financing difficulties.
Given the difficult external environment, MIGA’s volume of new business dropped from $2.1 billion in guarantees in FY08 to $1.4 billion in FY09. On the other hand, we supported a slightly higher number of projects this year – a total of 26. The vast majority of our guarantees were issued in the financial sector to support commercial banks so they could resume lending. We also covered 10 projects in sub-Saharan Africa, a priority for MIGA. Despite the lower volume of new issuance, we saw our portfolio grow by $800 million last year to $7.3 billion, due mostly to a lower level of portfolio run-off. What we are seeing is that existing guarantee holders have been more inclined to maintain coverage as the emphasis on actively managing all types of risk has increased.
Q: How has MIGA responded to the global financial crisis?
A: Over the last year, MIGA’s focus was on supporting the World Bank Group’s immediate response to the financial crisis, while also providing its own unique set of tools and solutions to support the goal of inclusive and sustainable globalization.
In responding to the crisis, MIGA has been a partner in many of the World Bank Group’s efforts to mobilize resources. We participated in joint regional initiatives for Eastern Europe, Africa, and Latin America.
Q: Can you elaborate on some of the initiatives?
A: Certainly. We provided guarantees for ten loans to banks in Eastern Europe to assist in their recapitalization. This support was significant in securing much needed capital in the face of the ongoing crisis. We also provided political risk insurance to support 10 small and medium-size enterprise projects to help facilitate foreign investment at a time of scarce capital, the largest number yet through our Small Investment Program. I consider this to be an excellent outcome because, as we know, smaller projects can have significant development impact, especially in poorer countries.
In parallel, MIGA continues to actively establish framework and contractual arrangements with other financial institutions in order to create mechanisms that will allow rapid response to institutions in great need and channel liquidity to investors. In 2009, we entered into an innovative contract with the African Development Corporation to develop a product that will facilitate private equity capital for new investments in sub-Saharan Africa. This is particularly important in an environment where investor confidence is lacking.
Q: Economists predict the economic recovery may start next year. How is MIGA positioning itself going forward?
A: We all hope the recovery will begin in 2010 and we are gearing up internally to meet the anticipated demand. To help us be more responsive, I’m very happy to say that this fiscal year we achieved an important milestone for the agency: our Board of Directors approved the adoption of amendments to MIGA’s Operational Regulations. These changes include a new area of coverage, expand our breach of contract and war and civil disturbance coverage, and address some procedural constraints we had faced.
Q: And, going forward, what do you see as some of MIGA’s other priorities?
A: Of course we want to focus our efforts on doing business that achieves sound development impact in the countries that need it the most. That is always a priority. The last year, as a result of the crisis, saw increased close cooperation with other parts of the World Bank Group, and private and public partners, to leverage resources and maximize economic growth and development. Going forward, we want to do even more in this regard, reaching out to our colleagues across the World Bank Group, and to project sponsors and the investment community around the world. We want to build on our partnerships and encourage more dialogue and debate. As part of this effort, we plan to launch a new flagship report in December 2009 that will be a compilation of industry thought and perspective on political risk that we hope will appeal to a broad sector and encourage interest and debate.