Experts debate trends in world investment and political risk
December 07, 2009—Experts from the political risk insurance (PRI) industry gathered recently to debate trends in global political risk and foreign direct investment (FDI), especially in the wake of the economic and financial crisis. A symposium in London jointly sponsored by MIGA and the Financial Times considered the landscape for investing in emerging markets, managing global political risk in uncertain times, and whether investors in general are moving into a riskier world. The panel discussions and audience participation prompted rich and lively debate around these and other issues.
World Bank Managing Director Graeme Wheeler set the scene. He noted indications that FDI flows are expected to increase over the next three years, with many investors redirecting investment to developing countries. “This is likely to be a long-term trend. The opportunities and demand for FDI are enormous." And as global leaders prepared to meet in Copenhagen, he cited climate change as the defining issue of our time and one that offers huge scope for FDI.
However, Wheeler also sounded a note of caution as he looked towards the future. “FDI flows will depend on the progress made in delivering sound economic policies, good governance, social stability, and adequate infrastructure." He told the audience the biggest challenges are likely to come from issues around nuclear proliferation, terrorism, and political tensions associated with climate change, food security, water management, demographic aging, the degree of poverty alleviation, and the distribution of income.
For the foreseeable future, delegates agreed the outlook for political risk insurance looks promising. Although over the past decade only about 10% of FDI flows to emerging markets have carried political risk insurance, experts expect this is likely to change as emerging countries expand their share of FDI outflows, and as investments shift to more risky destinations. Their views echoed the findings of the new MIGA report, World Investment and Political Risk 2009. The report notes that while political risk is a top concern for corporate foreign investors, the allure of business prospects in the developing world means that these markets are likely to continue to attract a growing share of FDI.
MIGA’s Executive Vice President Izumi Kobayashi noted there is still a long way to go to return to the levels of growth and the volume of private capital flows that generated positive economic trends in many developing countries. “In this environment, it is useful to understand how investors perceive political risk so we can better appreciate the role of political risk insurance in helping restore foreign direct investment flows to previous levels. It will also help us understand how we can be more effective as an industry in facing challenges in this riskier world and how to help investors mitigate them."
One of the panels looked at the landscape for investment in emerging markets. Herta von Stiegel, from the Ariya Capital Group, noted private equity investments are growing, especially in sub-Saharan Africa, even if the investments are comparatively small. “But Africa needs this lower end, under $100 million per investment, because nothing can happen without private sector investment, and that private sector investment has to be engaged with the public sector in order to break the cycle of poverty so many countries are in today." She said her company is determined to do its part in frontier markets but wants a reliable partner, such as MIGA, to help mitigate potential risks. “You have to look at things like governance and stability. Impact investors like us want a return but also want to see a strategic impact. So if we can box the risks by using guarantees then I see a tremendous room for growth."
David Suratgar, from MediCapital Bank, agreed. “Africa is a continent of opportunity. Private equity is looking for projects there and if governments can increase transparency and tidy up their regulatory risk we should see additional success stories there."
Looking towards the future, the World Bank’s Mansoor Dailami said investors want to understand trends. “I believe we find ourselves at a significant inflection point in global economic relations, and that this shift will have major implications for cross-border investment. The economic rise of emerging market economies in recent years is undeniable." Dailami said markets are already trading on the view that the transition of economic power from developed to developing markets is underway.
Everyone attending the symposium agreed private investment will continue—but they questioned whether the future is actually riskier. Richard Ward, Chief Executive of Lloyd’s, painted a picture of considerable peril on the horizon and outlined potential pitfalls. However, he said business should continue to invest because opportunities exist, especially for those who mitigate risk by preparing for the worst.
Anne Marie Thurber of Zurich NA Surety noted the world has experienced difficult times before. “Events have been painful but good opportunities exist. The markets are not predictable, there may be more political issues out there and this could lead to increased demand for products like PRI to mitigate the risks." She said the bottom line is that investors should go back to fundamentals: know their customers and engage in partnerships. She said the industry will have to price its risk appropriate to the market, while investors will have to consider the trade-off between risk and rewards and will look more carefully at diversifying investments across sectors and countries.
Raul Ascari of the Italian Export Credit Agency SACE noted every country has political risk and it is up to the investor to be clear about their needs. “If it’s your country you think you know it—if it’s cross-border you feel you have to do something and mitigate the risks. Political risk insurance is a credit enhancement and investors need to know which risks they can self-manage and which not."
MIGA’s James Bond predicted different sources and drivers of growth as a realignment of global and financial infrastructure takes hold. He noted investors want predictability but the times are uncertain."Going forward there is a greater likelihood for political risk; from increased commodity prices to transferability issues and even potential civil disturbance. The world is scarier but we have the financial tools to manage the risk and the market is deep enough to provide it."