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MIGA Closes Fiscal Year with Strong Results

July 6, 2011In the interview below, MIGA Executive Vice President Izumi Kobayashi discusses the pace of economic recovery, MIGA’s results for fiscal year ending June 30, 2011, and the agency’s strategy for fiscal years 2012-2014.

Q. This year MIGA issued $2.1 billion in guarantees, a significant increase from last year’s level of $1.5 billion. What do you think led to this increased level of activity?

A. There were several factors at play here. First we are seeing that foreign direct investment levels are beginning to pick up following a sharp contraction during the financial crisis. Second, much of the business we did this year would not have been possible without the amendments to MIGA’s convention that became effective in November 2010. We have also scaled up our client outreach and increased our focus on investors from emerging markets. A key example of our expanded client outreach is the hub we established in Asia. Our presence in the region will help us be more effective in encouraging more outward investment from Asian investors as well as inbound investment into the region.

Q. On your first point, how do you see the current landscape for investors focusing on emerging markets?

A. Emerging markets are driving the world’s economic recovery—that is certain. Many of these economies represent strong consumer markets and have maintained solid macroeconomic policies that underpinned their ability to weather the economic crisis. As liquidity constraints ease, investors are eager to seek out new opportunities in these markets. On the other hand, there are old and new forces at play that make investors from both developed and emerging markets nervous. The research that we conducted this year for our World Investment and Political Risk report indicates that political risk is the most significant medium-term impediment to making new investments in developing countries. Certainly, unrest in North Africa and the Middle East has very acutely reminded investors of the nature of political risk.

Q. What role did MIGA play this year in helping investors manage risk?

A. Since the onset of the global financial crisis, we have focused heavily on supporting the recapitalization of banks in Eastern Europe and Central Asia as part of the World Bank Group’s Financial Sector Initiative. This year we wound down those activities as demand subsided and investor needs shifted. Although liquidity constraints have eased somewhat, lenders are still very tentative and there is a good deal of risk aversion in the financial system. Through our guarantees, we can help equity investors gain access to financing and we can provide capital relief to lenders. As a result, this year we supported new investments in agribusiness, infrastructure, and manufacturing. In sub-Saharan Africa, we provided coverage for 15 projects, including our first projects in Liberia and Republic of Congo. Additionally, the amendments to our convention removed certain eligibility restrictions that had long constrained us, so we were able to support developmentally strong projects that we would have had to turn away in the past.

Q. How specifically did the amendments to MIGA’s convention help the agency support a higher level of foreign direct investment?

A. Many of the projects we supported this year would not have been possible without the amendments to the convention. For example, our new authority to cover existing investments allowed us to support the ProCredit Group Central Bank Mandatory Reserves Coverage project. Here we are supporting ProCredit Group’s operations in 14 countries—nine of which are among the world’s poorest. Our coverage for expropriation of funds is allowing ProCredit to obtain capital relief, freeing up equity tied up at the parent holding level for regulatory purposes. This equity is being injected into ProCredit’s banks across emerging markets, allowing those banks to provide loans and financial services to very small, small, and medium enterprises.

Our ability to solely cover debt to a project allowed us to support a number of projects, including the expansion of Istanbul’s metro system. This project is also an important milestone for MIGA because we are covering the financial obligations of a sub-sovereign entity, the Metropolitan Municipality of Istanbul. Another key project we were able to support was an Islamic finance transaction underwritten by Deutsche Bank and Saudi British Bank (SABB). Their $450 million Murabaha financing facility is bolstering the expansion of telecommunications services in Indonesia.

So, the convention amendments have played a strong role in shaping our portfolio this year, and for that I would like to extend my thanks to MIGA’s Council of Governors.

Q. What specific challenges will MIGA focus on going forward?

We just issued our new strategy for 2012-2014. This reaffirms our commitment to supporting investments into the world’s poorest countries, South-South investments, investments into conflict-affected countries, and complex projects. We felt these areas remain fully relevant and are where we can make the most difference as a development agency. Now is we are better equipped to respond in light of our amended convention.

Of course we will continue to react to the most urgent and pressing needs as they arise. This is what we did during the global financial crisis. Right now, supporting investment into the Middle East and North Africa is a top priority for us. We are setting aside our own insurance capacity to support investments into the region and are working with reinsurers to mobilize additional capacity. At the same time, we are reaching out to investors, lenders, and governments around the world to let them know we are open for business in the region and to share our global experience of managing political risks. We are also working closely with our World Bank Group colleagues to help the region attract and retain FDI. Looking ahead, I think our mandate of promoting FDI is more important than ever and we are poised to respond.

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