Investors and Experts Debate: Is the Glass Half Full or Half Empty?
December 12, 2012—The global economic and political environment is as precarious and uncertain today as it was one year ago. This has led to a marked increase in political stress and risk. That assessment underpinned a lively debate at the recent MIGA/Financial Times (FT) summit in London on Managing Global Political Risk as delegates grappled with the key question: If that assumption is true: what can we do about it?
The FT's Martin Sandbu, who chaired the event, noted "the historical forgetfulness of economists." As he put it: "Things are complex. Things are uncertain because economies depend on politics and that is unpredictable." The relationship between sovereign risk and political risk—and its impact on global markets—attracted keen interest among panelists and some 120 delegates ranging from representatives from banking and financial institutions to academic and business experts, analysts, and investors.
MIGA's Executive Vice President Izumi Kobayashi set the scene by noting that, while the economic turbulence unleashed by the 2008 global financial crisis still poses difficulties, all news is not negative. "Continued high growth in developing countries has made them increasingly attractive to foreign investors. While new challenges, especially the ongoing sovereign debt crisis and recession in the euro zone, have slowed the flow of foreign direct investment (FDI) from traditional sources, FDI outflows from new investors from developing countries have risen significantly in recent years."
Some of the panelists took on the overall theme of sovereign risk and political economy with a straightforward assessment of the current crisis. Jan Randolph of IHS Global Insight likened it to "the worst hangover you've ever had," underlining that we know we will "grow" out of it—but it will be painful and take time. Citi economist Jürgen Michels was not as sanguine. He believes the forecasts that the global economy will be back on a growth trajectory by 2014 are too optimistic and that it will take longer to deal with the mixture of the growth of both private and public debt.
World Bank economist Veronique Kessler noted that economic challenges may force governments to make painful decisions leading to dire consequences, even to their own demise. But, she noted, it's not a necessary fate. "If governments and leaders show understanding, honesty, and ensure the pain is fairly distributed, they can make the right decisions and maintain their general climate." The World Economic Forum's Lee Howell believes any solutions to the current crisis will spring from the future middle class, especially in developing markets. But he says the challenge in the current environment is solving the "youth bulge" and creating the right jobs and opportunities for young people. "That takes a lot of foresight and investment; but if we get it right the entire world benefits."
ING Bank economist Simon Quijano-Evans agrees on the need for a growing working population contributing to an increasing income tax base. But he had a very different perspective and urged the audience to stop being pessimistic—which he said feeds on itself. "The global economy is intertwined. We need to see politicians being less negative and providing consumers with more confidence to spend more."
Lauren Phillips from the London School of Economics noted that markets treat developed and developing economies differently on the broader political issues of elections and quality of government. But in the end, she said, unless there's growth in both kinds of economies, all will suffer. Simon Sole of Exclusive Analysis said he believes the fundamental missing piece is for countries to have a proper industrial policy and then actively support infrastructure.
The broad debate dovetailed with the findings of the fourth annual MIGA report World Investment and Political Risk that notes investors are concerned about the ongoing weakness in the global economy and this remains a top constraint for their plans to expand in developing countries in the short term. MIGA's Conor Healy noted that this picture changes over the medium term, as foreign investors rank political risk as the most significant constraint to investing in developing countries over the next three years. Significantly, the report finds that both sovereign default risk and expropriation—among other political risks—remain dominant issues for foreign investors deciding their investment plans.
The report also examines trends in the political risk insurance industry in general and finds that, between 2008 and 2011, issuance of political risk insurance increased by 29 percent for Berne Union members, an increase that has exceeded that of FDI flows into developing countries over the same time period. Speaking at the summit, Berne Union Secretary-General Peter Jones noted the trend is continuing, with record issuance this past year.
Indeed, Joseph Brandt, CEO of ContourGlobal, described his energy company as a very active consumer of political risk products, especially in emerging markets. "What we need is to find political risk-mitigation instruments for countries where you don't have the tools. There is no risk-adjusted return in current [sovereign debt] crisis countries, unlike what see in sub-Saharan Africa or Latin America."
The FT's Sandbu summed up noting the divide between panelists who focused on obstacles resulting from the current environment—and those who noted the potential opportunities. The summit may not have solved the issues facing the global economy, but it certainly contributed a lot of stimulating thought to a way forward.