February 21, 2008 - Sub-Saharan Africa is increasingly becoming a more attractive and hospitable destination for investors. Strong growth, improved macroeconomic performance, and relative political stability helped the region’s GDP expand by 5.6 percent in 2006—surpassing the 5 percent mark for the third consecutive year. According to the World Bank, 13 sub- Saharan African countries have attained middle-income status and another five countries are knocking or will soon knock on that door. More than a third of Africans now live in the 15 countries that were projected, in 2007, to extend a decade-long median annual growth rate of 5.3 percent. Foreign direct investment (FDI) has also increased noticeably, with the region attracting $13.8 billion in 2005, and $18.5 billion in 2006, thanks in part to investments from newly rising economies like China and India. MIGA in Africa
Democratic elections, economic stability, more peaceful relations, and regulatory reforms have helped improve the region’s investment climate and led to increased FDI in recent years. But countries in sub- Saharan Africa still occupy 19 of the bottom 25 places in ease of doing business. The World Bank Group’s Doing Business 2007: How to Reform report points out that despite some progress, only a few countries in the region are doing what is needed to simplify business regulations, strengthen property rights, increase access to credit and reduce the exorbitant costs of exporting and importing. The bottom line is that sub- Saharan Africa still has work to do to shed its image as a high-risk, high-cost place to do business.
MIGA’s Role for Investors and Lenders
For many investors and lenders, the financial consequences of doing business in politically vulnerable countries are often greater than the rewards of entering a lucrative market. As a result, Africa is receiving only about 10 percent of total foreign direct investment to developing countries, while investors are losing opportunities to capture potential high yields from a vast, largely untapped market.
MIGA is playing an important role to change this status quo. As a risk mitigator and promoter of foreign direct investment into developing countries, MIGA provides guarantees to protect the investments of foreign investors against political or noncommercial risks. The agency’s guarantees cover risks relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract. MIGA’s coverage also provides comfort to lenders, who may be particularly concerned about cross-border risks.
MIGA has for many years been a leader in supporting FDI into sub-Saharan Africa. The agency has issued more than $2 billion in guarantees in the region since 1988 and has a current exposure of more than $900 million. In fiscal year 2007, Africa accounted for 18 percent of MIGA’s outstanding portfolio. MIGA has provided political risk insurance for a wide range of projects in the region, ranging from the rehabilitation of sugar plantations to the establishment of broadband wireless service. The agency specializes in supporting investments in countries just emerging from conflict, providing coverage where other insurers are often not willing to go, such as Angola, the Democratic Republic of Congo, Mozambique, and Sierra Leone.
MIGA places no limit on the size of the projects it supports—in fiscal year 2007, the agency issued $115 million in guarantee coverage for a hydropower project in Uganda, as well as a $600,000 guarantee for a hotel privatization project in Guinea-Bissau. Indeed, MIGA’s Small Investment Program (www. miga.org/sip) supports investments considered to be quite small. The lower premium rates offered and the faster turnaround make it particularly attractive to investors looking for coverage for less than $10 million. As a member of the World Bank Group, MIGA has the added value of deterring harmful government actions and resolving disputes to prevent claims situations from escalating and keep investments on track. To date, MIGA has never paid a claim for any project it has covered in sub-Saharan Africa.