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Foreign Investors Increasingly Cautious Amidst Ongoing Global Turbulence, MIGA Finds
Foreign investors are increasingly cautious about investing in developing countries in the face of continued global economic and political turbulence, finds the World Investment and Political Risk 2013 report published by the Multilateral Investment Guarantee Agency (MIGA).
A survey conducted for the report finds that macroeconomic instability and political risk rank neck-and-neck as top concerns for investors as they plan over the short and medium terms. Despite this, the survey finds nearly half of respondents expect to increase their investments in developing countries over the next 12 months—with that number increasing to 70 percent when the horizon is extended for three years.
The fifth annual MIGA-EIU Political Risk Survey finds that breach of contract and regulatory risks once again top survey respondents’ political risk concerns. Survey results show that these concerns are based on actual experience as well as sentiment.
World Investment and Political Risk 2013 notes that the continued level of investor caution has been a boon for the political risk insurance industry. The dramatic increase in political risk insurance issuance of recent years has continued, rising 33 percent in 2012 and on track for similar growth in 2013.
Political risk insurance issuance has once again exceeded the pace of increase in FDI flows into developing economies over the same period. The report notes the ratio of FDI to PRI now stands at 14.2 percent for developing economies, a marked increase on the low-water mark of nearly 5 percent in 1997.
“These findings support the increased interest we are seeing in MIGA’s risk-mitigation products,” notes MIGA Executive Vice President Keiko Honda. “We’re happy to play a role in helping investors get comfortable as they navigate today’s turbulent markets. This allows good projects to move forward that benefit lives across the globe.”
The report offers an innovative analysis of breach of contract risk, combining deal and country specific causes of breach for the first time. The study finds the risk appears to be higher in middle income countries than lower income ones. It also finds that investors are more likely to face higher risk in contractual relationships involving public utilities than in other sectors. It notes the presence of a multilateral or development financial institution in a deal is likely to enhance the chances of contract success. And it notes the risk of a public contract is still significantly related to the age profile of that contract. Overall, the results identify a number of key focus areas for investors and insurers when considering a contractual relationship with a public, developing economy counterparty.
MIGA was created in 1988 as a member of the World Bank Group to promote foreign direct investment into emerging economies to support economic growth, reduce poverty, and improve people’s lives. MIGA fulfills this mandate by offering political risk insurance and credit enhancement to investors and lenders. www.miga.org