Political Risk is Top Concern when Investing in Emerging Markets

Political Risk is Top Concern when Investing in Emerging Markets

LONDON, UK, WASHINGTON, DC, December 3, 2009—A return to increased levels of foreign direct investment (FDI) following the economic crisis and the growing interest in the developing world as an investment destination are expected to support a continued expansion of the political risk insurance (PRI) industry.  And, although risk tolerance seemed to be on the rise prior to the financial crisis, political risk remains one of the main obstacles to foreign investment in emerging markets.

World Investment and Political Risk 2009, a report released today by the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA), examines the state of the PRI industry in the emerging post-crisis investment landscape.  The new report offers a snapshot of political risk perceptions of the largest multinational enterprises and perspectives of the PRI industry. It notes “positive business sentiment over emerging markets amid concerns over political perils point to a sustained need to mitigate these perils.” Envisaged to become an annual publication, the report establishes a number of benchmarks that will allow comparisons in subsequent years.

Among the key findings of the report is that investors rank political risk as one of their top three concerns when investing in developing countries more often than any other consideration, including macroeconomic stability and access to financing.

“The report affirms a variety of trends we’ve been observing,” says Izumi Kobayashi, MIGA’s Executive Vice President. “Even before the economic crisis hit, issues such as resource nationalism, the increased prominence of sub-sovereign entities, and concerns about political violence were on the minds of investors. The economic crisis has further exacerbated concerns over the ability to convert and transfer currency, especially in countries where the crisis has severely undermined liquidity.”

The report also focuses on the emergence of South-based investors as a factor shaping the PRI industry. From 2003-2008, FDI outflows from developing to emerging countries increased more than seven fold, and South-based investors surveyed for the report appear bullish in their investment plans. “At MIGA we’ve seen a substantial growth in South-based investors in our existing portfolio and our pipeline,” says James Bond, MIGA’s Chief Operating Officer. “The PRI industry is adapting to these needs by tailoring its products—such as Shariah-compliant insurance. But we still need to improve awareness of PRI among this key segment of the investor community.”

The report was launched today at a Financial Times Summit: Managing Global Political Risk. Featured speakers included Graeme Wheeler, Managing Di-rector of the World Bank Group and leaders from the PRI industry, including senior management of MIGA, and Dr. Richard Ward, Chief Executive Officer of Lloyds of London.

Contacts

Mallory Saleson, MIGA
Phone: +1 202 473-0844
E-mail: msaleson@worldbank.org

Rebecca Post, MIGA
Tel: +1-202-473-1964
E-mail: rpost@worldbank.org