Are We Moving into a Riskier World?

Are We Moving into a Riskier World?

On May 5, 2010 MIGA hosted the Washington launch of its report World Investment and Political Risk with an event, Are We Moving into a Riskier World?  With the newly-announced Greek bailout and fear of contagion mounting as the global economy sputters back to life, the event was particularly timely.

MIGA Executive Vice President Izumi Kobayashi opened the event; Chief Operating Officer James Bond moderated; and Stephan Dreyhaupt, team lead for the report, presented the findings. These MIGA colleagues were joined by Uri Dadush from the Carnegie Endowment for International Peace, Mansoor Dailami of the World Bank’s Development Economics Group, and Julie Martin from Marsh—a leading risk and insurance services firm.

If an important component of risk is unpredictability, the question posed by the event’s title was answered by a resounding "yes" from the panelists. With the transformation into a multi-polar global economy with multi-directional FDI flows, Dailami emphasized, “We cannot anticipate the changes, though we see the forces.” He noted that, as investors from developing countries become more active, "their needs and motivations are going to be greatly different from traditional Northern investors." 

In particular, panelists underlined concern that continued low interest rates in the developed world have driven capital to emerging markets, fueling a potential asset bubble. Moreover, worries about sovereign debt and shrinking national fiscal space mean that, "we’re definitely moving into a higher-risk environment," according to Dailami.

Dadush used a colorful metaphor to illustrate his points on the global economy. "Sometime in October of 2008, the world economy had a heart attack," he said. Its EKG spiked up and down, though through major surgery the patient was saved. "Now," Dadush continued, "The patient has left the hospital and is doing quite well, jogging to lose weight." But he cautioned that major complications remain and that the major "surgical interventions" required by governments may not be available in the future as fiscal space shrinks.

Martin noted that, based on her experience, lenders and investors have short memories and "have emerged relatively unscathed" from the crisis. "That’s not to say that all the events of the crisis and the other events that are looming have trickled through." She cautioned, "I hope they are able to catch their breath by the time the next event occurs," and noted that the probability of trouble was "very likely."

The event held at the World Bank’s InfoShop was the fourth public forum introducing MIGA’s World Investment and Political Risk report. The report was launched in London and then presented to the investor communities in Vienna and Singapore.  A fifth event will take place at the end of May in Johannesburg, concluding the overseas roadshow.

The report results from a survey conducted in the latter part of 2009, in which MIGA asked executives from multinationals to gauge how political risks may constrain their investment plans and what mechanisms they use to mitigate political risk. The report offers a snapshot of the industry and its drivers—especially as they relate to the recent financial crisis.

Among the report findings presented at the event were that investors rank political risk among their top three concerns when investing in developing countries—more often than any other consideration, including macroeconomic stability and access to financing. In addition, MIGA found that concerns over political risks, combined with sustained FDI into emerging markets over the medium term, suggest a growing need for political risk mitigation.

Commentators at the event agreed with the report’s findings. They emphasized the importance of continued monitoring of investor sentiment so that the political risk insurance industry can respond appropriately to ensure continued FDI flows to difficult markets.

Learn more about the report.