Assessing the Impact of September 11

Agency Takes on Tough Questions, Emphasizes Readiness to Do the Job.

<a></a>Assessing the Impact of September 11 Agency Takes on Tough Questions,<img height="3" src="http://www.miga.org/images/main/space.gif" width="3" vspace="6" />Emphasizes Readiness to Do the Job
<img height="185" alt="" src="http://www.miga.org/images/impact.jpg" width="343" border="0" />
November 1, 2001—MIGA News recently sat down with the agency's senior managers to talk about the September 11 terrorist attacks, an already slowing global economy, and what they mean for MIGA and its clients. MIGA's President James D. Wolfensohn, Executive Vice President Motomichi Ikawa, Vice President for Guarantees, Roger Pruneau, and Director of Investment Marketing Services, Karin Millett highlighted the unfortunate reality that developing countries will feel the brunt of the fallout, with poverty expected to rise globally. But, they emphasized, MIGA was created to do its job under just such difficult circumstances and is ready now more than ever to serve its clients.
What is the impact of the global economic slowdown and the events of September 11 on developing countries?
James D. Wolfensohn (JDW): We have seen the impact of the recent attacks in the US, but there is another human toll that is largely unseen and one that is being felt in all parts of the developing world, especially Africa. We estimate that tens of thoUnited Statesnds more children will die worldwide and some 10 million more people are likely to be living below the poverty line of $1 a day because of the terrorist attacks. This is simply from loss of income.
The biggest impact will be in Afghanistan and neighboring countries, where the number of refugees and displaced persons will increase considerably. Other countries will be severely hit by the slump in tourism. Developing countries in general will suffer from a substantial reduction of global financial flows as a result of greater risk aversion and a steep drop in demand. The dramatic fall in trade will be reflected in lower exports and falling commodity prices. This will be felt most in Africa,where many countries rely heavily on agriculture and other commodities.
How do current circumstances affect investors?
Motomichi Ikawa (MI): The tragic events of September 11 have impacted investors in a number of ways. The world economy was already sluggish and this was having a negative, though temporary, impact on business. The marketplace will see more changes now, including greater difficulty in obtaining project financing and insurance coverage. Projects were already being put on hold, but the economic and political events combined will make investors take even more of a wait and see attitude.
What steps can the World Bank Group and MIGA take to address the situation?
JDW: The World Bank Group has a tremendously important role to play in dealing with the unfortunate economic consequences of recent events. We need to boost foreign aid, reduce trade barriers, improve coordination among industrial countries, and build social consensus for continued reforms. MIGA, in particular, has a critical role to play in encouraging foreign direct investment into developing countries.
MI: We have a number of projects in the pipeline and are receiving more inquiries and guarantee applications than usual,but deals are taking longer to close. MIGA's risk mitigation products can really provide confidence to investors in these difficult times as they venture into emerging markets. We will also work to help countries out of the negative spiral by facilitating FDI in key areas through our investment marketing services.
Roger Pruneau (RP): As investors become more risk-conscious they will want to ensure that their investments are protected from noncommercial risks, even those who used to self-insure. Before the great fires that gutted Chicago and other cities a century or so ago, the idea of fire insurance was unthinkable. Today, no one questions it. MIGA is very well-positioned in this changing global scene to reassure people that projects can go forward safely.
Karin Millett (KM): The current situation means that we'll have to ramp up our services to help emerging economies attract foreign direct investment. Countries will likely be more attuned to the need to acquire and utilize tools and techniques that support their efforts to target and win investment. Because of this, I think we'll see a surge in demand for our investment marketing services. Our job will be to help countries position themselves to attract foreign investment, particularly scarce mobile foreign investment projects, over the long-haul.
Given that private insurers will probably shy away from riskier investments right now, will MIGA fill the void and take on more risk?
MI: Fortunately, MIGA is in the process of completing a capital increase. By the end of March 2002 we hope to double our capital base compared with three years ago, which will enhance our capacity to bear risk. Right now our financial situation allows us to do business as usual, but the increase should allow us to play a very important role in those countries that will be hardest hit and where reform efforts had been underway before the crisis, such as in Pakistan.
RP: We stand ready to participate in transactions that are riskier, while bearing in mind the need for financial stability. A bankrupt MIGA is of no use to anyone.
Will we cover risks such as terrorism?
MI: We already do. Our war and civil disturbance guarantees cover terrorist attacks. Private insurers, on the other hand, whose capacity is expected to decrease, will less likely be willing to cover the risks of war and civil disturbance or terrorism.
Are there plans to work differently with other insurers?
MI: Over the past four years we have worked very closely with other insurers, public and private, and we expect that cooperation to continue. In the coming months we need to step up our efforts to mobilize private insurers to take on the riskier projects,particularly big projects. But we may have to be ready to bear a larger portion of the coverage on the larger projects than we're used to. We can't cover everything ourselves though.
What will MIGA's priorities be in the year ahead?
JDW: The World Bank Group as a whole is working to minimize and mitigate the adverse impacts from the heightened uncertainty, risk, and volatility in the current global economic environment. MIGA has a strong role to play in working with the private sector to help those countries that are being hardest hit and to ensure that middle-income countries don't lose the ground they've gained over the past decade.
MI: We have laid out our priority areas: support for Africa, the world's poorest countries, investment between developing countries, and small and medium-size enterprises. The crisis has not reduced the need in these areas, but has in fact increased it. The current situation will call for additional risk-taking and additional efforts to mobilize private capacity. MIGA is ready to be an important part of the economic recovery of those countries directly or indirectly affected by political events.
RP: We need to be more attentive than ever to the development impacts of the projects we support to bring the optimal results to our developing member countries. We will continue to do that by delivering a useful and timely product to investors.
KM: Our priorities will be not to abandon our clients in the most difficult locations and to find ways to work with them. This will be tough considering we probably won't be able to provide hands-on, onsite assistance. We'll have to look at other methods, such as video conferencing and other innovative ways to keep dialogue open.
MI: Above all, we are facing a situation similar to that in which MIGA was created 13 years ago. It was against a background of faltering FDI flows, during times of conflict, that MIGA was born. This is why we're here.

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