Old Risks, New Moment

“Old Risks, New Moment”

December 14, 2011 -- “We cannot lose focus; we have to reform and get the job done in the face of serious challenges.”  That was the message from Tunisian Minister of Finance Jalloul Ayed at a recent seminar co-hosted by MIGA and the Financial Times in London on Managing Global Political Risk: Old Risks, New Moment.  The minister’s remarks to investors, bankers, and political risk insurance practitioners came almost a year since Tunisian street vendor Mohamed Bouazizi set himself on fire, sparking a wave of protests in his country and ensuing events that led to what we now refer to as the “Arab Spring”. 

Minister Ayed spoke with eloquence and insight about the challenges and opportunities facing his country and the North African region.  “Many look to Tunisia as setting the pace and showing the way.  So far so good. Democracy is now hopefully part of our political tradition.”  But there is a daunting road ahead, presenting a  multitude of challenges including creating jobs for the hundreds of thoUnited Statesnds of unemployed youth and encouraging much-needed investment while managing huge expectations. 

His comments touched off significant debate about the future of the region and the potential for meaningful political reform and investment, especially foreign investment that can help lead the region onto a strong development path.  Overshadowing the discussion was the euro zone crisis, with the minister echoing the thoughts of many by saying, “We hope Europe comes right.”  Otherwise, he noted, one of the many unpleasant consequences will be that countries and private investors will find it difficult to raise capital for much-needed projects.

 Daniel Korski, the head of the Middle East and North Africa (MENA) program at the European Council on Foreign Relations, noted there are great opportunities across the region despite fundamental challenges.  “Everyone is approaching investments in the region with new eyes.  It is a momentous time in MENA.”  But, he said, “There is not a lot of money going around and therefore less money for investment.”

This was confirmed by Charles Paradis of Bouygues Construction.  He confirmed it is business as usual for his firm, though the constraint of banks pulling back on lending due to the current economic turbulence has put a pinch on investment.  As a result, he said his company is turning to multilaterals, including MIGA, for assistance.

Christine Shields, head of country risk for Standard Chartered Bank, injected a more sobering note when she reminded delegates, “Don’t delude yourselves about the risks.”  She cautioned the audience to use the tools at their disposal to make a fair assessment of the countries and the region. “You have to differentiate.  The region is not a single entity with equal risks in each country.  You have to play to the strengths of each country.”

The debate tied in with MIGA’s latest annual publication World Investment and Political Risk launched at the seminar.  A survey for the report MIGA conducted with the Economist Intelligence Unit (EIU) found that events in MENA have had a negative effect on foreign direct investment, but that a significant majority of global investors said they have not changed their investment plans.  Laza Kekic from the EIU spoke about the survey findings and noted stability is critical for many investors, with some perhaps feeling more comfortable with a stable autocratic regime over a weak democracy.

Another panel debated expropriation, the legalities of it, risks to investors, and how to mitigate against the risk, including the use of political risk insurance.  Tony Cole from the Brunel Law School noted, “Expropriation is not illegal as long as you do it right, have due process, and pay.”  He said the potential for such action in the MENA region depends on how nationalistic new governments are about particular resources and want to “take them back.” He said he expects expropriations to increase over the next several years, as resources governments might want are currently in private hands. 

This assessment echoed MIGA’s report, which noted the probability of disputes between governments and foreign investors is materially increased by an economic shock or significant political shift. Evidence also shows that investor disputes are more likely to be resolved—avoiding outright expropriation—by democratically elected governments rather than non-democratic regimes. 

With the focus very much on the current situation in the MENA region, the bottom-line hope among many attending the half-day event was that transition in the region is coupled with political stability, which in turn could help contribute to economic development.  MIGA delegates at the seminar noted the agency’s own initiative to mobilize $1 billion in insurance capacity for the region to encourage investment—and to work flexibly with sponsors and lenders to achieve results.  Executive Vice President Izumi Kobayashi summed it up nicely.  She noted, “In today’s turbulent world, a discussion of this nature helps shed light on different dimensions of political risk and the role of investment insurance in fostering an environment conducive to attracting foreign investment and promoting development.”