In Search of Investment Opportunities in Challenging Countries

In Search of Investment Opportunities in Challenging Countries

 Interview with World Bank's Ngozi Okonjo-Iweala
 Interview with Standard Chartered Bank's Razia Khan

December 14, 2010—It can seem a daunting task to address the huge development challenges facing conflict-affected and fragile economies, especially when we consider these statistics:

• The annual global cost of conflict is estimated to be about $100 billion.
• Fragility and conflict affect 45 countries—a quarter of the world’s states.
• 34 of those countries are among the world’s poorest.
• An estimated one billion people live in fragile and conflict-affected states—one in seven of us on this planet.

But that is exactly what the World Bank’s Managing Director Ngozi Okonjo-Iweala asked the private sector to do at a recent seminar on Managing Global Political Risk hosted by MIGA and the Financial Times.   "I’m here today to ask you to be among the optimists—to remind you that where there are risks—there are rewards. I want to encourage you to seek the opportunities amid the challenges."

Okonjo-Iweala had a ready answer for anyone wondering why foreign direct investment (FDI) into these countries is so vital:  "It gives a positive signal to people in these countries—and gives them something to hope for."  She noted research that shows by providing much-needed financial resources, technology transfer, managerial expertise, and connections to the global economy, FDI can help make the difference between preventing countries from relapsing into more conflict or emerging from fragility onto the road to recovery. (See video)

 Her keynote address coincided with the launch of MIGA’s annual report on World Investment and Political Risk—which this year focuses on cross-border investment in conflict-affected and fragile economies.  The report notes investors are optimistic about prospects for a global economic recovery led by the developing world.  It also says FDI flows into developing countries are projected to increase by 17% in 2010. MIGA’s Executive Vice President Izumi Kobayashi welcomed this finding, especially as the global economy is still in flux.  "Undoubtedly this is important for all of us around the globe—but it is even more so for underserved markets—especially those economies that have been struggling under the very heavy burden of conflict and instability." 

MIGA’s report specifically looks at investor concerns when considering their options in more challenging countries.  It notes investors are primarily worried about adverse government intervention (for example changes in regulations, breach of contract, non-honoring of sovereign guarantees, currency restrictions, and expropriation) rather than overt political violence.

The report’s findings were echoed at the MIGA seminar, where delegates from the investment community, political risk insurance industry, and others noted that most risk is centered on regulatory concerns, government intervention, and transparency issues.  Razia Khan of Standard Chartered Bank noted that, while risks are still present, a number of countries have improved. "We have seen a lot of positive change in Africa where more transparent political systems and improved economic performance in some countries have led to greater accountability and economic growth."  She said one of the biggest difficulties facing countries, especially those that are resource-rich, is to put in place the right regulatory environment to begin with so that the goal posts don’t shift later. The good news noted by some of the delegates it the rise of domestic consumers in many developing countries, which has brought diversification in FDI.  (See video)

Some of the delegates noted shifting perceptions when it comes to political risk. "We’re now thinking of political risk in new ways," underlined Gideon Rachman of the Financial Times, "with the biggest risk the one you never thought of".  He noted the fall of the Berlin Wall, the events surrounding the 9/11 attack on the World Trade Center, and the more recent collapse of Lehman Brothers.  "There are some advantages to conflict-affected and fragile economies as investment environments—you can research and use political risk insurance so that you can take advantage of the opportunities and manage the risk."

Industry delegates noted political risk insurance is available in the most challenging countries—insurers just price for it.  John Hegeman of Chartis Insurance put it this way:  "Just because a country is conflict-affected or post-conflict doesn’t mean you can’t do business there.  People invest when the risk is acceptable and political risk insurance is in place in case they get it terribly wrong."

MIGA’s Kobayashi underscored the importance of understanding how investors and others perceive political risk, especially in fragile countries unable to attract the sizeable volumes of investment that could help boost their stability and growth.  She noted such information also enables the industry to be more effective in facing potential challenges and helping investors mitigate them so they feel encouraged to support projects in countries they perceive as risky.

Okonjo-Iweala told delegates the World Bank Group can help on a number of fronts—in assisting governments to build strong and credible institutions, and supporting private sector efforts to invest.  "We especially want to encourage the private sector to consider new frontiers.  The rewards can be well worth it for the investor, and for the people in those countries that need it the most."