Monday, January 26, 2009

World Bank says foreign direct investment to decline 31 percent in 2009

Sources: Bloomberg—Emerging Markets Face $180 billion Investment Decline

World Bank—MIGA Tackles Declining FDI Levels and Growth Prospects in Vulnerable Economies


Developing nations worldwide could face drops in foreign direct investment (FDI) of more than 30 percent in 2009 as investors and creditors tighten their belts, according to recent reports by the World Bank and others.  This could threaten the gains in growth made over the past decade, as FDI is often a key factor in the speed of growth and development in emerging economies.  Accordingly, the World Bank’s Global Economic Prospects Report has already predicted that growth in the developing world will slow from 7.9 percent in 2007 to 4.5 percent this year as a result of the after effects of the global financial crisis.

The amount of FDI inflow a country attracts is heavily influenced by both the rate of economic growth in the nation (almost certain to contract in 2009 for the vast majority of emerging economies) and the availability of credit for investors.  The current global financial and economic crisis has greatly reduced the availability and cost of credit for investors and corporations who might otherwise want to expand into emerging markets.  Additionally, the international financial market outlook has made many investors hesitant to take on risks, even if they can secure financing, and this failure of confidence does not seem likely to turn around in the near future. 

Thus, the World Bank Group, and particularly the Multilateral Investment Guarantee Agency (MIGA), which is the principle institution charged with promoting FDI in developing nations, are taking a proactive stance to try to improve investor and lender confidence.  MIGA’s primary tool to increase investor and lender confidence in emerging economies is as a provider of political risk insurance and guarantees.  Political risk insurance can be taken out by the investor against the risk of currency transfer restrictions, expropriation, domestic turbulence, and breach of contract with the government.  A MIGA guarantee helps secure financing from hesitant banks and can greatly reduce financing costs as well.  The World Bank and MIGA are making it a priority to restore confidence in financial markets so as to enable potential private investors to invest in the future of developing countries.

Discussion: Is political risk insurance, which does not insure against currency devaluation, enough to jumpstart FDI in the developing world?  MIGA is currently exploring other solutions to cure the crisis of confidence and to respond more quickly in a future crisis, what are some options? 

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