Tuesday, October 7, 2008

South-South investment seen expanding amid crisis

While the financial crisis forces US and European investors to pull back, emerging markets are increasingly looking to invest in other emerging markets, a senior official from the World Bank's Multilateral Investment Guarantee Agency said on Monday.

James Bond, the agency's acting executive vice-president and chief operating officer, said there are already signs that foreign direct investment from Western countries into emerging economies has been affected by the credit market turmoil.

"Projects are being delayed not because you don't get investors with good projects to invest in, but because they're having great difficulty in raising debt," Bond told Reuters.

"We are seeing projects expected to be closed by now being extended because presumably they're having more difficulty than they expected in raising the debt side of the financing," he added in an interview.

The failure of many Wall Street firms last month saw the biggest withdrawal of cash from emerging stocks, and Bond said that while emerging markets have so far avoided a direct blow from the crisis, economic growth and capital flows will likely be hit.

"The danger is it will reduce growth and it will impact some particularly vulnerable countries," said Bond.

"I would be very surprised if foreign direct investment in developing and emerging economies didn't slow down this year and next," he said, adding, "a 10% decline is significantly underestimating what we're seeing."

Earlier this year, the World Bank forecast that total investment into developing and emerging markets is set to drop to some $600-billion in 2009, from a peak of $1-trillion last year, as global banks become averse to risk.

SOUTH-SOUTH INVESTMENT

With the prospect of a sharp economic downturn in many Western countries, Bond said cash-rich emerging economies like India, China and Gulf oil producers are likely to look for investments closer to home or in other emerging markets.

Investment interest in Africa from large emerging economies like Brazil, India and especially China, has grown sharply in recent years as their economies have boomed and their need for resources has grown.

Bond said despite the prospect of some slowing in China and other large emerging economies, he expected interest in Africa and other developing countries to remain, spurring so-called South-South investment from one emerging market to another.

"What we're seeing is that the South-South demand is not declining, or if it is declining, it is doing so less," Bond said. "And we are going to try and work in the months ahead to focus on that market."

Established in 1988, MIGA promotes foreign direct investment in developing countries by guaranteeing the safety of investments through political risk insurance.

Demand for its product has grown rapidly as business opportunities and the search for profit took investors into untapped markets in Africa, the Middle East and Asia.

Until about two years ago, most of MIGA's clients were Western investors but that is changing.

Bond said MIGA is in the process of adapting its products to attract more clients from emerging markets, including sovereign wealth funds from Asia and the Gulf states.

"We're going to our board by the end of the year with a whole range of suggestions to modernize the way we deliver our product, to make it easier for companies to reduce the hassle factor. We have to go out to target these people," he added.