The Berne Union’s Pungent Political Risk Sauce
The World Bank’s MIGA direct investment guarantee arm offered a mixed annual take on developing country FDI trends with a near 10 decline this year, despite a better political risk climate under the Berne Union insurance body with record issuance directed at the post-Arab Spring Middle East and elsewhere. Demand has shifted to industrial economies and cover for sovereign financial obligations as opposed to the traditional war, expropriation and currency non-convertibility scenarios. Outward flows from emerging market-based multinational firms are at a record with one-quarter going to EM destinations. According to a survey of worldwide executives conducted jointly with the Economist Intelligence Unit, the top short-term allocation concerns are regulatory changes and contract violations, but only one-fifth purchase formal insurance as a hedging tool even as capital and deleveraging need reduce previous bank backstops. New public and private providers continue to enter the field with recent additions from Africa and Russia. In 2010 developing region FDI was 35 percent of global inflows and 15 percent of outflows. The $595 billion total for the former reflected a fall outside Latin America, with the BRICs taking 60 percent overall. Low-income economies receive less than 5 percent, although Sub-Sahara Africa’s annual amount is now almost $40 billion. China may have peaked and Europe and Central Asia suffered from Eurozone crisis links. Next year’s activity should increase 15 percent to $700 billion on a modest global GDP upturn, with half of poll respondents expecting company cross-border expansion.
Non-BRIC South-South ties have been promoted by a small cohort of resource-rich middle income source countries including Colombia, Chile, Malaysia, Thailand and Turkey, the report found. In commodities nationalizations have occurred in Argentina, Bolivia and Sri Lanka but the more common pattern has been royalty and tax revisions and greater state control throughout Asia and Africa in particular. MENA has experienced a “dramatic” drop in greenfield investment the past two years from $11 billion in 2011 to only $2 billion in the first half, compared with a pre-crisis haul of $115 billion. In Egypt the latest fiscal year volume was down 90 percent to $220 million while it rose 40 percent in the initial months of 2012 in Tunisia and may approach 2009’s tally of $2 billion, despite recent aversion from repeated civil unrest. Libya after its revolution and elections has launched a joint venture scheme where international partners can enter selected industries in return for workforce training.
Foreign banks however remain wary of credit deterioration which can aggravate political instability and lead to asset seizures and exchange restrictions. Risk insurance may be a preferred option with this year’s sum on track to beat 2011’s $75 billion from Berne Union members. Stricter EU solvency directives should not affect capacity and pricing as “soft” premium conditions last barring a growth boom or string of disastrous events which stir demand.
