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“When the Tide Goes Out, You See Who’s Naked”

Cara Santos Pianesi's picture

Said Martin Sandbu, the FT economics writer that moderated the FT-MIGA Summit, Managing Global Political Risk, last week in London.   
This is the fifth year that MIGA, the political risk insurance and credit enhancement arm of the World Bank, co-hosted the event to launch its World Investment and Political Risk report.  Undoubtedly, these have been heady years and most participants agreed that, while it is still strong, political risk has waned since the global financial crisis and the Arab Spring. This sentiment dovetails with the findings of the report, which show that macroeconomic stability won by just a hair over political risk as the factor that international investors fear most.
Also in line with these findings, the World Bank’s Andrew Burns cautioned that the world will soon be grappling with the next group of challenges brought about by the tide. What tide? Here, Sandbu meant the significant investment that has flowed to developing countries in search of yield over the past few years, quantitative easing that has kept economies afloat, and high commodity prices. All of these factors are now in flux.
 “When the Tide Goes Out, You See Who’s Naked
And now, the (potential) nudity. That is, as investment to emerging markets tapers, macreconomic tools are used less bluntly, and commodity prices normalize, will countries have laid enough strong economic foundations to weather the inevitable changes that will occur? And as this MIGA-sponsored conference deals with political risk, how will economic changes affect the destiny of leaders and, resultantly, citizens?
Tina Fordham of Citi Research emphasized that the structural determinants of political risk are still very present. She noted little improvement in unemployment and an increase in vox populi risk. By this she meant shifting and more volatile public opinion around the world—amplified by social media—has recently resulted in a proliferation of mass protests.  Panelists discussed several other risk factors, including increasing polarization in politics, pressure on central banks to keep the economic show on the road, reduced investment in infrastructure, and a reversal in living standards in some hard-hit countries.

To be sure, these years of heightened political risk perceptions have been busy ones for political risk insurance providers. As World Investment and Political Risk notes in its section on the political risk industry, this business is booming.  This is precisely what it should do in uncertain times: give investors and banks the confidence to move forward, even as the ground shakes. Investors can make their profits while infrastructure deficits can be chipped away, power can go on, and small and medium industries can produce and create jobs.
Another interesting topic addressed during the event is the dearth of highly-rated capital market issues as a result of the financial crisis—and how instruments like MIGA’s insurance can be used to fill a market gap for issuers and investors.
This subject allowed MIGA to showcase its recent landmark transaction, support to a €400-million financing backed by notes issued by Magyar Export-Import Bank (Exim) of Hungary. Specifically, MIGA’s guarantee provided coverage against non-honoring of the sovereign financial obligation for the principal and interest on the bond notes, representing  MIGA’s first use of this cover for a capital markets issue.
At the event, Hungary Exim’s head Roland Nátrán noted that 85-90% of the country’s GDP had its home in the export sector and the sector is dominated by small and medium enterprises. As a result, the cost savings and interest that Exim achieved as a result of MIGA's support (which significantly enhanced the credit quality of the issue from non-investment grade to investment grade) have an important impact on the Hungarian economy.

Panelists agreed that there was a strong need in the market for this kind of credit enhancement, especially for longer dated investments such as infrastructure and housing. The banks that were present expressed a desire to ensure that they were effectively tapping into these opportunities for their clients and will look more to international financial institutions, MIGA and others, to play a catalytic role here.
They seek to ensure that—even if someone is revealed as naked—there’s a robe in reach.