Optimism still reigns in Asia

The most recent World Investment and Political Risk report from the Multilateral Investment Guarantee Agency (MIGA), makes for largely unsurprising reading. Anything that comes out of the Washington-based political risk insurance and credit enhancement arm of the World Bank Group is odds-on to plug the positive aspects of political risk insurance (PRI) and foreign direct investment (FDI). It doesn’t disappoint in this regard, noting that the continuing high level of investor caution is a boon for the political risk insurance industry.

But when I raised this with a respected regional analyst recently, he told me straight there’s a problem with MIGA’s assumption that FDI is good for development. PRI (with the benefit of World Bank backing) can make it happen that much faster. He said that FDI was good for development, but only if it was the right kind of FDI and the right kind of development. The central question here is about speed – can MIGA serve as a catalyst and make good things (the ‘right FDI’) happen faster? 

Our analyst thinks it can, but only as long as it is supporting a deal that makes commercial sense in a country with plausible prospects for improvement. In short, it can make the tipping point happen faster provided that things are going in the right direction already.

There are some interesting titbits about the Asian region in the MIGA report. First, there’s the news that the developing nations of Asia-Pacific receive more FDI than those in any other region – more than $300bn (€216bn) a year. Dig a bit deeper, however, and you discover most of that money – about $250bn – goes to China, which is why a slowdown in its economy is dampening prospects for FDI for 2014. The report goes on to predict that improved economic performances in high-income economies such as Japan are projected to contribute to an estimated rebound to $345bn into East Asia and the Pacific in 2015.

Another section of interest hidden away in the report is an acknowledgement that developing economies with significant domestic imbalances and large current account deficits have been particularly vulnerable to recent currency depreciations and inflationary pressures. As commodity prices have stabilised or eased, commodity-exporting countries such as Indonesia and Malaysia have been negatively affected. 

The report goes on to state that additional risks to the growth of developing economies include excessive leveraging in select countries in Indonesia, Malaysia and Thailand that could give rise to domestic banking stress. There’s even mention of the spectre of “disorderly unwinding” of the current Chinese investment-lending boom.

But as anyone in Asia with half an eye on the horizon will tell you, optimism still reigns in the region. A survey for the report found that almost half of respondents expected to increase their investments in developing countries in 2014, increasing to 70% when the horizon was extended for three years. Investment opportunities emerging in Laos and Myanmar, for example, bode well for the region.

In fact, Myanmar became MIGA’s 180th member late last year, meaning that FDI into the country is eligible for investment guarantees. This is essentially protection of investments against the risks of transfer restriction, expropriation, breach of contract, non-honouring of financial obligations, and war and civil disturbance. 

MIGA senior risk management officer Paul Barbour has told me that MIGA currently provides a guarantee to one infrastructure project in Laos and that it is “looking at potential projects in Myanmar”.

The World Bank has an important role to play in developing economies such as Myanmar, and MIGA is part of the package. Although it is positive that Myanmar has joined MIGA, we should expect a trickle of guarantees, rather than a flood. In the analyst’s words: “MIGA can be a valuable catalyst, but rarely a game changer”. 

Myanmar is going in the right direction, but it’s only just beginning, and specific investments deals need to be judged carefully on their merits. There are still
significant political risks.