The euro-zone debt crisis may be squeezing capital out of emerging economies, but it is also cultivating much-needed regional depth in developing countries’ financial markets, says Lars Thunell, head of the World Bank’s International Finance Corp.
“We’re seeing more and more so-called south-south investments, the emergence of regional players in terms of both trade and investment flows,” Thunell said in an interview. “It’s accelerating as a result of the crisis,” he said.
Deeper financial markets fuel growth and can protect against the damaging volatility associated with external economic shocks.
The IFC is a global development arm of the World Bank focusing exclusively on the private sector, providing equity, short and long-term financing and advice. With total assets of around $68 billion, it finances firms both directly and through banks, private equity funds and other vehicles.
The European sovereign debt crisis is forcing euro-area banks to bulk up their capital and concentrate often widely disbursed funding back into Europe to buffer against a worst-case scenario: a cascade of defaults, starting with Greece.
The Institute of International Finance expects capital flows to emerging markets to fall this year by an estimated $164 billion, contributing to a near-30% plummet in cash flows to those regions since 2010.
Emerging market governments also don’t have the same budget room they did after the 2008 financial crisis to stimulate growth.
“The European banks, which have been very strong in cross-border finance, are reducing their exposures,” Thunell said. “There are lots of project finance portfolios for sale from the European banks and they are cutting down on peripheral finance. They are looking at their subsidiaries, asking if they are essential,” Thunell said.
That is particularly tough on companies that don’t have access to capital markets, such as the small-to-medium enterprises that dominate developing economies. Still, it is an opportunity for regional banks, the IFC chief executive officer said.
Thunell said he expects euro-zone leaders will “muddle through,” particularly since the European Central Bank has stepped up its efforts to contain the crisis.
But, he warned, “there’s more downside to this scenario than upside,” particularly given the amount of political uncertainty in 2012. He points to the possible change in leadership in a number of major economies, including France and China.
“We can hope … but we have to prepared that things may not pan out as well,” he said.
Given the fall in euro bank funding, and since investments in manufacturing capacity tend to fall in down economic cycles, Thunell said the IFC is focusing instead on boosting working capital levels in emerging markets.
The corporation is using its network of over 600 banks around the world to attract additional financing. That fosters the development of financial markets that have traditionally been too thin to manage strong growth without Western investment.
Besides ramping up trade finance, “we’re looking at helping to bring in risk capital, and continuing our equity investments,” Thunell said. In particular, the IFC is expanding its short-term loan portfolio, including rolling out new three-year financing options.
In the Middle East and North Africa Region, for example, the IFC expects to invest up to $6 billion over the next three to four years, assuming the political situation stabilizes in countries such as Egypt, Tunisia and Algeria.
The IFC recently inked a deal to provide $35 million in loans for chemical factory in Egypt, a joint venture between Indian and Egyptian companies, with additional financing from a Jordanian bank.
Thunell said Eastern Europe is the most exposed to the euro crisis, followed by Latin America.
Except for the Francophone states, he said Africa is more insulated while Asia is the least exposed, despite its trade, financial flows and commodity linkages. That is partly because regional firms are able to help step in the gap.
wsj.com
“We’re seeing more and more so-called south-south investments, the emergence of regional players in terms of both trade and investment flows,” Thunell said in an interview. “It’s accelerating as a result of the crisis,” he said.
Deeper financial markets fuel growth and can protect against the damaging volatility associated with external economic shocks.
The IFC is a global development arm of the World Bank focusing exclusively on the private sector, providing equity, short and long-term financing and advice. With total assets of around $68 billion, it finances firms both directly and through banks, private equity funds and other vehicles.
The European sovereign debt crisis is forcing euro-area banks to bulk up their capital and concentrate often widely disbursed funding back into Europe to buffer against a worst-case scenario: a cascade of defaults, starting with Greece.
The Institute of International Finance expects capital flows to emerging markets to fall this year by an estimated $164 billion, contributing to a near-30% plummet in cash flows to those regions since 2010.
Emerging market governments also don’t have the same budget room they did after the 2008 financial crisis to stimulate growth.
“The European banks, which have been very strong in cross-border finance, are reducing their exposures,” Thunell said. “There are lots of project finance portfolios for sale from the European banks and they are cutting down on peripheral finance. They are looking at their subsidiaries, asking if they are essential,” Thunell said.
That is particularly tough on companies that don’t have access to capital markets, such as the small-to-medium enterprises that dominate developing economies. Still, it is an opportunity for regional banks, the IFC chief executive officer said.
Thunell said he expects euro-zone leaders will “muddle through,” particularly since the European Central Bank has stepped up its efforts to contain the crisis.
But, he warned, “there’s more downside to this scenario than upside,” particularly given the amount of political uncertainty in 2012. He points to the possible change in leadership in a number of major economies, including France and China.
“We can hope … but we have to prepared that things may not pan out as well,” he said.
Given the fall in euro bank funding, and since investments in manufacturing capacity tend to fall in down economic cycles, Thunell said the IFC is focusing instead on boosting working capital levels in emerging markets.
The corporation is using its network of over 600 banks around the world to attract additional financing. That fosters the development of financial markets that have traditionally been too thin to manage strong growth without Western investment.
Besides ramping up trade finance, “we’re looking at helping to bring in risk capital, and continuing our equity investments,” Thunell said. In particular, the IFC is expanding its short-term loan portfolio, including rolling out new three-year financing options.
In the Middle East and North Africa Region, for example, the IFC expects to invest up to $6 billion over the next three to four years, assuming the political situation stabilizes in countries such as Egypt, Tunisia and Algeria.
The IFC recently inked a deal to provide $35 million in loans for chemical factory in Egypt, a joint venture between Indian and Egyptian companies, with additional financing from a Jordanian bank.
Thunell said Eastern Europe is the most exposed to the euro crisis, followed by Latin America.
Except for the Francophone states, he said Africa is more insulated while Asia is the least exposed, despite its trade, financial flows and commodity linkages. That is partly because regional firms are able to help step in the gap.
wsj.com
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