Thank you very much Danielle, and I really must join you in expressing my sincere appreciation to Chatham House for this invitation to speak on a timely topic: Risk Regulation and Capital Markets. I am delighted that you will be chairing our session given how important these issues are to you.
This is my first time entering Chatham House, and I have always been fascinated by the work of Chatham House because it’s a recognized leader in policy analysis and international affairs. I follow your annual conference and events because it continually informs and challenges my colleagues and I to ensure that we look deeper and encourage robust debate and alternative viewpoints. Even more fascinating for me is that your mission ‘to help build a sustainably secure, prosperous and just world’ is very closely aligned with the World Bank Group’s mission.
Like yourselves, we take pride in the work of our development economics team with their focus on the independent and rigorous analysis of critical global, regional and country-specific challenges and opportunities.
I am delighted to be speaking about risk and opportunities in emerging markets and will focus my remarks on leveraging the World Bank Group, and more generally multilateral development banks, to harness the opportunities emerging markets offer.
Our World Bank Group economists forecast global growth to rise slightly from the 3.0% in 2017 to 3.1% in 2018. They also project global will be 3.0% in 2019 and 2.9% in 2020. Estimates of growth in advanced economies are 2.2%, 1.9% and 1.7% in 2018, 2019 and 2020. Growth in emerging markets are collectively expected to grow by 4.5% in 2018, and 4.7% on average in 2019 and 2020. My message here is that growth in emerging markets and developing economies is key to global growth.
More importantly, sustainable and inclusive growth around the world foster a safe and prosperous society. Emerging markets often offer high returns on a risk-adjusted basis as well as opportunities for diversification. Opportunities abound across many emerging markets and in consumer goods, education, financial services, health, infrastructure, logistics, manufacturing, retail and other services, and technology. It is estimated that consumption in emerging markets will double to USD 30 trillion in less than a decade, and many of you are aware that the infrastructure in emerging markets will require more than USD 1 trillion annually to fill.
There are no doubt risks to investing in emerging markets. First, emerging markets depend on growth in advanced economies, on the one hand, while higher yields can discourage capital flows to emerging markets, on the other hand. Second, a number of emerging market economies that have taken advantage of the low yields to raise foreign currency debt will need to ensure that debt is for productive purposes and that they are not taking any currency risk. Third, many emerging markets are still very dependent on high commodity prices because of insufficient diversification of their economies. Also important, and I know this morning I know there were discussions about regulation, are the unintended consequences of recent regulatory reforms that require Banks to set aside additional capital for infrastructure and emerging markets. I believe that can deter growth in emerging markets. We are also concerned about the impact of low investments in human capital especially in the light of emerging technologies and the impact on the future of work. We are equally concerned about climate risk challenges and the disproportionate impact of disasters on developing countries and the poor.
When we look at the development history of China- where market reforms, infrastructure investment, economic, and social development delivered growth averaging 10% per year since 1978 and helped lift 800 million people out of poverty- we are encouraged about the power of development to help the world’s most vulnerable people.
At the World Bank Group, we believe that our twin goals of ending extreme poverty and boosting shared prosperity uniquely positions us to assist emerging market economies with their development agenda. At the same time, we assist investors with de-risking their emerging market investments because of our over seventy year track record of successfully investing in developing countries, our preferred creditor status that comes with the nature of our organization, our prudent operational and financial policies and our triple ‘A’ credit ratings. Over the years, and as an honest broker and trusted adviser, we have continued to realize the objectives of our 189 member countries.
Specifically, the World Bank Group comprises five institutions, namely the International Bank for Reconstruction and Development (IBRD), the oldest of the five, the International Development Association(IDA), International Finance Corporation(IFC), which lends to the private sector, the Multilateral Investment Guarantee Agency (MIGA), which is our insurance arm, and the International Centre for Settlement of Investment Disputes(ICSID), which is the arm that helps settle disputes. These five institutions work together to ensure that we support countries in sustainable and inclusive growth, investment in human capital and in building resilience against global shocks such as climate and financial risks and crises.
From Albania to Zambia, we provide countries and businesses in emerging markets loans, equity, guarantees, insurance, technical assistance and advisory services in important sectors of the economy. We also partner with both public and private sector to ensure that sufficient funds are available for programs and projects.
For example, we are supporting Columbia to design a fourth generation of road concession. In this example, we are assisting them with formulating policies, regulations, financial, and market conditions to attract private investment, including from domestic pension funds and the IFC. The program will attract USD$24 billion in investment and improve 8,000km of crucial roadway infrastructure and allow Colombia to focus public funds on essential programs and services that are normally funded by the public sector.
Similarly, we have supported Francophone West Africa’s housing sector with a project that aims to address the current and future housing shortages in the region by developing the market infrastructure for low and modest income households with long-term financing.
The third example I want to share with you is from Zambia, a country dependent on hydroelectric power that was facing power shortages due to lower than expected rainfall and draught. The World Bank launched Scaling Solar, which is designed to help governments secure private financing for large solar projects. Zambia is the first success story from this project, which attracted winning bids from First Solar, a US company, and two French companies, Neoen and Enel. Zambia was able to diversify energy production using a low cost, 6 cent per kilowatt hour renewable source, that protects their economy from further power outages.
The fourth example I would like to share is from Turkey. Some of you may be aware that a few years ago Turkey embarked on what is the largest public-private partnership program in the healthcare sector. As a part of this program, last year Turkey was able to build a state-of-the-art hospital using innovative development financing. There was EUR €288 million euro-denominated bond, a green bond was backed by the EBRD, and the World Bank’s MIGA enhanced its attractiveness to investors by providing political risk insurance, and the IFC invested alongside private capital. These efforts resulted in Moody’s assigning a project rating two notches above the current credit rating of Turkey, which increased investor and bank participation.
My fifth example comes from Uruguay, a net importer of crude oil; it imports 14 million barrels per year. It expressed a need to protect their economy and its public sector finances from rising oil prices. The World Bank Treasury helped design a USD $425 million package including an oil hedging program and a weather derivatives hedging program to mitigate the impact of oil price increases on the fiscal budget of Uruguay. As a result, Uruguay is able to focus fiscal resources on other areas. Their fiscal stability is the type of attribute that attracts foreign direct investment.
There are several other examples my colleagues in the room and I will be happy to share with you.
We also believe that capital markets are key enablers of economic development and have supported several countries around the world in developing their domestic capital markets, Albania and Indonesia to name two. At the World Bank Treasury we manage an outstanding debt portfolio of USD $200 billion and assets of almost USD $200 billion for the World Bank Group, Central Banks, pension funds, Sovereign wealth funds and other official sector institutions. We also have a derivatives portfolio of more than USD $575 billion notionally that we use for risk management purposes. Our market experience has been useful for emerging market economies in many respects. International markets have been an important source of funding for our lending activities. They have also been an incubator for innovation from our first bond issue on July 15, 1947, to the first ever formal swap transaction by two entities that we did in 1981 with IBM. We have had many innovative structures over the years.
We have also brought visibility and best practice to many emerging markets as many of their currencies are among the 60 currencies we have issued in. We have leveraged the capital markets to tackle some of the world’s most difficult development challenges, including bringing vaccines to the 70 poorest countries in the world. Last year we issued the world’s first pandemic bond that transfers pandemic risk from developing economies to the capital markets. We similarly have supported a number of developing countries with managing disaster risk by assisting them to transfer earthquake, hurricane, and other forms of risk to capital markets. We have had to global investors, asset managers, insurance companies and pension funds from in Asia, Europe and the Americas investing in these transactions. You may be aware of the recent catastrophe bond, where we helped four countries Chile, Columbia, Mexico and Peru, issue USD $1.36 billion last month, in their first ever transfer of sovereign risk to the capital markets. This also provides asset managers, pension funds, and other investors with high-yielding instruments and diversification opportunities.
I have shared these examples to highlight practical ways in which a partnership with the World Bank Group or any of the development banks can enable an investor make the high yields offered emerging markets while mitigating risks associated with them.
Let me close with what I believe is one of the greatest success stories in economic development; it’s about Singapore. Singapore gained independence from Malaysia in 1965. At that point, the country had an average unemployment rate of 14%, a housing shortage with overcrowded conditions, less than 50% literacy rate, and GDP per capita of USD $516.
The government in Singapore recognized the importance of economic planning, and investing in infrastructure and other sectors. It embarked on a program that started with receiving their first loan from the World Bank in 1963.
Over the next 12 years, Singapore received 14 loans from the World Bank. loans were for power distribution and extension, water supply and sewage, port development, telecommunications, capitalizing a development bank, expansion of educational offerings at the national university, and environmental controls to mitigate air and water pollution.
Since independence, GDP growth has been one of the highest in the world, averaging 7.7% per year and in GDP per capita is now more than USD $50,000, making Singapore one of the wealthiest nations in the world.
While there are not many rapid successes around like Singapore, I believe that Singapore is an example as how capital markets and development can have a tremendous impact on people’s lives. This success story makes me optimistic that if we work together, we can harness the power of capital markets to help people lift themselves out of poverty. I believe that poverty is the greatest risk of our time.
Perhaps the best thing we can leave future generations is a world free of poverty.