Revista-E

At the third plenary session of the WAIPA conference held yesterday in Milan, a select group of world-class economists engaged in an insightful and lively discussion on ways to identify and provide the needed liquidity to the financial system. The stalled financial market, lack of confidence and unavailability of once traditional sorts of funding has created a new world investment scenario. Marked by a slowdown of developed economies and significant growth of emerging ones, the crisis is generating new financial vehicles and new players to take on new roles.

The following participants took part in this panel session:

Emmanuel D. Ole-Naiko, CEO, Tanzania Investment Center

Dr. Jeffrey Chwieroth, Professor, London School of Economics

Enrico Vitali, Member of the Strategic Committee for the Italian Ministry of Foreign Affairs

Josep Borrell Fontelles, Former President of the European Parliament

Walter Ambrogi, Head of Global Services, Intesa San Paolo Bank

Norbert Walter, Deutsche Bank Research Manager

From left to right: Josep Borrell Fontelles, Norbert Walter, Emmanuel D. Ole-Naiko

Even though the crisis began in a few countries, the spillover effect of worldwide investment decline was felt globally. According to Mr. Walter, Japan and Germany went into a depression because world trade stopped, Malaysia and Taiwan suffered from the decline in IT, and developing countries, which experienced a raw material boom until 2008, were now in reverse gear.

Therefore no country has been left untouched by the crisis. The fall of FDI was felt globally, including in emerging economies. “Developing countries lost 4.5 basic points in terms of investments. In the Asian crisis, the lost was 2.5 points, making the current crisis twice as much,” stressed Mr. Borrell Fontelles.

When asked what impact the crisis had on traditional forces of lending, the majority of panellists agreed that it has been dramatic. “While central banks reacted immediately to the crisis with appropriate measures aligned to individual countries, these days banks are much more hesitant to lend due to the high risk premium,” explained Mr. Walter. He continued that sectors particularly hard hit, which are on the brink of bankruptcy, will have difficulty securing a loan. This will also cause problems for large projects that need loans from many banks. Renewable energy and pipeline projects will not succeed without government intervention.

“There is a radical change in the evaluation of risk,” insisted Mr. Borrell Fontelles. Risk assessment has become more stringent. Mr. Vitali refers to banks’ stricter criteria to lending as a “more social approach to banking”. Having said that, he explained that banks are willing to step in to support good business cases and institutions not hurt by the crisis. He gave the example of cooperative banks, which are continuing to lend.

Non-traditional mechanisms of finance and new financial avenues have the potential to take on the important role of providing needed liquidity to the financial system. Experts believed that SWF will be the great new investor and the next engine of the world, following China’s example.

Emerging markets are set for growth as the most important flow of funds will be from the countries richly endowed (Asia, Latin America and Africa) with commodities such as energy, metals and agriculture. As there is a shift from financial institutions to other institutions, trade will move in the direction of FDI flows. According to Mr. Walter, countries like China, that has amassed a great surplus, are in a good position to grab ownership in mature and developing parts of the world.

Dr. Chwieroth provided a summary of the panel’s concerns with SWF. Firstly, SWF are not all the same, for example, some are revenue smoothing, while others offer pure strategic and diplomatic influence. Secondly, many SWF are less than democratic, which increases the demand for financial protectionism.

“SWF will continue to develop because the developed, and especially the developing countries, need them. But it also makes us fearful because there is a political power behind it,” insisted Mr. Borrell Fontelles. In fact, some SWF have pledged not to engage in activist management; therefore they buy the company but choose not be on the Board of Directors.