Growing risk aversion in emerging markets and the need for risk mitigation Workshop on Tools for...
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Growing risk aversion in emerging markets and the need for risk mitigation Workshop on Tools for Risk Mitigation in Small- scale Clean Infrastructure Projects November 19, 2003 Infrastructure Financing
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Transcript of Growing risk aversion in emerging markets and the need for risk mitigation Workshop on Tools for...
Growing risk aversion in emerging markets and the need for risk mitigation
Workshop on Tools forRisk Mitigation in Small-scale Clean
Infrastructure Projects
November 19, 2003
Infrastructure Financing
2
Drop in private financing of infrastructure is affecting all developing countries…
0
10
20
30
40
50
60
70
80
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
US
$ b
illion
s
LowLower middleUpper middle
Source: PPI Database, World Bank
Asian Financial
Crisis
Tech Bubble Collapse
RussianFinancial
Crisis
Argentina Financial
Crisis
EnronCrisis
3
… in all sectors
0
10
20
30
40
50
60
70
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Years
US
$ b
illio
n
Telecom Energy Transport Water & Sewerage
Source: PPI Database, World Bank
4
Risk aversion in the market has increased…
Environment for financing emerging market private infrastructure has become increasingly challenging
9/11 Corporate Bankruptcies Argentina crisis Unstable global political situation Reduced availability of private Political Risk
Insurance Reduced number of strategic investors
Reconsideration of portfolios in emerging markets
5
Global economic conditions are dampening appetite and capacity
Banks capital has eroded Credit decline widespread both in developed and in
emerging markets Increasing number of ratings downgrades Infrastructure debt rating in Latin America dropped into
default Collapse of tenors and favorable lending terms
Limited private sector interest in infrastructure projects
6
Signs of investors withdrawal - stalled projects, failed privatizations
Average number of bidders power projects: 4 in 1998 down to 2 (LAC)
Failures of power privatizations: Senegal, Georgia, Mauritania, Ukraine, PNG, Ecuador
Failures of privatizations in other sectors Telecom in Czech Republic, airport in Algeria
7
Enron Energy BBB+/Stable D
NRG Energy Inc. Energy BBB-/Stable D
Reliant Energy Power. Energy BBB+/Stable B/Neg.
Endesa Energy A+/Neg. A/Neg.
CMS Energy Energy BB/Stable BB/Neg.
ABB Energy AA+/Neg. BB+/Positive
AES Corp. Energy BB/Positive B+/Neg.
Cogentrix Energy Corp Energy BB+/Stable BB/Watch Neg.
Edison Mission Energy Energy BBB-/Stable B/Watch Neg.
El Paso Corp. Gas BBB+/Stable B+/Neg.
Millcom International Telecom B+/Stable D
Developer Sector S&P Rating S&P Rating
August 2001 November 2003
Many investors involved in emerging countries have been downgraded
8
Project debt ratings downgrades increased in 2003
Source: Standard & Poor’s
9
US utilities worse than before…
Source: Standard & Poor’s
10
8/10/02
APR M A Y JUN JUL AUG SEP15
20
25
30
35
40
VIVENDI ENVIRO NNEM E NTSUE ZF T S E A /S W AT ER - PRICE INDEX Source: DAT AST REAM
Corporate Water companies investing in emerging countries are severely penalized…
11
While emerging market sovereign debt issuance has increased…
Mutual Fund Flows (4-week moving average)Mutual Fund Flows (4-week moving average)
EMBIG versus High Yield Spread Evolution (bps)Total Returns (%)Total Returns (%)
EM Monthly Debt Issuance (US$ billion)EM Monthly Debt Issuance (US$ billion)
0
5
10
15
20
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0
20
40
60
80
100
Average 1998-2002 2003 YTD
Source -JPMorgan
12
… and emerging market spreads are declining…
49. 1
38 .6
24 .730. 2
48 .0
17 .6
41. 9
21. 8
26 .6
15 .711. 1
15 .5
19 .8
24. 9
27. 6
10 .412. 8
13 .3
14 .8
19. 8
6. 4
0
10
20
30
40
50
60
70
80
90
100
1997 1998 1999 2000 2001 2002 2003YT D
Lat in Am erica EEM EA As ia
300
400
500
600
700
800
900
1, 000
1, 100
1, 200
1, 300
1, 400
1, 500
1, 600EM BI+
EM New Issuance vs. EMBI+ Spread EvolutionEM New Issuance vs. EMBI+ Spread Evolution
US$bn SSP, bps
1
13
Equity indexes are recovering…
Morgan Stanley Price Index
0
400
800
1,200
1,600
J-00 J-00 J-01 J-01 J-02 J-02 J-03 J-03
Pri
ce
In
de
x U
SD
US Equity Index Global Equity Index
14
Emerging trend in the global market is that…
Credit to projects declining while sovereign debt increasing
Traditional investor appetite/capacity has changed significantly and for the worse
Political, regulatory, and project risk matters more than ever
The supply of “easily” bankable projects is diminishing
… new approaches to project finance, risk mitigation and International Financial Institution support are needed
15
Which conditions are important?
Legal Protection of Investors' Rights
Minor
2.98
2.91
2.83
2.83
2.68
2.66
2.49
2.43
2.00
3.57
3.11
3.11
Major Critical “Deal-breaker”
63% Legal Protection of Investors
36% Consumer Payment Discipline
40% Government/Multilateral Guarantee
13% Government Efficiency
15% Judiciary's Independence
19% Clear Rules for Exit
19% Investment Grade Debt Rating
8% Transition to Competitive Market
10% Corruption Index Ranking
4% Domestic Borrowing
4% Competitive Selection
13% Possibility of Vertical Integration
Rated “Dealbreaker”
16
Legal protection and framework defining investor rights 63% of firms rated it a “deal-breaker” “Contract enforceability” “Clarity in market rules” [Brazil , Guatemala ] “Protection ‘to do business’ – labor laws, property rights; laws that work” “Enforceable exit strategy”
Payment discipline and enforcement36% of firms rated it a “deal-breaker” Both generation and distribution investors considered it important “We cannot fix it on our own” – government support essential “Worsening payment discipline – strong negative”
Guarantee from Government or Multilateral40% of firms rated it a “deal-breaker” “Support needed till the business becomes commercial” “Why should we take on the risk of a bankrupt business?” Interestingly not a determinant for success – mitigation is not an incentive
for default or mismanagement by government or sponsor
Top three concerns affecting investment
17Source: Deloitte Touche Tohmatsu
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
Cumulative Sum ($ Bn )
$2,300 Bn
$1,900 Bn
High Investment DemandScenario (3%)
Low InvestmentDemand Scenario (2%)
Historic Future
Private Capital Mobilized in Power Sector
Gap covered by public financing, self -financing, donor funding, and rationing.
Tot
al P
ower
In
vest
men
t ($
Bil
lion
)
Source: Deloitte Touche Tohmatsu
Investment needs still remain…
Financing required for the Power Sector in Emerging Markets 1990 - 2020
18
Private capital can be attracted even to the least developed countries…
With risk mitigation through… PRI Bilateral institutions e.g. ECAs Multilateral
Risk mitigation instruments can reduce risks that would discourage or otherwise make borrowing for/or investing in developing countries’ projects unfeasible by… Enhancing credit worthiness Improving lending terms Encouraging risk sharing Providing additional leverage with the government
19
World Bank Guarantees can help…
Risk mitigation for Government performance No cover for commercial risk
Specificities: IBRD/IDA balance sheet Counterguarantee Cross defaults Two types of guarantees:
Partial risk guarantees Partial credit guarantees
Help to catalyze debt with extended maturities and lower financing costs
20
Partial risk guarantees help access private finance at sustainable terms
Debt Maturity Interest Spread
Vietnam(P. Risk)
5%2%
5
16
with Guarantee
without Guarantee
Cote d’Ivoire(P. Risk)
112
3%
2.75%
Uganda(P. Risk)
016 3.1%
8%
1Bangladesh(P. Risk)
3%2%14
21
Each dollar of guarantee catalyzes close to 5 dollars of private finance
0 500 1000 1500 2000
China Yangzhou
Philippines Leyte
Pakistan Hub
China Zheijiang
Jordan Telecom
China Ertan
Pakistan Uch
Lebanon Power
Morocco Jorf Lasfar
Thailand EGAT
Cote d'Ivoire Power
Argentina PBG
Colombia PBG
Bangladesh Haripur
Vietnam Phu My 2-2
US$ Million
Guaranteed Amount
Private Capital Mobilized
22
Private Participation and Finance DepartmentThe World Bank
1818 H Street, NW
Washington, DC 20433 (USA)
or visit our web site: www.worldbank.org/guarantees
For further information contact:
Mr. Suman Babbar Acting Director
Ph: +1 (202) 473-2029Fax: +1 (202) 522-0761
Email: [email protected]
