Page 24 - October 2022 Issue 611 Part 1

Transformative role of ICIEC panacea for FDI inflows. The tax reforms, observes UNCTAD, are an opportunity for
• Investment promotion in and between the Member States is another core mandate of
ICIEC. What is your exposure to investment insurance in your primary markets in the
Member States, and what are the post-COVID-19 investment trends globally?
- Investment promotion into and between OIC member states is a core mandate of
ICIEC. Through our established suite of solutions, we provide cover, guarantees, and
reinsurance capacity in support of investments in development projects and infrastruc-
ture, often with the participation of government agencies, peer development finance
institutions, private insurers, the private sector, and other technical partners.
Through our credit enhancement and risk mitigation tools, we provide ‘bankable’ solu-
tions to project sponsors and their bankers in a market-responsible manner and mobi-
lize more significant amounts of investment from external partners that would otherwise not largely depend on their exposure and response to the triple crisis in food, fuel, and finance.
take place often in markets bereft of affordable and appropriate risk mitigation products.
The transformative role of ICIEC in promoting trade and investment into and between
its 48 member states is backed by the fact that since inception, we have disbursed a
cumulative amount of US$83 billion. Of this, US$66 billion represents support for trade,
while US$17 billion for foreign direct investments.
Of the total support provided by ICIEC in 2021, Outward Investment from member
states accounted for US$731 million and inward investment into member states for
US$2,241 million, as components of our Business Insured for the year. We strongly sup-
port enhancing the level and capacity of intra-OIC trade and investment, which we sup-
ported in 2021 to the tune of US$3,732 million and US$755 million, respectively.
The post-COVID-19 pandemic investment trends are encouraging, albeit tempered with
the caveats of demography, economic status, ability to mobilize resources and resource
affordability and capacity.
Preliminary OECD estimates for Q1 2022 show global Foreign Direct Investment
(FDI) flows continue on their upward trajectory, increasing by 28% compared to Q4
2021, to US$535 billion. Global FDI flows reached their highest quarterly level in the
past five years. On a year-over-year basis, global FDI flows increased by 15% com-
pared to Q1 2021.
The top recipients of FDI inflows worldwide in Q1 2022 were China (US$101 billion), the
United States (US$67 billion), and Australia (US$59 billion).
The top sources of FDI outflows worldwide were the United States (US$114 billion),
Australia (US$80 billion), and the UK (US$58 billion). This trend, as UNCTAD’s World
Investment Report 2022 shows, started in 2021 when FDI flows reached US$1.6 trillion,
up 64% from the exceptionally low level in 2020 of US$963 million. The developed
countries accounted for US$746 billion.
Cross-border deals and international project finance were particularly strong, encouraged
by loose financing conditions and infrastructure stimulus. However, the recovery of green-
field investment in the industry remains fragile, especially in developing countries.
FDI flows to developing economies in 2021 increased by 30% to US$837 billion, the
highest level ever recorded. The increase was mainly the result of strong growth per-
formance in Asia, a partial recovery in Latin America and the Caribbean, and an upswing
in Africa. The share of developing countries in global flows remained just above 50%.
UNCTAD figures show that FDI flows to Africa reached US$83 billion in 2021 – a record
level – from US$39 billion in 2020, accounting for 5.2% of global FDI. Flows to North
Africa fell by 5% to US$9.3 billion. Egypt saw its FDI drop by 12% as significant invest-
ments in exploration and production agreements in extractive industries were not
repeated. Despite the decline, the country was the second largest host of FDI on the
continent.
The GCC states’ pledge to invest some US$22 billion in various sectors may boost FDI
going forward. Announced greenfield projects in Egypt more than tripled to US$5.6 bil-
lion. Nevertheless, the competition for FDI flows into Africa is intense, especially in
today’s global socio-economic uncertainties.
However, the global environment for international Business and cross-border invest-
ment has changed dramatically in 2022 due to the lingering impact of the pandemic, the
war in Ukraine, and the resultant global economic shocks, which have spared no econ-
omy in the world. This has resulted in a global triple food, fuel, and finance crisis with
rising food and fuel prices and a cost-of-living crisis which, together with rising record
levels of inflation, insolvencies, and subdued GDP growth, is driving many people in
both developed and developing countries into food and energy poverty. Once again, the
poorest countries are bearing the brunt of these impacts. Inevitably it may also have an
impact on investor sentiments. Investor uncertainty could put significant downward
pressure on global FDI in 2022.
Game changers on the horizon
• According to your figures, there remains a considerable gap between your trade
credit insurance and political risk or investment insurance levels for your
Member States. What are the potential challenges and positive development to
narrow this gap in the near-to-medium future?
- Generally speaking, internal factors which drive or hinder FDI include political gover-
nance, economic and financial sector regulation management, currency volatility, land
reforms, security, the threat of expropriation, uninterrupted electricity supplies, social
governance, a developed capital market, transfer pricing, quality of tertiary education,
human capital availability, tackling corruption, trade union activism, and FDI incentives
including tax breaks, profit repatriation, labour and employment protocols.
There are some potential game changers on the horizon. The coming years will see the
implementation of fundamental reforms in international taxation. These reforms are
expected to have significant implications for investment policy, especially in countries
that use fiscal incentives and special economic zones.
The investment decision-making process is complex and tempered by various metrics
and perceptions. No amount of incentives, tax breaks, and platforms can serve as a
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developing countries, not only from a revenue perspective but also from an investment
attraction perspective. Strategically, tax competition will decrease. Investment promotion
toolkits need periodic reviews intending to make costly incentives more sustainable.
Developing countries are at a disadvantage and face constraints in their responses to the
reforms because of a lack of technical capacity to deal with the complexity of the tax
changes and investment treaty commitments that could hinder effective fiscal policy action.
The investment outlook is beholden to the uncertainty of various risks - geopolitics such as
the Ukraine conflict, inflation, new COVID variants and its associated health crisis, labour and
supply chain bottlenecks, and rising energy and food prices. Investor uncertainty and risk
adversity could put significant downward pressure on global FDI this year. The effects on
investment flow to developing countries in 2022 and beyond are difficult to anticipate and
Investment Promotion Agencies (IPAs) also have an essential role to play. While IPAs
are rightly concerned with short-term demand for inward FDI, they should also have
concurrent longer-term strategies. New investment takes time to unfold.
According to UNCTAD Secretary-General Rebeca Grynspan, the recovery of invest-
ment flows to developing countries is encouraging. However, the stagnation of new
investment in LDCs in industries important for productive capacities and key SDG sec-
tors – such as electricity, food or health – is a significant cause for concern. The need
for investment in productive capacity, in the Sustainable Development Goals (SDGs),
and climate change mitigation and adaptation is enormous.
As a credit and investment insurer, I strongly concur with the Secretary-General and
believe that a partnership approach to growing private investment is through expanding
PRI and credit enhancement which historically has provided effective de-risking and
thus catalyzing private investment into emerging markets through capital-efficient instru-
ments in combination with debt and equity financing. This can materially increase the
flow of private sector capital into developing economies.
In this context also, the new program in the process of being launched by The World
Association of Investment Promotion Agencies (WAIPA), the Enhanced Integrated
Framework (EIF), and the Islamic Development Bank (IsDB) Group to enhance invest-
ment promotion capacities and capabilities of Francophone least developed countries
(LDCs) common to all three entities, assumes even greater importance.
The uncertainties will impact the industry for some years to come
• As you stressed, 2021 was a challenging year for the Credit and Political Risk Insurance
industry and ICIEC. How do you see market developments pan out in FY2022/23?
- The uncertainties will impact the industry for some years to come. Credit and investment
insurers are the world’s shock absorbers and risk mitigators. Uncertainties bring new opportu-
nities because people and companies seek protection against emerging risks across the
Board. But they can also get elevated risks for the insurers through elevated claims ratios and
higher insolvencies, which could impact their operations and financial soundness.
For the credit insurance sector, a key lesson learned from the pandemic disruptions is building
awareness about the products offered and their role in supporting trade and economic resilience
during normal periods while maintaining close contact with governments during crises so that
the most appropriate policy decisions can be made in support of the real economy.
Governments can only do so much, including through state-backed reinsurance
arrangements. Due to a lack of resources and capacity in developing countries, this is
often not an option. But the protection of trade receivables or guaranteeing the perfor-
mance of obligations becomes ever more critical. The presence of such protections can
significantly boost capital efficiency for those involved.
Trade credit insurance plays a vital role in protecting one of the most significant asset
classes for companies of all sizes. But its distribution is far from uniform across regions,
sectors, and market segments. Trade credit insurance plays a significant role alongside
other products in protecting trade globally, but there are also likely to be large volumes
of trade unprotected, placing strain on supply chains worldwide. With most economic
outlooks predicting dark clouds approaching for both trade and GDP growth, the bene-
fit of being insured against counterparty default becomes ever more apparent.”
Given that the risks insured by credit insurers and sureties tend to be under-protected even
in many developed markets where they are readily available and relatively well understood,
it is likely that such risks are also underinsured, mainly in emerging markets too.
Public and private insurers are expected to help close the gap. Ensuring access to regular, accu-
rate, and consistent data upon which to rely for underwriting decisions is crucial. Related to this
is developing robust connectivity in different markets, including engaging with line ministries and
partnering with local agencies, brokers, or others who have detailed knowledge of their markets.
I am confident that with our capital increase, we can further consolidate our support,
performance, and delivery to our partners in our Member States while maintaining the
soundness of our institution and operations through effective monitoring, product inno-
vation, and enhanced risk management.
The challenge for ICIEC in 2022 and beyond is to develop a meaningful but balanced
climate finance footprint based on an inclusive Climate Action and Change Strategy.
That Strategy must be inclusive, comprehensive, well-defined, adequately resourced,
transparent, accountable, and all-embracing.
ICIEC’s COVID-19 response strategy has set a commendable precedent and template
for a Climate Action and Change Strategy. Providing international leadership on climate
change amongst ECAs and relevant financial institutions could also serve as a model
for partner agencies in member countries to follow.
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